Total Debt To Income Ratio

Day 736 / 365 - Ski holiday Ouch ( credit crunch debts bills )

Over at AllFinancialMatters, JLP recently asked his readers what their total debt to income ratio (DIR) was.

This calculation looks at the total debt you owe, including mortgages, loans and everything else, divided by your income (in this case, gross income, to make the calculation a little easier):

Total Debt / Gross Income = Total Debt To Income Ratio

Some of the commentors on the post suggest that it’s not a great measure of financial health, as people in very different situations can come out with the same Debt to Income Ratio (a little like using BMI as a measure of your bodily health – for example rugby players may have a higher BMI than most people, but they might also be considerably fitter).

However, if you’re trying to rid yourself of debt and calculate it every so often it could be a useful guage of how you’re faring.

JLP reckons that the average DIR in the US is around 1.3 (130%) – having done our calculation, I’m a little worried that we’re coming out at around 3 (or 300%)! I wouldn’t say that we’re particularly indebted, or have particularly low salaries, which could push the figure up. Our largest debt is naturally our mortgage, but I wonder how we compare to the UK average, and if we’re average, which I suspect we are, what the reason for the difference between the UK and US is. Is it because house prices are relatively higher over here?

In any case, to calculate your Total Debt to Income ratio, add up all of your debts, and divide by your income – use either gross or net income, but remember which one you’re using if you’re comparing either your own DIR going forward or with others.

Calculate it for yourself, and let us know what your ratio is in the comments below. If it’s 3 or above it will make me feel much better.

Creative Commons License photo credit: JasonRogersFooDogGiraffeBee

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