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Old 12-01-2009, 10:58 AM   #1
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Old 12-01-2009, 12:10 PM   #2
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Ohh, my debt to income is not good according to them. Its based on take home pay too. Doh!
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Old 12-01-2009, 02:14 PM   #3
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— The average debt-to-income ratio, or DTI, is 125 percent today. Economists roughly consider a 100 percent DTI ratio to be "normal" or healthy. So if you owed a combined $125,000 on your mortgage, car loans and other obligations and earned $100,000 in take-home pay, you'd want to pay down your debt by $25,000, or 20 percent, to be in the safe zone.
Does that sound right to you? It sounds outrageous to me. Maybe when you are nearing retirement, but I cannot imagine many people could even do 125% with their take home pay if they have a mortgage. At least not many in CA.
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Old 12-01-2009, 02:36 PM   #4
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According to their ratio I would be lucky to be eating cat food. The deep freeze is full of meat and produce. The car is a couple of years old in the garage and paid off. The utilities and property taxes get taken care of and sometimes I take a vacation from swimming in the back yard. I do plan on giving more to charity this year and will be buying some Christmas presents for my kids, dog and the house.

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Old 12-01-2009, 02:36 PM   #5
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tmm99 - I agree with you.

I copied the same paragraph out of it myself to reply (probably should have read all the responses first). I'd consider this person to be in pretty good shape with only $125k in total debt (mortgage+) and making $100k.
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Old 12-01-2009, 02:44 PM   #6
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The whole concept of using a debt to income ratio as some sort of measure of financial health is kind of pointless, it seems to me. My DTI is 0%. Seven years ago it was over 200%. So what does this prove? That I am more financially fit today than I was then? Yeah, right. I am just older but the same person. I have paid off my debt as planned, and as I was doing back then. I was doing a lot more LBYM back then than I am now.
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Old 12-01-2009, 02:46 PM   #7
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Does that sound right to you? It sounds outrageous to me. Maybe when you are nearing retirement, but I cannot imagine many people could even do 125% with their take home pay if they have a mortgage. At least not many in CA.
Totally agree. We have a relatively high income, and a smaller than normal mortgage (by CA standards), and we don't come close to that number. And we have no other debt. Seems like this should be bracketed by age, at least.
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Old 12-01-2009, 03:39 PM   #8
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In the old days of 1998, one would buy a house that had a value of about 2X to 2.5X your annual income and you would put 20% down. So let's just say your debt was no worse than 2X your annual income. Pay on your mortgage a few years and let your salary grow and you end up at 1X DTi in no time. Then because of all those renters out there and folks with paid off mortgages, you can calculate an average of a population that goes even lower.

Bottom line: Many folks don't have as much debt on average as you think.
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Old 12-01-2009, 04:10 PM   #9
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Wow, our debt to take home income (DTI) ratio is 425%. But that reflects huge student loans amortized over 30 years and a home mortgage, plus take home pay that is roughly 1/2 our pre-tax earnings. Our average interest rate on the debt is 2.9%, and virtually all of it is tax favored debt to some extent.

Again, general rules of thumb are meaningless to the typical ER crowd.

But I agree with posters above - almost anyone starting out today and buying even a modest house in most places in the country would exceed 100% DTI.
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Old 12-01-2009, 04:28 PM   #10
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My mortgage is about $160K. Take home is probably well below $60K. So I'm at 300%? Dang!
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Old 12-01-2009, 05:27 PM   #11
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I'm clueless when it comes to economics, but the article says more people are saving more but using those savings to pay down debt. So that definition of saving includes retiring existing debt, sort of a reverse investment? Is that a standard definition of saving?
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Old 12-01-2009, 05:46 PM   #12
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Debt-to-income ratio - Wikipedia, the free encyclopedia

Debt to income is a ratio to determine whether you can afford your loan payments. It's how much you owe vs. how much you make. So, if your mortgage is $1200/mo, your car payment is $325/mo your min payment on your cc's is $15/mo and you make $6500/mo, your debt to income ratio is 23%. A DTI of 100 means you're not saving anything and you're spending everything you make.

Unless I'm missing something it seems to me the article is wrong and the author is using the term incorrectly.
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Old 12-01-2009, 05:55 PM   #13
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Debt-to-income ratio - Wikipedia, the free encyclopedia

Debt to income is a ratio to determine whether you can afford your loan payments. It's how much you owe vs. how much you make. So, if your mortgage is $1200/mo, your car payment is $325/mo your min payment on your cc's is $15/mo and you make $6500/mo, your debt to income ratio is 23%. A DTI of 100 means you're not saving anything and you're spending everything you make.

