Tag Archives: Bad-Debt-to-Income Ratio

Bad Debt to Income Ratio

*Featured in The Carnival of Personal Finance #233 hosted by @RevancheGS on A Gai Shan Life.

Debt-to-Income-Ratio is the amount you owe measured against your income.
Motley Fool’s Get Out of Debt worksheet is what started my family’s debt free journey and blogging about our personal finances.

In the beginning, the family’s bad debt-to-income-ratio was approximately 112% paying $3496.27 annually in interest!

About the Worksheet

The first part of the worksheet is figuring out the interest you pay on the debt owed. Watch out, this part may sting a bit.

To figure the interest you pay on your bad debt is to take each card or loan and figure the calculation:

Balance x APR (annual percentage rate) = Annual Interest Paid

 

Interest Motley Fool

 

 

Now, add the last column’s figures all together and Wha la! you have the Annual Interest Paid per year. Hope it didn’t hurt too bad

or you could…

use the Excel sheet at the end of this post. πŸ™‚

Next, the worksheet requests you to figure your bad debt-to-income ratio.

bad debt Motley Fool

 

The difference between Motley Fool’s recommended calculations and others – the Fool’s worksheet has you calculate the bad debt to your net income. Most calculations request that you use your gross income. Why the difference? Because the fool wants to entice you to jump start your debt free journey (let me tell you 112% gets you moving like a jolt of electricity).

Try the worksheet for yourself. Understand, where your financial nature stands. It’s amazing how energetic you’ll become in wanting to pay down your debt when you discover just how much interest you are paying annually.

Where does my family’s bad debt-to-income-ratio stand now? 93%.

How to Use the Excel Sheet

Interest Worksheet

I had problems posting a workable Excel sheet on this screen, click here to be directed to a full version.

Enter the requested information – APR & Balance of card or loan – and the Annual Interest Paid will automatically be calculated for you.

What’s Your Score?

Your debt-to-income ratio

36% or less: This is a healthy debt load to carry for most people.

37%-42%: Not bad, but start paring debt now before you get in real trouble.

43%-49%: Financial difficulties are probably imminent unless you take immediate action.

50% or more: Get professional help to aggressively reduce debt.

Student Loan Payment

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So apparently, unbeknownst to me I had one last Student Loan check coming to me for $2205.00. I thought that I rec’d all money loaned to me and I was to start my journey in repaying the student loan. What I didn’t see was the second 1/2 of the disbursement was to be mailed December 17th equalling… you guessed it, $2205.00.

To Cancel or Not to Cancel is the question.

Well, I didn’t cancel and I will tell you why.

The $2205.00 was previously totalled on my spreadsheet for ‘Student Loan Debt’ (approx. $32,000 owed). So, it made more sense to me in using a lower APR student loan to counter act with the higher interest Credit Card bills. Now, because I already accounted for this money in my Track My Progress, it does bring the graph down a significant amount. I do enjoy watching the graph go down (as you will see on the 7th of January). πŸ˜‰

What did I do with this money? I definitely calculated my move before paying things off.

Initially I thought of just paying down the 6th card, as it is naturally the current one on my list. But, in the end this would only free up $219 a month ($37 normal cc payment + $182 rollover cc payments) to rollover to the next card (7th card).

I wanted to make a larger move. Especially, because my husband and I have been considering buying a rental property. But realize that we need to pay off more debt quickly. Even though our credit scores are pretty good, our Bad-Debt-to-Income-Ratio (BD2IR) is much too big. If we are going to buy a rental property, we want to do it right.

original payment plan*

Anyhow, back to the story. I wanted to make a larger move. And here is how I did it:

updated payment plan*

I paid a last payment of $203.51 to my Ortho bill = PIF ($2205 – $231.05 = $2001.49)

This freed up $100 per month. This bill is not part of my CC repayment schedule. And this will go to increase our Weekly Cash Allowance Fund – which we use for groceries, gas, entertainment, and any other little expenses that come up.

I took $100 spending cash. ($2001.49 – $100 = $1901.49 left)
I paid my monthly FFCU visa payment of $65. ($1901.49 – $65 = $1836.49 left)
I paid $1836.49 to my FFCU signature loan that has a monthly payment of $299.
($2858.43 – $1836.49 = FFCU sign. loan new balance $1021.94)

Recap:

FORMER: BofA monthly payment $37 + $187 = $219.00 (once pd, $219 would rollover to the next CC bill)

UPDATED: FFCU signature loan monthly payment $299 + $187 = $486.00 (by paying this card off, I will have $486 to rollover to the next CC bill!!!)

The remainder of the FFCU signature loan will take me roughly 1 1/2 to 2 months to pay off the balance. I will then be able to rollover $267.00 more dollars per month onto the 7th Card using the Updated plan versus the Former plan ($486 – $219 = $267).

I hope this makes sense to you. I have yet to figure how much interest and time I will be saving, but I am sure it is significant enough validate the changes I have made. I will be sure to update you when I do figure it out!

Did everyone have a wonderful Christmas? I know I did. It is one of the two times a year that family members make those delicious, memorable dishes to eat. Since my family is soooo multicultural, I get to experience a lot of variety in our food dishes. It makes that all the more delicious. But, I am also aware that I am seriously going to need to diet after New Year’s Day! πŸ™‚

Make it a great day! MF

*spreadsheet totals are not exact, but used more for reference material.

Figuring Your Bad-Debt-to-Income-Ratio

I wanted to introduce you to The Motley Fool. It’s a wonderful Website on all the facts about Personal Finance & it’s geared towards the young at heart. Actually, it’s geared to anybody wanting to know how to become financially educated.

What do I really like about The Fool? This is where I woke up when I started to follow their guide on How-to Guide: Reduce your Debt. More specifically, when I completed step #3 about getting a bird’s eye view of where my family stands, by completing the “Debt-to-Income Ratio” Worksheet (perhaps, I should have called my site “Step #3”!). This was a HUGE eye opener.

So, since it really awoke my senses, I wanted to share their advice with you. My eye opener? I realized that my family carried 86% Bad-Debt-to-Income Ratio! The recommended percentage to carry, if none at all, is 15% or less of your after-tax income! Eeeks! An eye opener, huh?

So, my family is working on erradicating this percentage! And hopefully faster than planned. Try the Fool’s Guidance.

If you care to share, what is your Bad-Debt-to-Income Ratio?

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