Money Matters: What's your debt-service ratio?

This is the season of first quarter performance review for companies. They analyse their earnings and evaluate their financial health. Like companies, individuals too have to check their financial health regularly. And there are different financial ratios, which help you know where you stand financially. Today, we tell you about one such ratio. To know more, read on.

[caption id=“attachment_100002” align=“alignright” width=“380”]  Ideally, your debt service ratio should not be more than 30-35 percent.[/caption]

Debt-Service Ratio: This ratio shows the portion of your income which goes towards servicing your debts, right from your home loan EMIs, to your credit card debt, to that small loan you’ve taken from a friend. In short, this ratio tells you how deep you are stuck in a debt hole.

More from Investing

MSMEs are breaking the traditional convention. Look who’s funding them Scale-up your startup without an investor! Here’s how

To get an estimate of this ratio you need know the total debt you owe. Which is, all EMIs, for all loans. Then you need to know the your total monthly income. Then divide the amount of total EMIs of all loan by your total monthly income.

Example:

For instance, your home loan EMI is Rs 11,000, car loan EMI Rs 6,000, personal loan EMI Rs 4,000 a month and a credit card minimum due payment of Rs 4,000, your total debt stands at Rs 25,000. If your salary is Rs 50,000, the debt-service ratio would be 25,000 divided by 50,000, which is 50 percent. In other words, half your salary goes into paying your EMIs and debts.

Are you in the red zone?

Ideally, your debt service ratio should not be more than 30-35 percent. At least that’s what most financial planners will tell you. But that is an ideal scenario. The maximum debt to service ratio, you can have is 40 percent. Any thing more than that is definitely a red flag. If your debt to service ratio is 50 percent plus, we suggest you get help as soon as possible form a debt counselling agency. Of course, we are making an assumption that you are a regular person, middle class to urban mass affluent. If you are high-network individual, a ratio slightly higher than 40 percent should not hurt.

Now that you know how to find out the debt-service ratio, find out what’s yours and take the necessary action. And keep tracking this space, as we tell you more about financial ratio in weeks to come.