Debt-To-Income Ratio: What Is It and Why Is It Important?

Debt-To-Income Ratio What Is It and Why Is It Important

A recent study found that only approximately 29% of American adults are considered financially healthy. A big part of improving financial health is paying off debt. Some people seem to think that the best way to obtain the little extras they need in life is by taking out loans or using credit cards. Debt-to-income ratio is vital to your financial standing.

While using credit or loans will help you buy something faster, it can also affect your financial health. When applying for any loan, one of the main things a lender will consider is your ratio. Below is information about this term and the importance of a low debt-to-income ratio. 

What is Debt-To-Income Ratio?

The term debt-to-income ratio is used to compare a person’s monthly gross income and their monthly debt expenses. If you want to calculate your own ratio, you will need a few basic pieces of information. 

Making a list of your monthly personal loan, car loan and credit card payments is the first step in this calculation process. Once you have the total amount of payments you are making monthly, you need to figure out your monthly gross income. 

You will then divide the debt payments you have by your income and that percentage is your debt-to-income ratio. Be sure you calculate your monthly income before taxes to ensure you get an accurate ratio. 

The Importance of a Good Debt-To-Income Ratio

When applying for a loan, the lender you use will consider many factors before approving your request. One of the main things a lender wants to know is how much debt you currently have. If your debt-to-income ratio is high, it will be difficult to get a loan for a significant amount of money approved. 

Calculating your ratio before applying for a loan can help you greatly. Most lenders will approve loans for applicants with a ratio of 36% or below. If your current debt-to-income ratio is higher than this, you may need to address this issue before applying for a loan. Avoid making money mistakes by applying with low ratio.

Great Tips For Lowering Your Debt-To-Income Ratio

Is your current ratio high? If so, it is time to do something about it. One of the first things you can do to lower this ratio is to pay off your outstanding debt. Most American consumers have around $3,000 worth of credit card debt

Regardless of how much debt you have, it is crucial to make a comprehensive plan to pay it off quickly. This is a good way to reach financial stability. You also need to avoid taking on any new debt until you get your current debt-to-income ratio down. By recalculating your ratio monthly, you can estimate how much progress you are making. 

Education is Power

The more you know about what lenders look for when inspecting a loan application, the easier it will be to get approved. By following these tips, you can lower your debt-to-income ration and get the funding you need with ease.

3 Outdoor Activities for a Great Labor Day Weekend

3 Outdoor Activities for a Great Labor Day Weekend

Most people view Labor Day weekend as the official end of summer. After this holiday, most children will be back in school. If you are trying to have a great time with your family this Labor Day weekend, now is the time to start planning activities. 

Over 60% of Americans claim they plan on traveling this Labor Day. Whether you plan to travel or stay home to celebrate this holiday without spending much, consider participating in the outdoor activities for Labor Day weekend below. 

1. Explore Nature on a Family Hike

During the summer months, the weather outside is absolutely beautiful. This means it is a great time to take your family on an excursion into nature. One of the best ways to give your children a sense of how enjoyable the outdoors can be this Labor Day is by taking them on a hike. 

Luckily, there are around 6,000 state parks in the United States. These parks have a combined total of 14 million acres of land. Many of these parks have great hiking trails that are perfect for individuals and families. 

If you plan to go hiking with your family this holiday weekend, be sure to check the weather in the area you will be traveling to. The heat during this time of year can be brutal. If the temperatures are going to be hot where you are hiking, be sure to bring along plenty of water and sunscreen for the family. 

2. Biking Can Be Lots of Fun

Getting your children off of their electronics and into nature can be difficult. As you start to plan outdoor activities for Labor Day weekend, be sure to poll the family. With the results from this poll, you can start to narrow down the list of outdoor activities at your disposal. 

Taking a family bike ride can be a lot of fun. Most children love riding their bikes. If you plan to travel to an area to take a bike ride, you need to make sure you can safely transport them in your vehicle. 

If some of your children cannot ride a bike due to their age, investing in a rear-mounted seat for them is crucial. With these rear-mounted seats, your baby or toddler will be able to enjoy the bike ride with the rest of the family. This activity is fun without making a money mistake.

3. Plan a Beach Day

A day at the beach is perhaps one of the most popular outdoor activities for Labor Day weekend. If you live relatively close to a beach, now is the time to start booking your accommodations.