Unless I'm missing something it seems to me the article is wrong and the author is using the term incorrectly.
Good point! After reading your post, I agree and think the author has misused the term.
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Old 12-01-2009, 05:57 PM   #14
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I'm clueless when it comes to economics, but the article says more people are saving more but using those savings to pay down debt. So that definition of saving includes retiring existing debt, sort of a reverse investment? Is that a standard definition of saving?
As I understand it, the savings rate is calculated by starting with aggregate income, then subtracting taxes and spending. It doesn't say anything about debt reduction, per se.
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Old 12-01-2009, 06:36 PM   #15
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As I understand it, the savings rate is calculated by starting with aggregate income, then subtracting taxes and spending. It doesn't say anything about debt reduction, per se.
This is what I don't understand in the article:

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The savings rate this year is about 4 percent. One mainstream assumption is that as the savings rate goes up, about 80 percent of new savings will be used to pay down debt, while about 20 percent will be invested in securities or other assets that pay interest.
It sounds like if I owed $10,000 on my Visa/car loan/whatever, if I "saved" $10,000 and then used $8,000 (80 percent) of it to pay down the debt, the $8,000 still counts as saving? Even though it is not invested. I guess I don't know why that $8,000 counts as part of the savings.
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Old 12-02-2009, 12:38 AM   #16
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This is what I don't understand in the article:
Quote:
The savings rate this year is about 4 percent. One mainstream assumption is that as the savings rate goes up, about 80 percent of new savings will be used to pay down debt, while about 20 percent will be invested in securities or other assets that pay interest.
It sounds like if I owed $10,000 on my Visa/car loan/whatever, if I "saved" $10,000 and then used $8,000 (80 percent) of it to pay down the debt, the $8,000 still counts as saving? Even though it is not invested. I guess I don't know why that $8,000 counts as part of the savings.
I think maybe it's "savings" because you didn't spend it.
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Old 12-02-2009, 03:32 AM   #17
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Well our debt to income ratio is a long way above the 100% healthy target - happily everything except the home mortgage is on investment properties which I have no intention of paying down early unless/until interest rates start rising.

Quite frankly, I thought the article was a little bit silly:

1. the debt to income comments do not distinguish between good and bad debt (apologies if that restarts another debate on the subject)

2. the net worth to income statements do not reflect the fact that they the population has aged with far more people in retirement now (and more people starting off burdened by student loans and having negative net worth as a result)
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Old 12-02-2009, 09:15 AM   #18
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[QUOTE=FUEGO;But I agree with posters above - almost anyone starting out today and buying even a modest house in most places in the country would exceed 100% DTI.[/QUOTE]

A lot depends on the "stage of life" one is in. In 1986 after my divorce I had a gross income of $38k/year and owed $94k on a house and about $12k on a pickup truck. Basically I was up to my eyeballs in debt and the only credit card I could get was a secured one. Though single, I was claiming 14 deductions on the W2 form to break even at tax time and make the monthly cash flow. Fourteen years later (with the help of a pretty and smart wife) we had zero debt.

So I think that for someone in their 20s or early 30s a high debt load is not unexpected if they just bought a home and/or have student loans. If they're still that deep in the hole 25 years later they have a problem.
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Old 12-02-2009, 10:46 AM   #19
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A lot depends on the "stage of life" one is in. In 1986 after my divorce I had a gross income of $38k/year and owed $94k on a house and about $12k on a pickup truck. Basically I was up to my eyeballs in debt and the only credit card I could get was a secured one. Though single, I was claiming 14 deductions on the W2 form to break even at tax time and make the monthly cash flow. Fourteen years later (with the help of a pretty and smart wife) we had zero debt.

So I think that for someone in their 20s or early 30s a high debt load is not unexpected if they just bought a home and/or have student loans. If they're still that deep in the hole 25 years later they have a problem.
I agree. I imagine most of my friends from high school/college/grad school who are just rounding the corner past age 30 are pretty deep in debt (like us). Add a new mortgage to a husband and wife's undergrad and grad school loans, and you have a hefty amount of debt. For me at least, the debt payments remain fixed, and the income tends to go up over time with inflation, promotions, raises, etc (pre-2009 at least LOL).

But 20-30 years later, the debt payments should be much lower relative to income.

We are sitting at 42% of take home pay going to service debt. 21% of gross pay. That's a lower ratio than what many people my age have, and we intentionally structured our finances with some leverage to (hopefully) give us some long term returns on our borrowed money better than the interest rates we are paying.
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Old 12-02-2009, 11:55 AM   #20
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Any debt-to-income ratio that doesn't take interest rates into account is pretty foolish.

You can carry a lot more debt at 5% than at 20%.
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