Which debt to income ratio to use?

[maineblackbear]

Hi,

Newbie here.

I am wondering which "debt to income ratio calculator" to use to figure out if we have too much debt.

Some calculators include your mortgage. Some ask for gross income, some net. Others ask you to double your minimum payments on unsecured debt.

All of these result in very different outcomes. Is there a best one you can recommend?

thank you!

[disneysteve]

I am wondering which "debt to income ratio calculator" to use to figure out if we have too much debt.

Welcome. My first thought when I read your post was that if you need a calculator to figure it out, you probably have too much debt.

The old standard rule of thumb is that your mortgage payment (including taxes and insurance) shouldn't exceed 28% of gross income and your total debt payments shouldn't exceed 36% of gross income. So if you are over those limits, by traditional measure, you have too much debt.

Lots of people, I'm sure, will post how they are beyond those percentages and doing just fine, but I think those numbers are good ones to use as a guide.

If it is credit card debt you are talking about, I think any is too much. If you can't afford to pay your credit card bill in full each and every month, you are in too much debt and living beyond your means. Of course, sometimes people end up with CC debt due to catastrophic circumstances - medical problems, divorce, etc. That's a different story. I'm talking just of folks who spent themselves into debt the normal everyday way.

[Daylily]

Welcome. My first thought when I read your post was that if you need a calculator to figure it out, you probably have too much debt.

That was exactly my thought.

When I took out a mortgage, the bank gave me a certain number based on a percentage of my income. I wasn't comfortable with that number and ended up buying a house that was far below my means. I'm not as concerned with the percentage, I'm concerned with my own comfort level.

[Snodog]

I wasn't comfortable with that number and ended up buying a house that was far below my means. I'm not as concerned with the percentage, I'm concerned with my own comfort level.

Yes go with what your comfortable with.

Our debt to income level is at 6%. We live pretty frugal but we could never afford a 36% level of debt. How do people do it?

[autoxer]

For me, If the debt is at a high interest rate, then any amount is too much.

[SnoopyCool]

The old standard rule of thumb is that your mortgage payment (including taxes and insurance) shouldn't exceed 28% of gross income and your total debt payments shouldn't exceed 36% of gross income. So if you are over those limits, by traditional measure, you have too much debt.

I've always wondered why you see these %s against gross income. Why isn't it net income? That makes more sense to me, as that is the money that you can actually do something with.

[disneysteve]

I've always wondered why you see these %s against gross income. Why isn't it net income? That makes more sense to me, as that is the money that you can actually do something with.

I think they do the calculations that way because most people know their gross income without thinking but not their net, plus net can vary throughout the year as certain taxes (like social security) and deductions max out at a certain level.