The best way to make your day at the beach enjoyable is by planning ahead. Getting to the beach early will help to ensure you and your family get a great spot right on the water. You also need to make sure you have plenty of sunscreen, sandwiches and drinks to go around. 

Making Memories with Your Family 

Now that you know more about great outdoor activities for Labor Day weekend, it is time to start planning. By planning your trip well in advance, you can focus on making memories with your family yet maintaining financial stability.

4 Budgeting Tips for the Sandwich Generation

Budgeting Tips for the Sandwich Generation

Everyone wants the freedom to live their own life. But for the sandwich generation, this is easier said than done. Having a family can put a serious dent in your budget. Add taking care of elderly parents to the mix and you find that balancing your family and financial obligations is ten times harder. These budgeting tips for the sandwich generation will help you get through this.

As someone in the sandwich generation, you know just how hard it is to raise children while also taking care of your aging parents.

One of the best ways to manage and come out on top is through effective budgeting. Keep reading to learn money tips for the sandwich generation.

1. Be Open & Set Boundaries with Your Parents

Though it can be hard to have tough conversations with those you love, these talks are a must. While you want to support your parents in any way possible, it’s important to balance your own health, happiness, and finances while doing so.

Talk to your parents about what makes the most financial sense and help them plan their budget. If one of their wants simple isn’t feasible for you, such as moving into your home, it’s okay to say no.

Discuss the financial impact and discuss other housing options that are affordable and safe.

2. Boost Your Emergency Fund

Planning for the unexpected is a must. From unforeseen medical expenses to car or home repairs, it’s best to be ready for the worst to happen just in case it does.

Being sandwiched requires financial preparation. The best way to plan and prepare is by having a healthy emergency fund.

Make sure that you have at least 6-9 months’ worth of expenses saved. This way you can cover any unexpected expenses while also having peace of mind if you lose your job.

If feasible, encourage your parents to start aggressively saving as well.

3. Set Up a College Savings Plan

Odds are that you want your children to go to college. And while there are scholarships and grants to help offset the cost, it never hurts to set up a college savings plan as soon as possible.

By saving when your child is still young, you have years to plan, which means years of compound interest and growth. There are many ways to save for college, including:

  • 529 Plan
  • U.S. Savings Bonds
  • Coverdell ESA
  • Roth IRA
  • UGMA/UTMA custodial accounts

Start saving now, and by the time your child is 18, you’ll have a lot less stress.

4. Keep Saving for Retirement

Dealing with financial obligations and responsibilities from all sides makes it all too easy to put yourself on the backburner. While you want to take care of your family and your parents, don’t forget about your own needs. Check retirement account options as early as you can.

At this stage of life, you’re likely planning for your own retirement and thinking of how you want to live out your golden years. To give yourself some financial stability, continue to contribute to your retirement savings.

Maximize your earnings by contributing as much as possible, diversifying your portfolio, and taking advantage of any employer matching.

Final Thoughts

Taking care of your own family while taking care of your parents is no easy feat. However, with these budgeting tips, you’ll find that you can lead the life you want without feeling overly burdened or pressured.

3 Times You Think You’re Saving Money That Actually Cost You

Saving Money That Actually Cost You

Creating a healthy saving system is an essential step towards achieving true financial stability. However, life is riddled with examples of times when you think you’re saving money, but you’re actually setting yourself up for a financial loss. 

Below is a collection of such examples. Take note of the following points and keep them in mind the next time you’re debating a purchase or investment: 

1. Impulsively Shopping at Sales

Shopping for essential items when they’re on sale is an excellent way to save up! However, the trouble begins when people start buying nonessential items solely for the sake of availing a discount, which gives them the illusion that they’re saving money just because they’ve spent a lesser amount than the original price. Tip: You may use a shopping app to list down essential goods to buy.

Sales cost money, too! So, just because an item was purchased on sale doesn’t necessarily mean you’ve saved a significant amount of money. You still had to let go of some amount, albeit a smaller one, to purchase the product. This results in them unnecessarily spending money they could have otherwise saved.

2. Compromising on Product Quality to Save Money

Although cheaper alternatives to certain products will help you save money in the short term, there’s a high chance they’ll end up weighing your wallet down in the long run. 

This is because cheaper products are typically of lower quality than their pricier counterparts, resulting in them breaking down or malfunctioning sooner than you’d have expected them to. 

