Your Financial Health Check

A debt-to-income ratio is a measure of financial stability calculated by dividing monthly minimum debt payments by monthly gross income. This calculation gives a straightforward depiction of your financial position. Typically, the lower your ratio, the better handle you have on debt.

Determining your debt

Collect your most recent credit billing statements for current balances

Outline your total monthly bills using two columns: bill type (such as car loan, mortgage/rent payments, and so on) and monthly payment.

Do not include bills such as taxes and utilities in this list. Add up the total for all of the monthly payments listed. Calculate your monthly before-tax income. If you receive a paycheck every other week, as opposed to twice a month, your monthly gross income is your before tax income from one paycheck times 2.17. Your monthly debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly income. For example, someone with a monthly income

of $2,000 who is making monthly payments of $500 on loans and credit cards has a debt-to-income ratio of 25% ($500 /$2,000 = .25 or 25%).

Staying aware of your ratio can help avoid debt reaching a problematic stage. Try our online calculator to determine your debt ratio--just click here.