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Debt and Borrowing Money

Playlist: Debt and Borrowing Money

How much should you borrow in comparison to your income?

How much should you borrow in comparison to your income?

When considering taking on debt, take a look at your income.

There are several ways to determine the amount of debt you should take on, but the most important factor is your ability to meet the repayment obligation.

Your debt limit should be lower than what is recommended by a financial professional (e.g., a banker or mortgage loan officer). Most financial professionals use your gross income (amount before taxes are taken out), not your net income (amount after taxes have been taken out). Financial professionals use multiple methods to help you determine your debt limit.

Example methods include: debt-to-income ratio and the 25/36 rule.

The debt-to-income ratio is based on how much of your monthly income is going to pay down debt.

Debt-to-income ratio is your monthly debt (mortgage, credit cards, auto loans, and other debt) divided by your monthly income and then multiplied by 100 to get your percentage.

36% or less is a healthy number; anything over 43% means you are in financial trouble and paying off debt needs to become a priority.

The 25/36 rule is that your rent or mortgage payment should not exceed 25% of your gross monthly income.

All debt including your rent/mortgage should not exceed 36% of your gross income.

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