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When I Realized My DTI Was Too High

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dti

If you are looking at the title and going “What in the world is DTI?,” then let me give you a quick run down.  DTI is short for debt-to-income and it is a simple ratio.  This ratio deals with your gross monthly income and then factors in your current debt load.  There are technically two types of DTI, but for this article we are going to just talk about overall DTI. This includes mortgage/rent payments, and all other debts that you may owe.  This can include car loans, credit cards, student loans, child support, alimony, and really anything that you pay on a monthly basis.

There are a wide range of discussions that describe where your DTI should be.  Some recommend not having more than 35% of your income being taken up by debt, but I think that is too high.  While I say that now, I want to talk about when I first discovered my where my DTI ratio was and how it made me feel.

My Dreaded DTI

 

When the financial crises hit back in 2008, I was living my dream, or so I thought.  I was enjoying life, running a successful business, and didn’t have a care in the world.  Well, that is what I thought at least.  I had racked up way over $50,000 worth of credit card debt.  I was paying the minimum payments each month on my many credit cards, but didn’t think I had a problem. I mean, I could easily handle the minimum payments, so I was good.

Or so I thought…..

I did not know about DTI when I first started looking into my lifestyle.  I had my credit card debt spread across many credit cards.  It didn’t register in my mind that I had a problem.  That all changed when I put all of my debt onto a whiteboard.  That is when my eyes were opened; and what I saw on the board hurt. A lot. I was in debt and I was in trouble.  After a bit of research, I decided to calculated my debt-to-income ratio.  Want to guess what the percentage was?

67%

Yes, you just read that correctly.  I was paying 67 percent of my net income toward debt.  The big issue was that since I was paying so much, I wasn’t bringing any money in.  All of my money was going toward debt and then when I wanted to buy something, it would just go on the credit card.  It was a viscous cycle that I would never get out of unless I changed my mentality.

Working My Way Out

 

It took me four years to get out of my credit card debt.  It was a long process that required me to make a mental shift along with earn extra income. I would have never gotten out of debt if I didn’t work extra on the side.  That inspiration to get out of debt also changed my thinking of how I earn money. Ever since 2008, I have hustled on the side in order to make extra money.  I think it is a great way to change your financial situation.

As I cut down my debts and increased my income, I saw my DTI drop. After some time, I was able to get it down to 35 percent and it felt good. I had breathing room in my budget and could do other things like invest for the first time. Though 35 percent is not bad, I wanted to do better. I wanted to get it down to 20%.  It took more time and I finally was able to get there.

Though I wanted to keep it at the 20 percent, I also had an opportunity to get a nice Jeep Wrangler as a project vehicle. I have a great credit score, so I was able to secure some really low financing. It was an experiment which just ended last week. When I got the loan for the Jeep, it raised my DTI a bit. While that ratio really doesn’t matter much, it does when you need to get a loan or apply for a credit card. Unfortunately, my wife and I are selling our home and buying another one.  That puts us in the process of securing a mortgage. My Jeep experiment lasted for four months, but I paid off the loan in order to get my DTI back down to a respectable level. The lower my DTI, the better chance I have to secure a good loan.

After everything is said and done and I look back at my DTI from where it was 6 years ago, I am lower than my 20% goal. I am now sitting at 15 percent and I think that is an awesome level. Yes, this does include my mortgage as well, just in case you were wondering.

 

So, you heard my DTI story, what is yours?  Is your debt-to-income ratio where you want it?  What is your optimal number?

 

Photo courtesy of: LendingMemo

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Grayson is the owner of Debt Roundup and Empowered Shopper. He also co-owns Sprout Wealth and Eyes on the Dollar. After going to battle and winning against consumer debt, he decided it was time to learn how to use credit wisely and grow his wealth. He discusses all things personal finance and is not afraid of being controversial. He also is a freelance writer and blog manager.

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45 Comments

  • Wow – a 15% DTI is extremely good when you have a mortgage. Moving from 67% to 15% in 5 short years is a really impressive feat! I don’t actually know what my ratio is. I guess that’s something I should probably calculate. Thanks Grayson, you’ve inspired me to action!

  • If we wiped out our student loans and/or increased our income our DTI would look a LOT better. The monthly cash outflow of our student loans each month can be a real drain. Thankfully I am now able to offset the student loan payments with income from blogging so that’s helped. I would love to get to a 15% (with mortgage) like you!

  • Really great progress! This is something I would never think about! Most people focus on the actual amount and trying to get it lower. But when seeing it as a percentage of your income, that really can awaken your want to become debt free.

  • Matt Becker says:

    I think DTI is a flawed metric because your income could go away at any time. I don’t really have any debt, but if I did I would prefer to look at it as a percentage of my liquid net worth. To me, that’s a better indicator of how risky that debt really is.

    • Grayson Bell says:

      While I agree that it is a flawed metric, it is easier for people to understand. Many don’t have liquid net worth, so they wouldn’t be able to calculate such. Though, unless you only have cash, your liquid net worth can disappear if you are counting investments.

      I assume you grow your liquid net worth with income, so without it, you probably wouldn’t have a very good DTI.

  • Michelle says:

    Our DTI is relatively low and below 20% (for both our mortgage and car payments). It used to of course be much higher when we had student loans (lots of debt and low income at the time). I prefer to have it as low as possible.

