Learning to be Financially Independent

In dating, it’s okay to ask “What’s your sign?” to see if our astrological personalities are compatible.

But, in my mind, it’s more important to ask, “what’s your DTI?” — Debt to Income Ratio. I want to know if our financial perspectives will be aligned in the long term.

It’s funny, but not really, to see when couples come in to apply for financing and have never discussed their financial and credit portfolios in advance.

Gee, why didn’t you tell me you had bad credit?! What, all your credit cards are over the limit?! Who is this person with whom you’ve co-signed a car note? You have a six-thousand dollar judgment against you??? You never told me you had to pay child support?!

Yes, I’ve seen and heard it all.

The formula for calculating your Debt-To-Income ratio (DTI).

The formula for calculating your Debt-To-Income ratio (DTI).

So, what is Debt-To-Income ratio (DTI)? The DTI ratio, a rule-of-thumb in the lending industry, determines what portion of your gross monthly income goes towards your debts vs. your disposable income. It is a number that people only think about when they apply for financing. However, it’s just as important if you’re NOT buying.

DTI appears as a fraction: 28/36.

The 28/36 DTI rule is typical but not written in stone. The top number (28%)  is the maximum amount of your gross income that can be used towards your monthly housing payment (mortgage payment which includes taxes/insurance/assessments OR your rent payment). The bottom number (36%) accounts for your monthly housing payment PLUS all other reportable monthly debt obligations such as credit cards, auto, loans, child support, etc. If you want to be overly-diligent, also include non-reportable debts such as utilites, food, child care, etc.

For example, on an income of $50k a year, $1167 (top ratio) may be allotted for your total housing payment and $1500 (bottom ratio) is the maximum total debts including your housing payment. In other words, after you’ve paid your housing payment, $333 is left to pay any other debt obligations.

After more than a decade of studying clients’ finances, here are some general observations that I’ve made:

Men are better at saving than women. Men usually like big ticket items (cars, technology, investments, vacations, etc) and pay it off quickly. Women like smaller ticket  items that add up ( purses/shoes/clothes, makeup, beauty, etc) and usually let the debt accumulate.

Women acquire more credit card debt than men (for the same reasons as #1). Try to keep your balances no more than 50% of the limit and pay more than the minimum payment otherwise you’ll never pay off the principal as you’re only paying interest.

People don’t write down their budgets and revisit it on a periodic basis. Treat your personal budget like your personal goal or business plan. It has to be written down and tweaked often.

It takes about 30 days to acquire, or get rid of, a habit before it’s part of your normal routine. Do the same for 30 days to figure out what you’re spending on a daily basis. Jot down each time you grab a $4 Starbucks coffee, buy that $12 lunch, or $50 VS bra. Once you have 30 days of data, at the end of the exercise you’ll be amazed at your buying trends and where you are wasting money.

Parents should think thoroughly before dipping into retirement savings to pay for their children’s college tuition. Will you get your years of hard work back on that risk? Taking out a student loan is sometimes smarter depending on your retirement timeline.

Just because someone makes a good income and has nice “things” does not mean they have sufficient cash savings. We all know someone that appears they have money but live paycheck to paycheck. Don’t try to run with the Jones’s, live within or under your means unless you have a comfortable cushion of savings or annuities.

To prepare for hard times, have at least 6-12 months cash reserves to pay for your expenses and emergencies. Know what your options and penalties are if you have to dig into a locked in account such as a retirement or mutual fund.

Having a personal bankruptcy does not mean you are careless with your finances or that you are a bad person, unless you abuse the system. Treat your personal finances and credit as a business, then a bankruptcy won’t seem so personal but do know the steps to quickly rebuild your credit again.

Women are not as educated in investing their money in mid-high risk investments as men. Most women keep all their money in a basic savings or checking account which isn’t smart. Only keep enough funds in basic accounts to live on and emergencies while investing the rest in riskier or higher interest investments. Take a class or hire a professional to learn how but do it soon after you’ve done sufficient research to make an informed decision.

When you’re ready to apply for financing, discuss your financial and credit portfolio with the loan officer at least three to six months prior to application. This way you will be better prepared and have all your personal and legal documents ready when you formally apply.

Living well as a woman means taking a realistic look at your financial situation, and planning for your own future. Knowing your DTI, and keeping that useful ratio in the back of your mind, will help put you better determine if you can afford that large financial purchase you were contemplating… and put you onto the path to better planned financial future.

Gone are the days when women looked to men for financial security. These days, the only Prince (or Princess) Charming on whom you should depend is your financial planner. ♥

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