Is Your Debt Ratio Healthy?

slideIllustrated by Sydney Hass.
Sure, women are bringing home the bacon in record numbers these days, but what if you're still not reaching your maximum earning potential? Enter: DailyWorth, a destination that supplies financial decision makers (that's you!) with both indispensable money expertise & a serious dose of entrepreneurial confidence.
How do you know if your debt ratio is healthy? Let’s say you’re making a good salary, but you’ve got a big mortgage and car loan. Is there a point at which you’re tipping the scales and being weighed down with too much debt?
One way to gauge is by calculating your debt-to-income ratio. It’s easy. Add up your net monthly income and divide that by your monthly debt payments: mortgage, car payment, loans, credit cards. If you net $6,000 a month, and pay $1,500 to your mortgage, $300 to your car, and $200 in other debt payments, that equals $2000. Your debt ratio is 30%.
What does that mean?
A debt ratio isn’t important in and of itself, says Galia Gichon, founder of Down-to-Earth Finance. But, it acts as a litmus test for more important questions: Does the amount of debt you carry enable you to put money aside for big financial goals like retirement and a safety fund?
Someone who carries a debt ratio of 20% to 30% is probably able to hit their savings goals. Forty percent is okay — but it probably means you’re not putting much aside. Gichon says she sees many people in the 50% range. “At that point, you’re probably paying your bills and your mortgage, but you’re not able to get ahead, once you take care of expenses.”
This is where you can toss the ratio aside and focus on what it’s pointing to: Do you have a savings problem? Is your debt impeding your ability to prep for the future?
Solutions to the debit/savings issue obviously need to be tailored to the individual. In broad terms, you can make more money, you can get rid of debt, or you can get creative. On the more creative side, Gichon recently encouraged a client to consolidate her student loan (which had an interest rate of 7.6%) with her mortgage to reap a better rate.
“Technically, she’s taking out more debt, but because it’s a 15-year mortgage, and her rate is 3%, her total payment and interest paid are lower. When we walked through the numbers together, she realized that she now had an extra $1,200 a month to beef up her retirement savings. She’s feeling really excited about that.”

More from Work & Money

So, you've graduated from college, updated your LinkedIn, and have been hitting up your network like crazy. You had an amazing first interview, you ...
If the new phrase for the office BFF is the "work wife," then is a good boss or mentor your "work mom" or "work dad"? Part authority figure, part dispenser...
The morning at my insurance firm was hectic. My first appointment after lunch was a balding man in his mid-50s. I smiled at him warmly and attempted ...
Refinery29 joined the Clinton Foundation for a tour of Port-au-Prince, Haiti, to get a firsthand look at the experiences of the women and girls who live ...
9:30 p.m. — HANGRY. Get home and eat canned soup and watch Netflix before bed
Any recent grads freaking out about their job prospects need not fear: Apparently the demand for exorcists has never been higher. The Telegraph reports ...
9:45 a.m. — Starbucks reward, bitches! OBV I get the most expensive thing that I can concoct. A Venti 5 shot soy latte. Yum
You know what's easy? Spending money. It's the best way to get what you want right now. Except...this is not sustainable. Those little luxuries add up ...
Four years ago, my life was exactly where I wanted it: I was working as a senior editor at a major glossy magazine. My first young adult novel had just ...
After months of waiting and countless discussions about what the future holds for our favorite television characters, Shondaland shows are finally back. ...
Just after my son’s first birthday, I was on the phone with my mom, grappling over a gut-wrenching decision. I was scheduled to go on a business trip but...
I get so nervous before job interviews — sweaty palms, dry mouth, butterflies in my stomach. It’s really not fun. But once I’m sitting down with the ...
Fifty percent off your purchase here. 1,000 free miles there. When it comes to credit cards, the benefits are easy to see — while the downsides are often ...
As the host of RIOT's Woke Bae, we already know comedian Phoebe Robinson is funny AF while getting serious about major issues like feminism and ...