Comments on: Financial Ratios for Personal Evaluation: Debt to Income Ratio

By: » Roundup Linkfest on Blueprint for Financial Prosperity

» Roundup Linkfest on Blueprint for Financial Prosperity — Mon, 30 Jul 2007 01:48:10 +0000

[...] used on analyzing the financials of companies, to personal finance; this time it’s using the debt to income ratio. Nickel authors an excellent post listing ten simple ways to protect yourself with regards to [...]

By: Flexo

Flexo — Mon, 12 Feb 2007 14:29:42 +0000

Matt: My next ratio is the non-discretionary expenses to income ratio, which takes your point into account.

By: Matt

Matt — Mon, 12 Feb 2007 07:29:25 +0000

If debt-to-income ratios don’t classify rent as “debt” (which it isn’t) then looking at them is going to provide a misleading picture of one’s financial health, by making the mortgaged purchase of a primary residence look like a far worse decision than it is. I tend to prefer an “obligation-to-income” ratio, which factors in all nondiscretionary recurring cashflows, rather than one which excludes certain ones on the basis of factors other than sustainability. Which change nicely accounts for the fact that substituting a debt service obligation for another form of obligation only worsens one’s financial picture if the latter is larger than the former, and even in that case only to the extent that it is.

By: Free Money Finance

Free Money Finance — Fri, 09 Feb 2007 11:21:38 +0000

Star Money Articles for the Week of Feb. 5…

Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: Blueprint for Financial Prosperity details his January net worth. Consumerism Commentary gives some thoughts on the debt to income ratio. He’s also starting a …

By: Flexo

Flexo — Wed, 07 Feb 2007 15:08:42 +0000

Thanks for the comments, Marcus. You raise some interesting points. I was taking the approach of a pure debt to income ratio, but I can see how including rent would produce a better picture if you’re looking to see how much you’re spending in total.

As far as minimum payments go, I don’t see any reason to include them for my own personal analysis. If my credit card decides to change its minimum payment from 2% to 5% of the balance, even though I pay in full every month, and I include that in the calculation, it affects this ratio, even though I’m doing nothing different.

If my payments were based on the minimum amount due each month, then there is a case for inclusion.

This may not be the way lenders evaluate potential customers. What’s useful for lenders isn’t necessarily useful for personal analysis.

I see what you’re saying: using expected debt payments including minimum CC payments shows how well you’ll be able to cover expected liabilities, but I’ve already used the working capital ratio to view that. I’ll also look at an expense/income ratio which will help build a complete picture.

By: Marcus

Marcus — Wed, 07 Feb 2007 14:47:24 +0000

Good post, but I’d suggest a few tweaks -

1.) Most guides – including the US News one you linked to – include rent in your debt calculation. Whether it’s a mortgage or rent, the point is the same: you have to pay money to live somewhere.

2.) You used your extra loan payments and say you would include your credit card payments (if you had any recurring ones). Actually, the way mortgage companies calculate debt ratios is by using your MINIMUM payments.

While your way is inevitably healthier – and further ensures your debt load isn’t just manageable (but can be more easily paid down), it’s not the way ratios are typically calculated.

By using your actual payments, you somewhat contradict yourself — in years you’d pay off MORE debt, your ratio would actually rise (unless your income grew at a higher rate).