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If you are ready with your plans, we now need to finally fix and stick to a strategy. Life is all about strategies and the strategy we follow makes a change. Who knows if a small change can project a large difference?
Now it's time for you to revise your financial plan. Before this, I want to let you know a crucial point. Many of you might have a surprisingly high debt when compared to your assets. The fact is that, according to CNBC, In second quarter of 2018 global debt-to-GDP ratio is 316%. And when I participated in an online course, 75% of financial assets are debts and the remaining 25% are equities. Hence, it is not quite hysterical if you are carried in debt. And those who are not holding a column for it, I'd like to revise to know if you have any debts that can be inherited.
It is quite exasperating to clear debts, as the liability caused by them is always greater than risk free guaranteed returns (I mean to say returns on deposits). As we did take the example of Sambhrama, who acquires privileged whopping payslips but could not make an efficient financial strategy to her comforts. She can actually hit her expenses to 50% and make herself quite comfortable. But it is not quite advisable to make the debt at margin of 50% of her income making 50% DTI.
DEBT TO INCOME RATIO.
Every bank or financial body asks for income certificates for at least two years or income tax returns to lend huge amount of loans. It is evident that it estimates the credit performance of the customer but not assuming a secure payback. How does a banker can estimate the performance of an individual based on his payslips. These payslips determine something called DTI or Debt to Income ratio.
Debt to Income ratio is the ratio of your debt to your income. For example if sambhrama is receiving a monthly payslip of Rs. 50k INR, and she settles Rs.10K INR in her debts she is having 20 DTI. It is one of the most important factor that determines the quality of life. A person holding 40 DTI is predicted to have moderate quality of life.
In general, these DTI guidelines are close to what lenders will assume:
20% or less is generally considered excellent.
20% — 36% is a good ratio and will most likely not be a cause for concern.
36% — 40% starts to make you a questionable candidate and lenders may need an explanation of why your DTI is so high.
40% or higher is a huge “no-no.” This is usually a deal breaker for the majority of lenders.
It is also important to note that credit score is different from the DTI. Credit score defines the performance of an individual to clear his dues which is the function of his income and his past clearances. It has nothing to do with the current debts. However, one can always assess his performance through debt to credit ratio.
When you apply for a credit card, you’re given a certain amount of credit limit. This is the credit portion of this ratio. As you spend on this card, drawing out a balance, you go into debt to the credit card issuer. This balance is the “debt” portion of your debt-to-credit ratio. If you owe Rs.100 on a card with a Rs.1,000 limit, you have a 10% debt-to-credit ratio on that card.
It is time for readjusting the debt plan and roll the strategy. It is important to plan a strategy in which one should adjust his debt payments below 40%, whenever or wherever it's applicable.
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