Could you be deeper in debt, proportionally speaking, than the U.S. government? According to a recent Planet Money Podcast the United States’ Debt to GDP percentage is 100%. That means that the government owes about the same amount (approximately 14 trillion, according to the podcast) as the country produces. What about you? What’s your equivalent amount? We can call that the Debt to Household Income percentage.
Debt to household income percentage
To find out your debt to household income percentage, add up the amounts of everything members of your household owe (including things like the mortgage, home equity loans, student loans, car loans, credit cards, etc.) Then add up the total amount of money everyone in your household makes per year. Divide the amount you owe by the amount you make to get the percentage.
For example, if the total owed added up to $200,000, and your total household income added up to $100,000, you would divide $200,000 by $100,000 to get 2. That would mean that your household owes 200% of what it makes. As another example, if you owed $52,000 and had a household income of $100,000 a year, your debt to household income percentage would be 52%. ($52,000 divided by $100,000 equals .52.)
It’s not at all uncommon to have a percentage of way over 100%, if you have a mortgage. The higher the percentage, the more risk you’re taking on. Creditors look at the amount of risk you’re taking on too, when deciding whether or not to lend you more money, and what interest rates they’re going to charge. The bigger a risk you are, the more it costs you to borrow money.
Debt to income ratio
For example, if you’re applying for a mortgage, the lender will take a look at your debt to income ratio — which is not at all the same as the debt to household income percentage. The DTI ratio basically looks at how much money you are paying out each month to service debt and then compares that with how much your gross income is for that month. So you’ll almost certainly get a very different percentage if you calculate that.
Why consider these?
In either case, the numbers help to measure risk. The debt to household income percentage is more dramatic, because it’s going to spell out in black and white just how much you owe compared with how much you earn. In either case though, the higher the percentage, the less money you have available to do things that might be more interesting than sending money to creditors. So it’s something to think about.
What’s your debt to household income percentage?Posted in Debt on 08.01.11 with 24 comments.