Ask the Money Lady,
Today we are going a little off protocol and rather than answering a question I wanted to share a strategy from my book that you can apply to your own lives to determine your own financial plan. I want you to consider determining your future affordability the same way the banks do. It is called TDS and stands for Total Debt Servicing Ratio. This is used by banks and lenders to establish the servicing for increases to your lifestyle. It is a great way for you to instantly determine whether a larger mortgage payment, extra car loan or additional loan payment can fit into your budget. Today people go too deep, too early and too fast. Don’t make the mistakes of being lured in by instant gratification. So let’s get started. (It is important to always stay within the TDS Ratio of 40%). I know we are going to do a little math here – but stay with me!
First determine your monthly mortgage payment or rent, monthly property taxes and your monthly debts/loan payments. You will also need to take your annual gross income and determine the monthly amount, (gross income divided by 12 – this is not your take-home income, please use your before tax income). Here is an example, Jane Doe wants to know what her TDS Ratio is so she can consider purchasing a new car.
Jane’s Mtg payment = $1,258 Property Taxes = $155
Credit Card Min. Balances + Student Loan Monthly amount = $320
Monthly Income = $5,666 ($68,000 per year)
Here is the TDS formula: (MTG Payment + Taxes + Debts + $100 ) / Total Monthly Income x 100 = TDS%
($1,258 + $155 + $320 + $100) / $5,666 x 100 = 32.35%
With a TDS of 32.35%, Jane is living well within her means and she can easily make her monthly commitments and perhaps even save for the future. Now let’s say Jane wants to purchase a new car and the financing payment is $620 per month. Here is how we would add it in. ($1,258 + $155 + $320 + $620 + $100) / $5,666 x 100 = 43.29 %
With a new TDS of 43.29%, we now know this car payment is too high to fit into Jane’s budget and if she were to try to get approved from a bank, she most likely would not qualify. Jane should now consider a lower monthly car payment – lets try $425/month. ($1,258 + $155 + $320 + $425 + $100) / $5,666 x 100 = 39.85%
With a new TDS under the 40%, Jane now knows that her maximum monthly car payment cannot exceed $420 and she can begin her car shopping. Determining your TDS is very easy and acts as a non-discriminatory, “tell it like it is” ratio for anyone wanting to ensure their current financial situation is on the right track. Of course, if you are living month to month and constantly reaching to credit to supplement living expenses, you already know that your TDS will be over 40%. Whether you are planning to buy a second property, move to a larger home, purchase a new car, or even restructure your debt, the 40% benchmark should always be adhered to. It is very lenient and there should be no reason why you need to live over this percentage. Right now, work out your own TDS ratio and play with the monthly amounts. Remember, everyone has the ability to retire wealthy, but it isn’t for slackers, you have to work at it. Stay within the 40% and you will get there. Guaranteed.
Good Luck and Best Wishes,
Written by Christine Ibbotson, Author of “How to Retire Debt Free and Wealthy” Follow on Facebook & Instagram