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The Importance of a Good Debt to Income (DTI) Ratio

November 15, 2019

It is evident to most people that having more income and less debt is good for their finances. If you have too much debt compared to income, any shock to your income level could mean you end up with unsustainable levels of debt. Every month you have money coming in (your salary plus additional income) and money going out (your expenses). Your expenses include your recurring bills for electricity, your cell phone, the internet, etc. There are also regular amounts that you spend on necessities, such as groceries or transportation. On top of all of this, there’s the money you spend to service any debts that you may have. These debts could include your mortgage, rent, car loan, and any student loans, personal loans, or credit card debt.

 

What is the Debt-to-Income Ratio (DTI)?

The Debt-to-Income Ratio (DTI) lets you see how your total monthly debt relates to your gross monthly income. Your gross monthly income is your total income from all sources before taxes and other deductions are taken out. Below is the formula for calculating your DTI:

DTI = (Total of your monthly debt payments/your gross monthly income) x 100

 

Example: Let’s suppose the following. Your gross monthly income is $5,000, and you pay $1,500 a month to cover your mortgage, plus $350 a month for your student loans, and you have no other debt. Your total monthly payments to cover your debts amounts to $1,850.

 

Your DTI is (1,850/5,000) x 100 = 37%

Here’s a handy calculator to work out your DTI.

 

Why is Your DTI Important?

Your DTI is an important number to keep an eye on because it tells you whether your financial situation is good or if it is precarious. If your DTI is high, 60% for example, any blow to your income will leave you struggling to pay down your debt. If you are hit with some unexpected expenses (e.g., medical bills or your car needs expensive repairs), it will be harder for you to keep on top of your debt payments than if your DTI was only 25%.

 

DTI and Your Credit Risk

DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)

 

So, What is a Good DTI?

If 43% is the top level DTI necessary to obtain a Qualified Mortgage, what is a “good” DTI? According to NerdWallet, a DTI of 20% or below is low. A DTI of 40% or more is an indication of financial stress. So, a good rule of thumb is that a good DTI should be between these two figures, and the lower, the better. 

 

The DTI Bottom Line

Your DTI is an essential measure of your financial security. The higher the number, the less likely it is that you’ll be unable to pay down your debt. If there are months when it seems that all your money is going toward debt payments, then your DTI is probably too high. With a low DTI, you will be able to weather any financial storms and maybe even take some risks. For example, if you want to take a job in a field you’ve always dreamed about but are hesitating because it pays less, it will be easier to adjust to a lower income. Plus, debt equals stress. The higher your DTI, the more you can begin to feel that you’re working just to pay off your creditors, and no one wants that.

 

DTI and Student Loan Refinancing

Your DTI is one of several factors that lenders look at if you apply to refinance your student loans. They may also assess your credit history, employment record, and savings. Refinancing your student loans may actually decrease your DTI by lowering your monthly student loan payment. This may help you, for example, if you want to apply for a mortgage. ELFI can help you figure out what your DTI is and if you are a good candidate for student loan refinancing. Give us a call today at 1.844.601.ELFI.

 

Learn More About Student Loan Refinancing

 

Terms and conditions apply. Subject to credit approval.

 

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2020-03-30
Should You Save for Your Child’s College Fund or Pay Your Student Loans?

As you start to grow your family, you may be wondering whether you should continue to aggressively pay down your student loans or start saving for your little bundle of joy’s college fund. Do you immediately set up a 529 to start saving for their college expenses? Or should you focus on paying your student loans before saving for your kid’s college? Here is some information to consider before you decide.   For the 2018-2019 school year, families spent an average of $26,226 on college. With tuition rates and the cost of living increasing, higher education can be an expensive endeavor to undertake. In 2019, 64% of families planned to pay for college by saving, according to Sallie Mae’s “How America Pays for College 2019 Study”   With all this in mind, you may think it’s a good idea to start saving for your child to attend college when they are a newborn. Perhaps the heavy burden of your student loans is something you want your child to avoid. However, it’s important to consider some factors:  

Do you have a healthy retirement account?

Financial experts will argue you should not save for your child’s college expenses if it prevents you from saving for your retirement. The argument is based on the fact that you can’t borrow for your living expenses in retirement, but your child can borrow for school costs. If you wait to save for retirement after sending your child off to school with their tuition saved for, you will be missing out on vital years of compounding. Saving for retirement early can earn you thousands of dollars more than if you were to start saving later!  