Investing in a cheap product usually means you’ll need to replace it much sooner than its pricier alternative. In the end, you end up spending more money trying to either repair or replace the damaged, low-quality product than you would have needed to spend had you bought the higher-quality product in the first place (despite the latter’s heavy price tag). 

So, be smart and buy the expensive, high-quality option. Yes, it will cost you more at the start. Try looking at it as a smart investment that’ll help you save money in the long run.

3. Compromising on Medical Visits

Doctor’s visits sure do cost a lot of money, but the good part is that they help you avoid spending even more money in the future on curing diseases that were caused due to negligence on your part. 

In other words, although skipping your doctor’s visits may seem like a smart, money-saving idea right now, this decision could end up taking a toll on your health, leaving you with massive medical bills to pay in the future for conditions that could have easily been avoided had you not skipped your doctor’s visits in the past (for the sake of saving a few extra bucks in the short-run)

The key to achieving a healthy, balanced approach to saving is to spend money on investments that will benefit you in the long run instead of trying to save a few extra dollars in the short run. Build an emergency fund in case you need to have medical visits.

Saving money doesn’t mean you cut off all your expenses (even the sensible ones!) Instead, it suggests that you cut down on inessential purchases and redirect that amount towards your savings jar. 

4 Steps to Avoid When Trying to Get Out of Debt

Get Out of Debt

Making the decision to get out of a debt is the first step in your journey to financial freedom and security. However, paying off all of your debt isn’t something that happens overnight. It takes careful planning, smart decisions, and commitment.

Here are steps you’ll want to avoid so that you can be successful regaining control over your financial health.

1. Not Changing Your Spending Habits

Humans are creatures of habit, and you’re no exception. We tend to repeat our actions. Why? Because it’s comfortable and what we have become accustomed to.

However, if your goal is to pay off financial obligation, you can’t continue with the same spending habits. This means you’ll have to work extra hard to stop doing things you’ve been doing for months, if not years.

Some of the best ways to improve your spending include:

  • Cooking meals at home
  • Not making impulse buys
  • Separating wants from needs

You don’t have to stop spending on things you enjoy. However, it’s important to make better choices with the money you do spend.

2. Not Creating a Budget

One of the most important tools you’ll need in order to pay off financial obligation is a budget. Without a budget, it’s impossible to gain control of your finances.

Most people don’t create a budget because it “takes too much time.” But the reality is that creating a budget doesn’t require hours upon hours. Getting started is simple.

Start by writing down all of your income. Then write down all of your bills, such as your car payment, mortgage, and utility bills. With the money you have left over, save as much as possible, while also saving some funds for a rainy day.

In the age of swiping cards and mobile payments, it’s all too easy to lose track of how much you’re spending.

3. Trying to Pay Off Too Much Debt at Once

Many people make the mistake of trying to put an end on your debt by paying everything off at once. If you have multiple credit cards and loans, you may put all of your money towards them each month, leaving nothing left to account for emergencies.

Instead of trying to tackle all of your financial obligation at once, prioritize your debt. Start by:

  1. Listing all of your debt
  2. Ordering debt from highest to lowest interest rate
  3. Paying off any small balances (i.e. $200)

Start by paying off the highest interest debt first. Once this debt is paid off, go to the next card or loan with the next highest rate.

You may also want to consider debt consolidation. If you have several credit cards and loans, you can combine them into one loan that is paid at a single interest rate.

4. Not Getting Help

Tackling debt on your own can become extremely overwhelming. Even if you’ve created a budget and prioritized your debt, seeing such large numbers can send you into a mental tailspin.

Don’t hesitate to ask for help and support from those around you. There are also non-profit credit counseling agencies, financial courses, debt counseling, and credit counselors available to help you every step of the way.

Stop Letting Debt Weigh You Down

Carrying around years’ worth of debt gets quite heavy. The good news is that debt isn’t a life-long sentence. With a plan, commitment, and willingness to change, you can finally dig yourself out of your financial hole. Dont make unnecessary money mistakes.

Make financial freedom your future by not making these four common mistakes when getting out of debt.

3 Types of Debts You Should Focus on First

Types of Debts

You’re having a laugh with a friend when they mention that they’ve paid off their mortgage loans or that they’re finally done with college student debts. Your mood instantly turns dark as you realize your situation is the exact opposite. Knowing these types of debts can help you organize your plan how to pay them faster.

