Debt-Income Ratio

There is not a lot of math in personal finance. Most of it is about understanding what options you have and how to make choices that move you towards your goals.

Knowing your debt to income ratio can be a guide, to let you know where you are financially, so you can get where you are going.

There are 3 kinds of debt-to-income ratios and they can be useful for different things. There is the front-end ratio. This looks only at your housing debt.

Imagine that you are standing at your front door. You just see your house - this is your front-end ratio. This includes all related payments: mortgage, home-owners' association fees, taxes, and insurance.

The math is pretty simple: monthly housing payment/divided by monthly income It is recommended that this stay below 28%. Your desired front-end ratio will depend on your circumstances, but usually, if you find that there is not enough income for your expenses or financial goals, and you are spending more than 28% towards housing...

This is likely an area where you may want to consider cutting back.

Come back next week to find out about the back-end debt to income ratio.

Sources:

Financial Counseling by Dorothy B. Durband, Ryan H. Law, and Angela K. Mazzolini