How to Reduce Your Debt-to-Income Ratio (And When Not To)

How to Reduce Your Debt-to-Income Ratio (And When Not To)

According to the Consumer Financial Protection Bureau, “Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way that lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.”

In general, lenders such as home mortgage lenders look for no more than a 43% debt-to-income ratio when it comes to approving loans. In other words, like your golf score, smaller is better.

So how can you get your ratio down if it’s too high? You could reduce your debt-to-income ratio by asking for a raise, getting a second job or creating a secondary income stream. But in all cases, you should always be aware of what your debt-to-income ratio is and pay down excess debt if you have it.

Just like you learn the lay of a golf course and develop a strategy to play each hole, when it comes to reducing or eliminating debt, it’s helpful to have an overall plan. Start by tracking your spending, finding ways to cut back in order to free up funds. After that, you can choose to pay off the debt with the highest interest rate first, or you can use the “snowball method,” where you pay off the smallest debt first. (The way the snowball method works is that after you pay off the first debt, you add that monthly payment amount to the next-smallest debt until everything is paid off.)

In future, try to stay out of debt. Rather than take out loans, save up for large purchases. For instance, if you know you will need newer transportation within the next few years, save up for a good used car and pay cash for it. The same principle applies to paying for new set of golf clubs—save up for them rather than pulling out your credit card. This alone can save you hundreds, if not thousands, of dollars in interest.

But there are times when going into debt will justify the interest you will pay. For instance, going to college can allow someone to make much more money throughout their career, so going into student loan debt may make sense. Obtaining a mortgage to purchase a rental property could make sense if the monthly income generated is enough to pay for expenses while generating an income stream now or in the future. Similarly, starting a business, expanding an existing one or purchasing new equipment to create higher production efficiencies can pay huge dividends in the long run.

The point is, always be mindful of debt and make sure it’s a needed resource rather than a drain on your budget.

There are no mulligans when it comes to your finances. For more information about how to tee up a plan to fund your life’s passions, hobbies and long-term dreams, contact Faye Sykes,  CEO and Independent Wealth Advisor at 800.871.1219 or email fsykes@scarletoakfs.com.

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This article originally appears in Golf Central Magazine : Volume 21, Issue 8, page 51 on 03/26/21. Golf Central Magazine is The Southeast’s Turf, Travel, Philanthropy, and Lifestyle Magazine. Check out their websiteFacebook, and Twitter.  Golf Central Can be contacted  at (321) 765-7550 or info@golfcentralmag.com.

Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes and is not intended as tax or accounting advice. Please consult tax or accounting professionals for specific information regarding your individual situation.