When it comes to managing your personal finances, it is essential to keep a track of your debt-to-income ratio.

This helps you keep an eye on your debt levels and take corrective measures if your debt seems to be going on an upward trajectory.

This is particularly true during a global pandemic!

So, what is the debt-to-income ratio?

This ratio measures the amount of debt held by a person or household against the amount of disposable income they have.

It can be calculated monthly or yearly. You just need to add up all your monthly debt payments and then divide them by your gross monthly income to arrive at the monthly ratio.

Some of the common sources of income and debt are mentioned below:

• Income

a)  Total household income;
b)  Child care benefits;
c)  And retirement benefits.

• Debt

a)   Mortgage;
b)  Other personal loans;
c)  Vehicle loans;
d)  Credit cards;
e)  And monthly bills.

A low debt-to-income ratio indicates that you have lesser debt and that’s almost always a good thing.

Though, how bad is a high debt-to-income ratio?

Well, an important thing to note is that higher levels of debt can make you financially vulnerable. For instance, if you lose your job or are faced with an unexpected expenditure, it will become hard for you to manage your finances as you already have significant debts to pay off.

Similarly, high debt-to-income ratios are worrying for policymakers too. In June 2020, Statistics Canada reported that the household credit market debt as a proportion of household disposable income rose to 176.9%.

High ratios are concerning because high levels of debt can reduce the economy’s ability to withstand economic shocks in the long-run.

Coming back to personal debt, what is the best debt-to-income ratio?

While there is no specific number and everyone’s situation is different, it is advisable to keep your debt-to-income ratio below 40%. If the number you calculate is higher than this, it is prudent to get rid of high-interest debt such as credit cards and work towards reducing other types of debt.

Also, it matters what type of debt you have accumulated over time.

If your debt is primarily due to a mortgage, on a property that has high equity, that is better than having a debt that’s not backed by an asset.

If you are unsure of how to manage your debt or are contemplating how to consolidate your debt, a personal debt management plan could be helpful. Working with a debt consultant can enable you to create a tailored plan that helps you gain better control of your finances and maintain a healthy debt-to-income ratio.

We offer a free consultation to explore what options are available to you.

To learn more about our services call or text us on 1-888-890-0888 or visit www.debtcare.ca.