What do your other debt payments look like?

Is your financial situation stable enough to be able to pay tuition or save for future tuition costs? To determine this you should consider what debt (including your student loans) you have. Are you able to make all your debt payments? Do you have an emergency fund you are contributing to? If you have unpaid debts or don’t have an emergency fund, you may need to delay saving for future college expenses at this time.   

Can you afford tuition payments or monthly college savings in your budget?

If saving for your child’s college expenses is a priority for you, plan for it in your budget. If you are able to continue making your own student loan payments, save for retirement, and continue to build an emergency fund while saving for your child’s college expenses, go for it! Ready to make a budget, but not sure how? Check out this budgeting method  

Options to Consider 

If you want to help with your child’s college expenses but it’s not financially feasible at this time, here are some ways you may still be able to help:
  • Refinance your student loans. If you are trying to save some money in your budget for your child’s college expenses consider refinancing your student loans. Refinancing allows you to obtain a new loan, presumably at a lower interest rate, to pay off your old loan. The new loan with a lower interest rate can result in significant savings for your monthly payment and in interest costs over the life of the loan. This monthly savings can go directly into your child’s college savings. To find out how much you may be able to save, check out our student loan refinance calculator.* 
  • Don’t feel bad if saving for your child’s higher education is not something you can afford. In 2019, 50% of families borrowed for college. This figure also includes families who had some savings. Student loans, both federal and private, are an important resource to pay for college expenses. Help your child determine how much they need to borrow and compare their options.     
  • If it’s not in the budget to save for future education expenses start saving any cash gifts your child receives. Take those gifts and open a 529 plan for your child. A 529 is a tax-advantaged investment account that allows you to save for qualified higher education expenses such as tuition and room and board. 
 

Ways to Save on College Costs

When you are deciding how to pay for college expenses, be sure to include your child in the discussion. After all, they will be starting their adult life and should have a good understanding of finances. Here are some points of discussion to get you started:
  1. Can they take Advanced Placement classes or do dual enrollment in high school to earn college credits? Earning college credits while still in high school is significantly less expensive, or possibly free in some cases, and can cut down on the required number of classes when they actually attend college. This can help them graduate early or reduce the amount of tuition you need to pay. 
  2. Is your child considering a private or public college? The type of school they are considering can have a significant impact on the cost. In 2019, the average cost of a private school was $48,510 per year compared to $21,370 for a public college. Though the sticker price for a private college is a lot higher, private schools often have the ability to give more generous financial aid. Before eliminating a potential college due to costs, be sure to look at their financial aid statistics. 
  3. Will they be eligible for any scholarships? There are a number of general and niche scholarships that your child can apply to. College Board’s Scholarship Search is a good resource to find out about scholarship opportunities. Tip: Be sure to fill out the FASFA, which allows you to be eligible to receive aid such as grants, scholarships, work-study and federal student loans. 
  4. Will your child have a job during school to help pay for expenses? A job on campus can be a great way for a college student to be more involved on campus and earn money for their living expenses. 
 

Bottom Line 

The ability to help your child pay for future educational expenses can be a great feeling. But before you take on this endeavor, you’ll want to be sure that your financial situation is stable enough. Armed with this information, you can make an informed decision for how you can successfully pay off your student loans and save for your child’s college expenses.  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
2020-03-27
Millennials and Money: Surprising Facts You Should Know

When it comes to millennials and money, they have a bad reputation. The Pew Research Center defines millennials as people born between 1981 and 1996. Despite this wide age range, many stereotypes exist about millennials, including poor work and financial habits, especially when it comes to student loan debt, managing a monthly budget, and saving for the future.    But you may be surprised by how frugal millennials really are. Here are some facts about millennials and money that you should know.   

1. Nearly half of millennials have a side gig

During the 2008 recession, many millennials watched their parents lose their long-time jobs and investments. They learned the importance of diversifying their investments and of having multiple income streams.    With that experience in mind, millennials are leading the charge when it comes to side hustles. In a BankRate survey, 48% of responding millennials said they earned extra money on the side.    On average, people with side gigs earn $1,122 in extra income per month, working 12 hours a week. They use those additional earnings to boost their savings, pay down debt, and even afford their regular living expenses.   

