Is your debt too high for your income? In tough times like these, I'm sure many of us are asking this question whenever we haul out the checkbook to pay our monthly bills.
Even though our family lives quite frugally, I also feel as if we are crushed by bills since it's so darn hard to make ends meet every month. Like other American families, we have a mortgage and all the costs connected with owning a home, plus living costs, groceries, clothes, and so on. By the time we get through paying the bills at the end of the month, there's very little left over to put into savings.
So what is a good debt to income ratio? According to US News, a "healthy" ratio for most people is 36% and under. Using the US News Debt-to-income calculator, I determined that our family's ratio was 34% which is considered to be a healthy debt load for most people.You can use this same calculator to figure out what your debt ratio is.
Of course my idea of "debt" is quite a bit different than what the bank views as debt when calculating our ability to get a loan. By banking standards, debt is what you owe to someone else such as a mortgage payment, car or credit card payments, or a medical bill being paid in installments. All the rest of the bills (utilities, food, day care, tuition, etc) don't factor into the debt ratio.
This may explain why so many middle class Americans are in financial straits. Add the cost of day care or a car payment to the debt load and the debt-to-income ratio shifts dramatically. Using our family finances as an example, a $450 a month day daycare bill (or medical bill, or equity line, whatever) would put us on the brink of the 43-50% bracket which is a sign of imminent financial difficulty.
Regardless of how "healthy" our debt ratio is, I think most of us would feel much more comfortable and a lot less pinched if the ratio was between 20-25%. For my husband and I, that number is reached by paying off a $25,000 emergency repair that's hanging out on a 7% credit card.
You can figure out your comfort zone by adjusting the numbers on the US News calculator to see what it would takes to tweak the ratio downwards. You'll discover like our family has that moving the ratio into a healthier zone is only possible by making the extra effort to increase our household income or paying off consumer debt.
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