When I Realized My DTI Was Too High
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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?
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