Rate yourself using debt-to-income ratio...(scary stuff)

[SoCalDem]

Rate yourself using debt-to-income ratio
http://www.washingtonpost.com/wp-dyn/content/article/2006/02/04/AR2006020400574.html
Reuters
Saturday, February 4, 2006; 12:42 PM

(Linda Stern is a freelance writer. Any opinions in the

column are solely those of Ms. Stern. You can e-mail her at


lindastern(at)aol.com.)

By Linda Stern

WASHINGTON (Reuters) - If you were a company, what would the analysts be saying about you?

Most investors use financial ratios to grade the companies they buy and sell, but they rarely subject their own finances to the same rigorous reviews. Now, an investment adviser has suggested that his clients measure themselves against key ratios, too.

Charles Farrell, a Medina, Ohio, consultant, says that individuals can use these formulas to get a quick report on how they are doing."They can serve as an important tool, a guideline, to help convey to individuals how their income, savings and debt are related, and how those ratios must change over time," he writes in an article in the January issue of the Journal of Financial Planning.

Of course, mortgage lenders have long used ratios to determine whether applicants are credit-worthy. Typically, they like to limit your housing expenses to 28 percent of your gross income, and your total debt payments to no more than 36 percent of your income.To figure out if you're within that range, add up what you spend in a month on your mortgage, home insurance and real estate taxes, and divide that figure by your monthly gross income. Your answer should be under .28.

Go back and add in your car payment, credit card payments and other debt payments to the first total, and divide again by your monthly gross salary. The answer should be under .36. In his article, Farrell takes that formula further. He notes that a financially healthy family or individual will look different at different ages, and adjusts his ratios accordingly.He based his ideal ratios on the goal of retirement at age 65, and assumes his clients will earn a 5 percent real rate of return on their investments and spend down about 5 percent of their savings every year in retirement.

Here are the numbers he believes healthy families should strive for.

-- Savings. Farrell suggests that everyone, at every age, should save 12 percent of their income every year. In his charts and calculations, that figure doesn't change. But the amount of savings accumulated, relative to household income, does change. He expects a 30-year-old to have 10 percent of their income amassed in savings, including retirement savings and other household savings. By age 35, that should be 90 percent.

[rwenos]

1. Unless You Live in California

Where three bedroom houses with one bath, built in 1959, cost $750,000.

And people are standing in line to buy them.

And then there's the $1200 per month for health insurance.

[jamesinca]

3. Maybe this will help

www.healthcareforall.org It should help cut the cost of living in California by a lot. Cradle to grave coverage.

[rwenos]

4. Medicare for Everybody

I've heard Sheila Kuehl on the subject.

It's too obvious. The insurance pigs will never let it happen.

[jamesinca]

9. I went on 2/2 to a lecture Q&A on this

A woman by the name of Sarah Rodgers from Sen. Kuehls office was speaking that night. She came right out and said it, this thing has bipartisan support in Sacramento but they expect the biggest fight to come from insurance and pharmaceuticals.

Think about the business and population impact. Cost savings to business will be unbelievable, they will want to move here regardless of the tax rate. People will want to live in CA so they can live with health care and because all the jobs moved here.

If this makes it through,and after the 2010 census I have a fantasy of KS, NE, AL, GA, MS being redistricted to the point that they only have one Rep and only one Senator. Like I said, it is just a fantasy

[kineneb]

2. what is retirement?

answer: when the poor get to live on even less.

[MercutioATC]

5. Actually, I'm doing O.K.

Where do you figure in monthly utility (gas, electric, car insurance, cable, cell phone, etc) bills, though?

[SoCalDem]

6. I guess they figure if the housing is in line, the rest will be OK too

:)

[Nay]

7. I think that's where they figure you will be spending the other .64 of

your income -- on the variable daily necessities like food, utilities, etc. They are telling you that in order to pay for a normal life, you shouldn't spend more than .36 of your gross income on housing and cc debt.

[salin]

8. doing great on the debt ratio

(far less than 10% - work from the save first than buy with no debt formula) - not sure about the "by 35 90% of income should be in savings" means - am guessing this means that should have in savings 90% of current income (that is - if earn 50,000 a year should have 45,000 in savings?) - in which case I am not doing so great (as in I spent the savings to get the house and car - but owe nothing); but am working on it...

[Wcross]

10. My numbers are 12% and 18%. I feel good!

I missed it on the savings- 200% of my yearly gross instead of 90%. Yes I'm bragging a bit but when you live very frugally you can't brag about things too often!

[BiggJawn]

11. Interesting, but kind of scary...

I rent, I have a $400 car payment, and the rest of my indebtedness is under $1,000.

But yet I clocked in at 32%

Not living as frugally as I thought I was, am I?

[Wcross]

12. You have too much car/or your rent is too high. n/t

[BiggJawn]

18. I screwed up my math....

It's only 27%. Still seems rather high for something that will never be anything but an Expense.

Can't imagine what it's be with a $800 mortgage and the Murkan average $20,000 Capital One debt...

[tjdee]

13. Well, I went to college, so I know I'm doing really bad.

Student loans are a killer. And I also have horrible credit all the way around. Yippee.

[Matariki]

14. Horrible credit can be a blessing

keeps you from getting tempting credit card offers and deep in debt.

[tjdee]

15. I have thought of that, but...

I'm already deep in debt, LOL. I'm not getting any deeper, and my non college loan debt is not too outrageous when I put it in perspective.... but it really sucks when I need to do things like get a car....rent an apartment (not yet thank god)...

[Wcross]

17. I get an offer every freakin day in the mailbox.

I don't even open them anymore. Anything from Deleware is auto-trashed. I don't want your credit cards!!!!!!

[tjdee]

16. And why do they always do gross?

Is there a reason they take these percentages out of the gross? I guess that helps to get a mortgage or whatever, but nobody takes home anything near to gross.

[SoCalDem]

21. because some people have a lot withheld from their checks, and others

not so much.. If you are claiming 0 dependents, and paying insurance premiums out of your check, your net will be a lot smaller than someone who's claiming 4 dependents and has nothing taken out for insurance....even if the gross starts out the same

[hfojvt]

19. what is scary?

my debt to income ratio is 16.8% at most
housing expenses are 9.6% as I estimate taxes and insurance at $200 a month even though they probably are closer to half of that. Okay maybe $150 a month since I just looked up insurance and it is $581 annually.

[LSK]

20. looks like Im ahead of the game as far as savings.

24% yearly income saved (56% if you count 401K).

Saving 18% per month of my income.

My debt ratio is 2.36 even thou my only debt is my mortgage.

Im 33.