Many families across the U.S. have struggled financially in recent years. In fact, fewer than 40% of Americans have the reserves to pay for an unexpected $1,000 car repair, medical treatment or another emergency. Consequently, many individuals have little choice but to reach for credit cards.
If you have too much consumer debt, you may have difficulty making minimum payments. You may also struggle to pay other monthly bills. Calculating your debt-to-income ratio may tell you whether you have too much debt relative to your income.
To determine your debt-to-income ratio, add all your regular monthly bills. Then, divide by your gross monthly income, which you can likely find on your paystub. To convert the figure to a percentage, simply multiply by 100.
Your debt-to-income ratio may naturally fluctuate a bit. Still, if your ratio is too high, you may have trouble paying your monthly bills. You may also find it difficult to obtain financing for a new home, car, education or anything else. Consequently, the U.S. Consumer Financial Protection Bureau recommends keeping your debt-to-income ratio under 43%.
If you regularly cannot pay your monthly bills or you have an inflated debt-to-income ratio, you probably have a few options. First, you can increase your monthly income. You can also pay down your debt. If neither is feasible because of your current financial situation, you may want to explore bankruptcy protection or another debt relief strategy.
There should be more to life than constantly being unable to stay on top of debt. While it may make you feel uneasy to do so, identifying your debt-to-income ratio may be the first step to financial freedom.