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Tuesday, May 26, 2009

Debt to Income Ratio shows your true borrowing capability

Up to what extent you can drown into debt in a month, and come out of debt smoothly by repaying, is best shown by your debt to income ratio. This ratio of debt and income is the key method to determine the availability of cash from you monthly income for repayment of your loans….or, in other words, it expresses your true borrowing capability. That’s why creditors consider debt to income ratio a very effective tool to figure out your monthly payment, and your true financial situation. This ratio clearly calculates the total amount of loan an individual can take.

There are 3 categories of debt to income ratio:
Front End and Back End Ratio
Your creditors tend to analyse your debt to income ratio with two numbers 33/38. 38 is the back end ratio. It is the long term debt ratio. And front end ratio is 33, which is the ratio of housing expenses.





Housing Expense Ratio
The payments of an individual’s housing normally means each and every payment you need to make in your day to day life. That includes all of your monthly payment. It includes costs like- principal, interest, taxes, and insurance. The ratio of housing expense is meant for measurement of an indivudual,s income’s percentage which would cover all his housing payments. A limit would be normally set by your creditors on where your debt to income ratio is wanted by them.
For example, sometimes the creditors set a rule that they want your housing expenses should not exceed 28% of your gross monthly income, and like that.

Long Term Debt Ratio
Long Term Debt ratio is used to calculate the specific percentage of an individual’s monthly earning that is available for making repayment of total debt. The calculation of Long Term Debt ratio includes your housing expenses (PITI), auto loans, credit card loans and some other debts.
Here also, the limit seting trend exists like that of your Housing Expense Ratio. The creditors sets a limit to your long term debt ratio. It is also referred as Back End ratio.

Debt to Income Ratio: guide to show your borrowing capacity

Upto what extent you can drown into debt in a month, and come out smoothly by repaying, is best shown by your debt to income ratio. This ratio of debt and income is the key method to determine the availability of cash from you monthly income for repayment of your loans….or, in other words, it expresses your true borrowing capability. That’s why creditors consider debt to income ratio a very effective tool to figure out your monthly payment, and your true financial situation. This ratio clearly calculates the total amount of loan an individual can take.

There are 3 categories of debt to income ratio:
Front End and Back End Ratio
Your creditors tend to analyse your debt to income ratio with two numbers 33/38. 38 is the back end ratio. It is the long term debt ratio. And front end ratio is 33, which is the ratio of housing expenses.











Housing Expense Ratio
The payments of an individual’s housing normally means each and every payment you need to make in your day to day life. That includes all of your monthly payment. It includes costs like- principal, interest, taxes, and insurance. The ratio of housing expense is meant for measurement of an indivudual,s income’s percentage which would cover all his housing payments. A limit would be normally set by your creditors on where your debt to income ratio is wanted by them.
For example, sometimes the creditors set a rule that they want your housing expenses should not exceed 28% of your gross monthly income, and like that.

Long Term Debt Ratio
Long Term Debt ratio is used to calculate the specific percentage of an individual’s monthly earning that is available for making repayment of total debt. The calculation of Long Term Debt ratio includes your housing expenses (PITI), auto loans, credit card loans and some other debts.
Here also, the limit seting trend exists like that of your Housing Expense Ratio. The creditors sets a limit to your long term debt ratio. It is also referred as Back End ratio.

Monday, May 25, 2009

Managing Debt - Part 1

How do you deal with debt? How do you pay the monthly credit card charges, minimum amount or full amount? What is the best way to reduce debt?

Before we go into reducing debt, we have to understand what are debts. Debt means we are using future money now, in one way, we are killing inflation, if properly utilize this tool, but without proper planning, the interest alone will be enough to kill us before we manage to hedge the inflation. Thus, to fully utilize debt as a tool for us to increase our net worth and in another way, making money for us, one must have very strong discipline in the debt repayment.

There are some debt which actually favors us, while some will get us deeper in the world of debt. Good debts are like property loan whereby the property will have value in the long run and credit card although it can be damaging, if not used properly. Bad debts are like getting personal loan or charge credit cards just to buy electronic gadgets to show off.


Guess, I'll stop at the introduction of the debts. Moving forward, and from time to time, I will continue to blog more on this issue as Financial Management is also about managing debt.

Friday, May 22, 2009

To be wealthy, one must first develop the right habits...

I wonder how many of the bloggers who drop by here are fans of Stephen R. Covey. Anyway I guess it's important for us to set our perspective right, all the more if we want to wealthy.