You go home, whip out your calculator, and there’s a dizzying list of numbers and figures and percentages and dollar signs. Your debts are crippling, and so are you. So how do you begin paying off these debts? Well, there are a couple of ways to arrange your debt payments in order and achieve your financial goals. Here you go:

1. Secured vs. Unsecured Debts

As you know, while signing a debt contract, there are two types of debts. The ones that have collateral against their monetary value, otherwise known as secured debts. The others are unsecured debts, against which there are no collaterals. The collateral maybe your car, your business, your stocks, or even your residential property.

So while arranging a debt repayment plan, you have to choose between secured and unsecured debts first. In secured debts, something precious to you is actually at stake. You might lose your possession if you do not pay the debt in time, so it makes sense to just clear the secured debts with whatever you can arrange. 

On the other hand, your unsecured debts can become pretty troublesome if you delay them for too long. The pressure will just mount higher, and late payment may also affect your credit score. 

Both are risky, and both are urgent. You just have to keep a balance between the two sets and figure out a repayment method with the least losses incurred.

2. Debts with the Highest Interest Rates

This category is also pretty crucial in figuring out which debts you have to pay back first. The debts with the highest interest rates, such as those on a credit card or a mortgage loan. Other debts, such as student loans or other personal loans, have lower interest rates, which do not accumulate as fast as the higher interest ones.

In this way, it’s usually beneficial to pay back loans in their elevating interest rate. The higher the rates, the sooner you should try to get rid of the debt. This way, you’ll be able to reduce the more significant debts quickly and will be able to focus better on the smaller ones.

3. Small Debts

Many people follow the total opposite of the highest interest rate. They use the debt snowball method by starting paying off their debts with the smallest ones right up to the largest one. This way, you can get rid of the number of debts on your credit sheet and focus much better on the larger ones. In this type of debt arrangement, you don’t have small debtors nagging you for repayments every single day, which is a great benefit in itself.

Conclusion

Debts are terrifying. They keep us up at night. However, paying debts back is not impossible. You just need the right strategy to arrange how you will pay back the different debts you have under your name. From debt, you may then start thinking about how to build your emergency fund.

5 Easy Steps to Build Your Emergency Fund

Emergency Fund

The unexpected can happen at any time, which could leave you without an income, a job, or at another type of disadvantage in life. When this happens, having access to some sort of emergency fund can be a significant advantage. An emergency fund gives you access to finances in dire times. In turn, you gain an opportunity to get back on track, while being sure that financials are covered by this fund.

Following a telephonic interview, one report shows that a mere 23% of adults in the US have an emergency fund. This means the remaining 77% are left at a disadvantage should they be struck by misfortune. If you are looking for some solid advice to get your own emergency fund going, then simply follow the five simple steps we share.

1. Understand Your Goals

One of the most important factors when it comes to saving plans and funds is to understand the financial goals you have. Before you build an emergency fund, set clear goals that are easy to follow – then break them down into smaller ones. Perhaps you want to aim for an emergency fund that can care for your entire family for a period of six months. Consider how much would be needed. You should also determine how long it will take you to achieve the goal.

2. Open the Right Account

The type of account you use for your emergency fund is important. Certain account types come with several fees that need to be paid on a monthly basis. This can reduce the amount of money you end up saving in the fund. Talk to your bank manager and make sure you use an account that is suitable for an emergency fund.

3. Create an Automated Deposit Plan

In an interview, 32% of people who are aged between 18 and 29 reported feeling more secure about their job security. Even though secure, unexpected events do happen. Once your account is up, be sure to configure an automated monthly deposit. This way, you’ll never forget to add more funds.

4. Cut Expenses or Increase Income

To build up your emergency fund faster, consider getting a side hustle that brings in some extra cash. Alternatively, see if there is any way to cut on some of the expenses you currently have.

5. Add Manual Payments

If you are able to create a second income or cut down on expenses, then you give yourself an opportunity to get to your goals faster. As you obtain extra income, be sure to make a few manual payments into the savings fund. This ensures you build-up toward the goal amount faster and that you will be sufficiently covered in those unexpected events.

Conclusion

When struck by a misfortunate event, such as a job loss, or a serious disease, having an emergency fund can save the day. Unfortunately, many Americans do not have any type of emergency fund at their disposal. To get started with yours, be sure to follow the five steps we shared in this post.