How is your debt to income percentage?
Many experts recommend that you not have more than 33 percent of your total (gross) income in debt payments. Because of this, you should calculate your debt to income percentage to see where you stand. Your gross income is your income before taxes. And your payments need to include all your debts… including credit cards, rent or mortgage(s), student loans, etc.… To calculate your debt-to-income percentage:
- Determine 33% of your gross monthly income. To do this, multiply your total monthly income before taxes by .33.
- List all your monthly obligations, including your rent or mortgage payments, credit card payments, student loans, and any other type of consumer and/or installment loans; and then calculate the total.
- Subtract the “monthly payment total” from 33% of your gross monthly income. This is the maximum debt payments you should have.
As an example, if your pretax income is $50,000, your total payments toward debt should not exceed $16,500 a year ($50,000 x .33). Now, assuming your existing debt payments equal $10,000 a year, you can afford to pay $6,500 annually, or around $540 a month, towards your car payment.