One must first develop the right habits. What habits one may ask? The effective habits, I believe as suggested by Stephen R. Covey. Probably if we look at the lives of those successful people such as Bill Gates, Warren Buffet, Michael Dell and many others, there are a few things we may find it to be similar, is that all of them have an effective habits and hardwork.

I'll probably just simplify it as Stephen did in his book, 7th Habits of Highly Effective People, although I don't agree with him in coming with the 8th Habit book. After all, how is it possible to keep developing new habits without getting rid of some of the old ones.

Therefore, I shall start by mentioning the need in PRIVATE VICTORIES, but I might not start with Proactive. Because I believe it's not about Proactive, but before Proactive, there must be a deconstruction of old habits. Just like if you want to renovate your house, you'll have to take down those beautiful decorations before making them even more beautiful.

The HABITS....the right habits:
1. Deconstruction of Old Habits, lead to Proactive.
2. Think for the future ahead.
3. Priority must be set right.

These are the habits important for PRIVATE VICTORIES.

And there is another that we call: PUBLIC VICTORIES, and remember, the right habits must be develop during the PRIVATE VICTORIES, and only then the effective habits can reflects the results on public.

The next 4 habits for PUBLIC VICTORIES:
1. Winning mentality habit
2. Put others first...then others will put you first.
3. Teamwork.

And of course last but not least, the most important habit is to continue to practice all these right habits, until they become effective in your life.

Tuesday, May 12, 2009

Budgeting Mother's Day Spending

It was Mother's Day last week, and I am sure that many of us bought our beloved mum special gifts and maybe treat her a meal. Before I began writing on Budgeting Mother's Day Spending, I wish all the mothers in the world, a Happy Mother's Day, though it is kind of a little too late. Anyway, for those who has yet to celebrate Mother's Day with their beloved mum, I do hope that they will not be too stingy or cost savvy about the spending. I'm sure that the every mum would be very happy if her children even decided to cook for her or just do something special on this occasion - nothing fancy, but maybe spend some extra time with her or buy her favorites recipe book, etc. Mother's Day official date might be the 2nd Sunday of May, but if one cannot make it last week, then he or she can celebrate Mother's Day on some other day, but at least we do something to show our love for our mum and honor for her.

My family (total seven of us including my brother's girl friend) celebrated Mother's Day on Sunday, well, we actually just dine at Sushi King on Sunday evening. Before that, we bought her a perfume set from Lancome. I will not be revealing the total that we spend that day for the dinner and present, but I can assure you, it is not expensive.


Many has thought dine out and presents are not necessary to show our love and honor to our mum. They are right also, but for me, I believe buying presents or gifts to show that we remember that the day is special, and not just ordinary weekends dine out with family members.


To budget on the Mother's Day spending, first, I take into account the financial strength of all my siblings plus my brother's girl friend. As my brother is still studying in University, the budget for the gift/present cannot be too high, so that it is fair to everyone - everyone would be paying fair and square and it will not be burden to others.

Next, we need to budget the dinner spending as well. Dinner for seven definitely will not be cheap, and even if it is shared among the four of us - which is why Sushi King come into play. During the November to January time frame where HSBC is having Padini and Sushi King promotion, where credit card user will be delivered Padini or Sushi King RM30 voucher, if certain terms and conditions fulfilled. Since I have a lot of the Sushi King vouchers, we decided to dine at Sushi King, since it is like "free" meal. So, dining out will not necessary cost much.

Basically our mother's day spending is just the gift/present which would be about 50% of the overall cost as well.

Mother's Day spending does not necessary means burning hole to your wallet. One just has to budget his or her spending properly and spend within his/her mean. A meal does not necessary have to be at luxury restaurants, it can be at the fast food restaurants or even better - home cook food. We dine outside because it is simple and also to use the vouchers that I have and also because my mum is a KKC teacher in church as well, so dining out on Sunday evening is like a norm to the family. The gift does not necessary cost a bomb, it could be as simple as just a cookbook. I'm sure that every mum will treasured her those gifts/presents they got during this special day.


As consumer and credit card user, one must know when to spend and when to hold on to horses. I spend on what I need during the time when credit cards and shopping malls are having promotions. So, in one way or another, I still need to buy stuff, just that I'm using the correct credit card and do my shopping at malls that are giving better discounts and loyalty points. It is always my opinion that it is best to use credit cards for purchasing stuff, because we get credits and also loyalty rewards. The most important thing is to control - discipline in spending.