  • Optimal is not an option for me presently. My DTI is way too high, with all of my (puny) income going towards debt. My horrible DTI ratio is the reason Sallie Mae won’t ever release my co-signer.

  • Awesome job on dropping your DTI so much! And for becoming aware- I’m sure most people who are deep in credit card debt have no idea what DTI is or the role it plays in their life.

  • I would love a 0$ DTI! 15% is great. Ours is around 32% right now, mainly because the commercial building we bought at the end of the year is on a six year term and has a high payment. If I really wanted to beat myself up over debt, I could look at what seems like a really high payment for the commercial building at $3200 per month. That seems like a lot, but we were paying much more than that per month when we were trying to get out of credit card debt. If we’d bought real estate instead of crap, we could probably own an income producing property outright by this point. Hindsight is always 20/20, and I try not to think about those days except to remind myself never to go there again.

    • Grayson Bell says:

      I think that your 32% is not bad considering you have a commercial building that you are paying for. Hindsight really is 20/20, but you can’t change the past, but change how you act in the future.

  • Wow, Grayson – it’s nice to know we weren’t the only ones starting out with a ridiculously high DTI. 🙂 If we keep on track with the way things are running now, in 4 more years our DTI should be hanging out at around 25%. Won’t that be nice. 🙂

    • Grayson Bell says:

      I was in your shoes before Laurie! This is the reason why I share my story, because all things are possible if you just put your mind to it. You can get to 25% and it will be nice.

  • Liz says:

    oh student loans can be such a pain… if it wasn’t for those, we would be sitting in a much better place. Hopefully in about 2 years we won’t have to worry about those anymore!

  • With my current debt with my husband, we’re around a 35% DTI ratio but we also don’t own a home. Our goal is to get that down significantly by 2017 so we can afford to buy a home. We’re on the path to accomplishing that goal but it can be hard at times. Thanks for sharing this.

  • E.M. says:

    My DTI is around 13% with my student loans. The minimum payments are pretty manageable so I always try and pay extra. This is a good way to really open your eyes to how much of your income is being eaten up by debt.

  • I tell people that your DTI is like your BMI. You can have a high DTI, but it is not necessarily healthy and will have long term implications to your financial health. Congrats on getting yours so low!

  • Very impressive on how you turned your DTI around, Grayson. It’s something many people don’t think about unless they are trying to get a loan, then maybe they do. But not always. 🙂 Unfortunately, so many people assume they are doing okay because they are paying the minimums (which, of course, is certainly better than not being able to do that!) on their credit cards and their bills but they don’t look at the big picture. Eventually that debt will catch up with them. You should feel great about how far you’ve come and I have no doubt you’ll secure a great loan for new home.

    • Grayson Bell says:

      Thank you Shannon. Ever since I made my first payment to get out of debt, I have looked at the bigger picture. While DTI is typically thought about when a loan is in play, it should be looked at more.

  • Way to tackle your DTI after learning what it was. Many people would just give up. When you are in debt and start putting the pieces of the puzzle together, it’s quite eye-opening and sometimes scary. We know of many who try to continue ignoring it. It always catches up one way or another. Nice job!

  • Marvin says:

    That’s a great story Grayson, thanks for sharing. We are currently debt free but before my wife and I got married she had student loan debt and a car loan. I knew how burdensome debt could be so we knocked out all her debt ASAP.

  • Is there a specific calculator you use to calculate your DTI?

  • Mine was up to 55%, but it’s close to 50% now and dropping monthly. Can’t wait to have it drop even more.

  • My DTI is 25%, the biggest factor is our home mortgage and land investment that I am still paying every month. Hopefully in the 3rd quarter of this year it will drop to 20%.

    This is very interesting story how determined you are to reduce DTI. Thanks for the tips.

  • Cat says:

    Hmmmmm I haven’t calculated mine, but when I do I’ll leave out the husband’s loans and just use mine…. or maybe that’s cheating?

  • jonnypean says:

    Wow Grayson, it is really nice to know that having debt to income is a common problem with many, and these are some quite effective tips o follow. Thanks for sharing.

  • Jason B says:

    Mine is ridiculously high. They good thing is that it’s less than it was at the beginning of the year. I have a lot of work ahead of me but I’m ready!

  • Going from a DTI of 67% to 15% is no small task, so congrats on your efforts. Just curious, wouldn’t it be better to calculate DTI using net income, since this is the actual income used to pay expenses. It would make DTI higher, but I think it would show a more realistic ratio.

    • Grayson Bell says:

      Sorry, when I said gross, in my head I was thinking my income I get in my paycheck, not including any other expenses. I should change that to net. You are right. The numbers are still the same, but I just used the wrong term.

  • ADZ says:

    My DTI is VERY high right now, and my Credit Score has dropped to ~590… I’m struggling after years of living as a contractor, in the midwest, and not making enough money to pay back my debt. It’s hard to work extra hours because I have sleep apnea, and am only just starting my treatments. So I’m exhausted after work. I also have 1 dog and 2 cats. I now live in San Diego, CA where cost of living is extremely high. I do have have a spending issue, and am not good at conserving money. I do have money investing in my 401k at work, should I stop all that and take that money and apply it toward my debt? I can’t even open credit cards anymore because my debt is just too high, and I get negative results when I try to apply for a new card… I’ve got about $25k in credit card debt, and my income is only ~$85k/yr. What should I do?

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