Whether you're planning your financial situation and managing a budget or calculating your eligibility for a mortgage, calculating your debt-to-income ratio serves as an important measure. Your debt-to-income ratio basically tells you the percentage of income you have going towards expenses and required debt obligations. Each mortgage company and lender uses slightly different guidelines, but a general rule of thumb is to keep this ratio equal to or less than 36 to 40 percent. The lower your debt-to-income ratio, the more money you can sock away into savings or put towards financial and personal goals. On the other hand, a higher ratio means that your financial situation may be tight.
Calculate your annual gross income. Multiply your gross pay listed on a paycheck from your employer by the number of paychecks you receive in a year. For instance, multiply by 52 if you're paid weekly; multiply by 26 if you're paid biweekly or by 24 if you're paid twice per month. Depending on the type of work you perform, add annual bonuses and commissions that are guaranteed, net earnings from self-employment and any other income sources you receive consistently. Add your spouse's income to the total if you're married. For this example, let's assume your annual gross income equals $51,000.
Divide your annual gross income by 12 to determine your monthly gross income. In this instance, dividing $51,000 by 12 equals a monthly gross income of $4,250.
Calculate the total of all your monthly bills and debt obligations. Add your rent or mortgage payment together with property taxes and insurance payments. Add to the total your monthly payments for alimony and child support, minimum payments to credit cards, auto and student loans. Since most lenders do not consider the amount you spend on clothing, food and nonessentials like satellite, cable and Internet, don't add these items in your calculation. For this example, assume the total of all your fixed monthly expenses and debt obligations equals $1,650.
Divide the total of your monthly expenses by your monthly gross income. Multiply the result by 100. The result equals the percentage of your income that goes to bills and expenses. For this example, dividing $1,650 by $4,250 and multiplying by 100 equals 38.82 percent.
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