How do you calculate your debt-to-income ratio?

The debt-to-income ratio is an important financial metric that provides insight into an individual's financial health by comparing their total monthly debt payments to their gross monthly income. The correct method to calculate this ratio involves dividing your total monthly debt payments by your gross monthly income, then multiplying the result by 100 to express it as a percentage.

This calculation helps lenders assess the risk of lending money to an individual; a lower debt-to-income ratio typically indicates better financial health and a greater ability to manage additional debt. By using gross income rather than net income, the calculation gives a clearer picture of one's financial obligations in relation to total earnings, as gross income reflects all earnings before any deductions.

This approach emphasizes the significance of understanding how much of your income is allocated to servicing debt, which in turn informs financial decision-making and future borrowing capabilities.