Why should you know your debt-to-income (DTI) ratio? Well it will help shed light on and help you better understand your true financial picture that is why.
The good news is, getting this number is pretty easy to do with the Truth About Money’s handy debt to income ratio worksheet.
Your debt-to-income ratio gives you an indication of how high your debt is compared to your income. The lower your DTI ratio, the better for you as that means you don’t spend much of your income paying debts. On the other hand, a high DTI ratio would mean much of your income is being put toward debt, leaving you without very much money to spend or save.
There are times when having a high DTI ratio makes sense. For example, it’s not terrible to have a high DTI ratio if you actively paying off your debt, but, if your ratio is high and you’re only making minimum payments, that’s a problem.
Generally, there are two ways to lower your DTI ratio:
- First, you can increase your income. That could mean working some overtime, asking for a salary increase, taking on a part-time job, or generating money from a hobby. The more you can increase your monthly income (without simultaneously raising your debt) the lower your DTI ratio will be.
- The second way to lower your ratio is to pay off your debt. Once your debts are paid off, your debt-to-income ratio will drop drastically.