Understanding your financial health is the first step on your road to financial independence. Two key elements, net worth and the debt-to-income (DTI) ratio, can guide you to a brighter financial future. We'll simplify these concepts and show you how to use them with real numbers for practical decision-making.
Net Worth: What You Own Minus What You Owe
Your net worth is like a financial report card. It tells you if you're making good money choices. It's calculated by taking everything you own (your assets) and subtracting everything you owe (your liabilities). Here's a simple breakdown:
Assets: This includes your money, investments, property, and more.
Liabilities: These are your debts, like credit card balances, loans, and mortgages.
Example: Let's say your assets total ₱2,500,000, and your liabilities are ₱1,000,000. Your net worth is ₱2,500,000 - ₱1,000,000 = ₱1,500,000.
If it's a positive number (like ₱1,500,000), you're doing well.
If it's a negative number (like -₱500,000), you have work to do.
Debt-to-Income (DTI) Ratio: Can You Manage New Debt?
Your DTI ratio measures how much of your income goes toward paying debt. The formula is simple:
Monthly Debt Payments include your mortgage, car loans, credit card payments, and other debts.
Monthly Income is what you earn before taxes.
Example: Let's say your monthly debt payments are ₱15,000, and your monthly income is ₱50,000.
DTI Ratio = (₱15,000 / ₱50,000) x 100 = 30%
A DTI ratio under 35% is generally good.
DEBT RATIO BENCHMARK:
Zero debt ratio - indicates 100% equity, signifying strength and stability to your portfolio or net worth.
Debt ratio below 36% - is generally manageable -indicates that the individual has a significant portion of equity to cover their debts.
Debt ratio of 100% or above - indicates probability of financial distress taking too much debt. It is important to analyze your financial situation, assess your capacity to manage and repay debt, and pursue debt-reduction methods.
Now, let's see how you can use these tools for real-life decisions:
Example #1: Buying a Car
Imagine you want to buy a car. You calculate your DTI ratio and find it's 30%, well under 35%. It means you can afford car loan payments without straining your budget. You also check your net worth and see it's positive at ₱1,200,000. This tells you that you have some financial stability to handle a car loan.
Example #2: Starting a Business
Suppose you dream of starting a digital company. You calculate your DTI ratio and find it's 25%. Your net worth is ₱1,250,000, which is positive. These numbers show that you're in good shape to take on new business-related debts or investments, as long as they don't push your DTI ratio too high.
Conclusion
Understanding your net worth and DTI ratio is about making informed choices. They are tools that can help you decide if you can afford to take on new financial responsibilities, like buying a car or starting a business. So, start calculating your net worth and DTI ratio today, and make your financial dreams a reality.
"Your net worth is your financial compass, and your DTI ratio is the map to your financial goals."
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