In episode 44, we discussed “Knowing Your Numbers” and this is a follow-up to that episode on some of the more popular questions I’ve come across.
Questions/Issues We’ll Address on this Episode:
Q) What is a good debt ratio and what is a bad debt ratio? (5:23)
- A) Most experts would say for every dollar of income you should have no more than 36 cents of debt. This would be anything you have a payment on (house, car, etc.). As I explained in episode 44 about knowing your numbers, underwriters will use 43% to give you a loan, but this is a really high number. Now let’s talk about some reasons people may want to ask this question. I think it centers around the concept of “delayed gratification”. How much can I afford to consume and not have a negative consequence is essentially what someone is asking when they ask this? So let’s just illustrate the concept of bringing your future consumption to the present. A good example of this is when someone buys a home. You buy the home and of course, you are financing that purchase over a long period of time (e.g. 15-30 years). So you are bringing a considerable amount of your consumption forward into the present. However, when you start to purchase additional items to furnish the house this is when you may tend to go overboard. The level of consumption generally speaking far exceeds what needs to be brought into the present. So try and keep this inside 33%–that would be good. Above 43% would be bad.
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