THe dumonts take- home pay ( after deductions for taxes and benefits ) is approximately $6045 monthly. currently nonmortgage debt payments equal $911 (i.e, $405 auto, $100 miscellaneous credit, $196 student loan, and $210 furniture). calculate and interpret their debt ratio. Assume they could purchase another auto with a $300 monthly payment. calculate and interpret their revised debt ratio. what advice would you give the dumonts about purchasing another vehicle?
a. RATIO = 911/6045 = 0.151 = 15.1%.
The max allowed is 43%. So 15% is very
good.
b. RATIO = (911+300)/6045 = 0.200 = 20%.
The ratio is still good. Therefore, they could easily purchase another vehicle.
To calculate the Dumonts' debt ratio, we need to determine their total debt payments as a percentage of their monthly take-home pay.
Step 1: Calculate the total debt payments
Total debt payments = Auto payment + Miscellaneous credit payment + Student loan payment + Furniture payment
Total debt payments = $405 + $100 + $196 + $210
Total debt payments = $911
Step 2: Calculate the debt ratio
Debt ratio = (Total debt payments / Monthly take-home pay) * 100
Debt ratio = ($911 / $6045) * 100
Debt ratio ≈ 15.07%
Interpretation: The Dumonts' current debt ratio is approximately 15.07%, which means that their total debt payments account for about 15.07% of their monthly take-home pay.
To calculate their revised debt ratio if they were to purchase another vehicle with a $300 monthly payment:
Step 1: Add the new auto payment to the existing total debt payments
Total debt payments (revised) = $911 + $300
Total debt payments (revised) = $1211
Step 2: Calculate the revised debt ratio
Debt ratio (revised) = (Total debt payments (revised) / Monthly take-home pay) * 100
Debt ratio (revised) = ($1211 / $6045) * 100
Debt ratio (revised) ≈ 20.03%
Interpretation: If the Dumonts were to purchase another vehicle with a $300 monthly payment, their revised debt ratio would be approximately 20.03%. This means that their total debt payments would account for about 20.03% of their monthly take-home pay.
Based on this information, here's the advice for the Dumonts about purchasing another vehicle:
The Dumonts' debt ratio is currently around 15.07%, which indicates that they have a reasonable amount of debt compared to their monthly income. However, if they were to purchase another vehicle with a $300 monthly payment, their debt ratio would increase to around 20.03%.
Considering their existing non-mortgage debt payments and the potential impact on their debt ratio, it is advisable for the Dumonts to carefully evaluate their financial situation before purchasing another vehicle. They should consider factors such as their monthly budget, their ability to comfortably manage additional debt payments, and their long-term financial goals before making a decision. It may be prudent for them to focus on paying off existing debts or saving for the purchase rather than taking on more debt at this time.