2. Millennials have one of the highest student loan balances of any generation

Millennials are dealing with unprecedented levels of student loan debt. However, that’s not entirely their fault.    In recent years, college costs have skyrocketed. The College Board reported that from 1989-1990 to 2019-2020, the average cost of tuition and fees at a public four-year university tripled. With such high expenses, millennials have had to take out more in student loans to pay for school.   In fact, the average loan balance for millennials is $34,505. That’s the third-highest average balance for student loan debt. Only Gen-Xers and Baby Boomers have more.    Such a high loan balance affects millennials’ ability to pursue other goals, like buying a home, getting married, or starting a business.   

3. Millennial households are earning more than ever before

Despite their substantial student loan debt, millennials have very high earning potential.    According to the Pew Research Center, the median income for millennial households is $69,000. That’s significantly higher than the median household income for all age groups, which is just $61,937.    While that’s good news, much of that higher income goes toward their student loan payments and living expenses, so the economy is not reaping the benefits of millennials’ salaries as much as you’d expect.   

4. Millennial credit card debt is lower than average

After watching their families struggle with debt, millennials are notoriously wary of taking on consumer debt themselves. That’s especially true when it comes to credit cards.    Experian reported that consumers carry $6,028 in credit card debt, on average. But for millennials, the number is much lower; they carry an average of just $4,712.    That’s a good decision. Credit cards often have sky-high interest rates. According to the Federal Reserve, the average interest rates on credit cards that assess interest was 16.88% as of November 2019, the last available data. But some credit cards have interest rates of 25% or higher, which can cause you to owe far more than you initially charged on your card.    Keeping your balances low — and paying off your statement balance in full each month — helps you reap the advantages of credit card rewards without paying interest charges.   

5. Millennials are delaying home ownership

While previous generations considered home ownership a huge step in becoming an adult, millennials are delaying this milestone.    According to CNBC, the home ownership rate for millennials is eight percentage points lower than it was for Gen X-ers and Baby Boomers when they were in the same age group.    There are a few reasons behind their reluctance to buy: 
  • Fear of commitment: Many millennials prize flexibility. They want to be able to take advantage of new opportunities that come along, like a dream job in a new city. They feel like home ownership would prevent them from being able to pursue those opportunities, while renting allows them to be more nimble. 
  • Lack of starter homes: Business Insider reported that there is a massive shortage of starter homes in the real estate market. Baby Boomers looking to downsize and real estate investors making all-cash offers are swooping up available homes, making home ownership unattainable for many millennials.
  • Prevalence of student loan debt: With high monthly student loan payments and a high debt-to-income ratio, millennials struggle to qualify for a mortgage and keep up with their payments. Until they pay off a significant portion of their debt — or eliminate their loans entirely — many millennials simply don’t feel comfortable making such a large investment. 
   

Millennials and money: Maximizing your finances

If you’re a millennial with student loan debt and it’s causing you to put off your other financial and personal goals, there are some steps you can take now to improve your situation: 
  • Create a budget: If you don’t have one already, spend some time creating a budget. Make sure you earn more than you spend each month and look for areas where you can cut back so you can free up extra money to put toward your debt so you can pay it off faster. 
  • Use your side hustle strategically: If you have a side hustle — such as graphic design, driving for a rideshare service, or delivering groceries — set aside your earnings solely for debt repayment. By using your extra income to make additional payments, you can pay off your student loans months or even years ahead of schedule — and cut down on interest charges. 
  • Refinance your student loans: To pay off your student loans even faster, consider refinancing your student loan debt. With this approach, you consolidate your loans together by taking out a loan through a lender like ELFI. The new loan has different repayment terms; you could even qualify for a lower interest rate, helping you save money over time.
        If you think that student loan refinancing sounds like a good idea for you, use ELFI's Student Loan Refinance Calculator to get a rate quote without affecting your credit score.*  
  *Subject to credit approval. Terms and conditions apply.    Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
2020-03-23
How to Appropriately Ask for a Raise

So you’ve been taking on more responsibility at work, your boss says you’re a real asset to the company, but your salary hasn’t changed in a few years. If this describes your current work situation, it might be time to ask for a raise.    According to PayScale’s “Raise Anatomy” report, only 37% of workers have asked for a raise. Of those that did ask, 70% received some sort of increase in compensation. Those are pretty good odds so if you’re excelling at your job, you should ask! The average raise in 2019 was 3%, according to the 2020 Compensation Best Practices Report. This means that if you are earning $40,000, your raise would increase your income by $1,200 per year. The amount of a raise depends on the sector of work, location, and demand for the position. Typically, jobs in the private sector usually receive higher raises than jobs in the government. As a best practice, you should usually wait to request a raise after you have worked for the company for at least one year. Additionally, in most cases, you should not ask for a raise more than once a year.    If you feel it is time to ask for a raise, here are some tips on how to appropriately request one.  

