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10 Tips for Improving Your Debt to Income Ratio

written by: Olivia Emisar•edited by: Michele McDonough•updated: 9/8/2011

A recent news story showcased a couple for winning the biggest jackpot in European Lotto history. The couple has modest interest and intents for their new found wealth, but the most striking comment made was: "We have always lived within our means..." and that is step one to improving your DTI.

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    What Is a Good DTI Ratio?

    Stating it plainly, it means you have more money coming in than going out and the ratio or all your combined expenses does not exceed 36 percent of your monthly income. To determine your ideal Debt to Income (DTI) ratio, simply multiply your monthly income by .36. The resulting amount is the maximum you should be spending on mortgage loans, credit cards, student loans, child support, auto loans, property taxes and required insurance premiums.

    If your payments fall at or below that number, you are in incredibly good financial shape. If the numbers are less than desirable, there are things you can do to decrease that number and improve your debt to income ratio.

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    1. Live Within Your Means

    Champagne Champagne wishes and caviar dreams on a beer and hot dog budget will spell financial disaster if you act on them. In order for you to be financially sound, you must live within your means and save up for items and events to take place at a later date.

    Forgo instant gratification and think things through before charging the newest electronic equipment and paying only the minimum amount. Save up and pay cash if you are unable to charge and pay off the amount in full at the end of the month.

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    2. Adjust Expenses to Income

    The recently unemployed have learned a hard and unpleasant lesson when remaining unemployed for a year or more and ending with employment that pays less than what they were accustomed to; their lifestyle had to be changed if they were going to keep their heads above water. If your income has dropped, you have to cut out some expenses to reflect that change and cutting expenses to reflect less income enables you to live within your means.

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    3. Take Control

    Improve your debt to income ratio by taking control of your finances and creating a budget that includes purchasing only the basic needs of food, shelter, utilities and transportation. Anything left over goes to the savings account and to reduce revolving credit accounts.

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    4. Pay It Down

    There are different schools of thought on paying down credit card debt, feel free to choose the one that would work best for you.

    • Pay off the credit card with the highest interest rate first and work your way down to the list.
    • Pay off the credit card with the highest amount first and work your way down the list.
    • Pay off the credit card with the least amount owed and work your way up to the next one on the list.
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    5. Consolidate

    Consolidate Reduce your payments instantly by consolidating all your credit card debt into the lowest single-digit bank loan you can obtain. Most credit cards carry a double-digit percentage rate. Making the minimum payments on all of them will never change your debt to income ratio. Once you have it all in one low-interest package, add up the total you used to pay every month toward your credit cards, pay a larger share toward your loan and put the remaining in your savings account.

    For instance, if you paid $1,000 a month toward your credit cards and your new loan is $400 a month, put $600 toward the loan and put $400 into your savings accounts. You are still going through the same amount of money on a monthly basis but you are making better financial choices.

    *Note: Do not use your cards again until you have paid off the consolidated loan and do not close your credit card accounts either because you need this to bolster your credit and FICO scores.

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    6. Save Up

    Save Money When you cut your bills by reducing expenses, you must put that amount towards your savings account. This increases your liquidity and gives your financial portfolio a much needed shot in the arm.

    Easy ways to reduce or eliminate bills:

    • Get rid of the cable bill and enjoy High Definition channels with an Over The Air antenna. (See resources for channels you will get in your area.) The average household spends $60 a month or more on cable and the $25 offers are practically worthless.
    • Turn down the thermostat in winter and up during the summer. Bank the difference.
    • Turn the thermostat on the water heater a few degrees lower.
    • Carpool and if you can't, plan your itinerary to save gas like the pros do.

    You can look around your house and see where else the money is going and make the necessary adjustments to reduce or eliminate recurring expenses. The main thing in this exercise is that you put that money in the savings account.

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    7. Food Savings

    Food deserves its own section because we are the most wasteful country in the world. No one spends as much money on groceries they have to throw out as we do. The following food tips can shave off 25 to 50 percent off your food bill on a regular basis, and initially, it could save you 90 percent or more in the first two or four months.

    • Make weekly menus that include everything you already have in your pantry and stick to the menu.
    • Purchase only the fresh produce you and your family will consume within the first three days and only replace as necessary.
    • Bag your lunches every day for work. This is a commitment that will keep you physically and financially healthy.
    • Plan your menus based on items on hand and the advertised sales on your local flyers.
    • Use coupons only for the things you regularly use.

    Stock up on toiletries (toothpaste, toilet tissue, shampoo, razor blades) when you have coupons and can combine them with sale prices or temporary price reductions. Calculate the savings for all of the above and put the money you would have spent in the bank.

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    8. Say No

    Say no to impulse buys by allowing yourself and your family members to have a "cool down" period. If after a couple of hours or days, the purchase seems necessary, then go ahead, but if after the cool down period has lost its luster, go ahead and take the amount you would have spent and put it in the savings account. You are effectively decreasing your debt and increasing your purchasing power when shopping for a loan.

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    9. Renegotiate

    Renegotiate loan terms with your bank for mortgages and automobiles. Interest rates have dropped drastically in the past couple of years and people who were paying 7 percent are now paying 4 and 5 percent on their loans. Ensure you get the best possible terms by negotiating down fees and points or shopping around for a bank that has those offers. A 2 point reduction will effectively impact your debt to income ratio in a positive way.

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    10. Establish Goals and Rewards

    You don't have to live the life of a hermit and endure drudgery and sacrifice. Once you have reached a goal or completed a step towards your main goals, say eliminating a credit card debt, feel free to reward yourself with free activities and low-cost treat. Remember that Rome was not built in a day and neither is the financial crisis most people find themselves in, so take baby steps that allow you to reduce expenses, save money and give you a sense of accomplishment.

    Please be sure to check out the other tips and strategies in Bright Hub's collection of personal and household budgeting guides.

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    Being Frugal:


    Images: Champagne by digitalart /; Consolidate by nuttakit /; Save Money by Cochrane /

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