Prepare for a Meeting 

When you are ready to ask for a raise, request a meeting with your boss and let them know you’d like to discuss your salary.   

1. Plan your request at the right time

When you want to ask for a raise, pay attention to the timing of the meeting with your boss. An appropriate time for a meeting would be:
  • After you successfully completed a big project that brought value to your company
  • During a performance review meeting when you have exceeded expectations. Performance review meetings are a typical time when companies award raises. Being prepared to ask for a raise during this time could allow you to negotiate for more than the planned raise. 
  Times to avoid a meeting:
  • During a busy season of work when your boss will not be able to focus on your request 
  • When you are behind on your work. If you are not able to perform your current workload, it will be hard to justify a raise to your boss.
 

2. Prepare talking points

Go into the meeting prepared to advocate for yourself. Although you don’t have to memorize a speech, it’s good to be prepared with the following information: 
  • Specific examples of accomplishments you have achieved at work recently. This could be anything from securing a big client to implementing an idea that brings in extra revenue for your company. 
  • How you have exceeded expectations for your position. 
  • Additional responsibilities you have undertaken. If you have taken on more responsibilities by taking initiative, be sure to highlight those. 
  • The value you will continue to bring to the company in the future and examples of how this will be accomplished. 
 

3. Do your research

It’s important to know that the salary you are requesting is realistic for your position and your location. A great resource is Glassdoor. You can compare salaries for your sector or receive a personalized salary estimate based on your market and position.  

4. Practice, practice, practice

Asking for a raise can be a nerve-wracking conversation. By preparing and practicing before your meeting, you can walk in confidently and armed with data to back up your request. In addition to practicing your talking points, you will want to be ready for any questions or negotiations that may arise. While it’s good to have a specific salary in mind, you should also be open to other numbers or benefits that your boss may offer. For example, the company may offer you work from home or extra vacation time in place of a salary increase.  

In the Meeting 

You’ve requested a timely meeting, prepared extensively, and now it’s go-time. Once you’re in the meeting here’s what you should focus on:  

1. Your Demeanor

Pay attention to your tone and body language when speaking. You want to appear confident in yourself and your abilities. Show a positive attitude about the value you bring to the company, but do not appear arrogant. If you get questioned about why you deserve a raise, keep your cool and answer with the talking points you prepared.   

2. Communicate Your Accomplishments

Instead of just rattling off a laundry list of accomplishments, focus on a few incredible examples and, if possible, bring proof of your work. Here are a few ideas of what you can present in the meeting:
  • Two-three examples of big projects you accomplished 
  • Work you did that was beyond the scope of your job
  • Specific examples of when you took the lead and were successful
  • Examples of work brought that brought monetary value to the company
  • Ideas for your future at the company. Companies value loyal workers so be sure to point out how you have demonstrated loyalty and your desire to remain with the company.   
 

3. Explain Why You’ve Earned It

Be sure to avoid talking about why you need the extra money and instead focus on how you have earned a raise. For example, if you are in sales, instead of saying you need the money because of increased living costs, say you have earned this raise because you are the most successful sales associate, have brought in $100,000 in revenue, and receive great reviews.   

4. Bring a Specific Number

It’s best to have a specific number you are requesting, according to a study by Columbia Business School, instead of a range. For example, you want to request $55,000 as opposed to saying $52,000 to $57,000. Provide the reasoning for how you arrived at that number and, if applicable, give examples of how it is in line for the type of work you do.    

Bottom Line

If you have been in your role for over a year and are killing it at your job, you should seriously consider asking for a raise. But before you do so, preparation is absolutely critical. Follow the steps above and you’ll be in a great place to have this discussion with your boss. Good luck!  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.