What The Research Says
- Debt to income ratio is the ratio between your monthly (gross) income and monthly debt payment. A debt to income ratio greater than 39% of your income ($390 on every $1000 of income) can have serious negative consequences on your creditworthiness.
- To the degree that mortgage debt leads to feelings of housing insecurity, it has been shown to correlate to a decrease in subjective well being.
- High levels of personal debt have been correlated with common mental disorders (CMD). The direction of the correlation has not been clearly established.
- The type of debt you have is important. While revolving debts (e.g. credit cards) and indebtedness are highly correlated with a reduction in subjective well being, large secure debts (like mortgage debts) except to the degree that they lead to housing insecurity, do not.
References
- Debt to Income Ratios (Merrick Bank)
- Do You Have Too Much Debt? – Calculator (Smart Money)
- Mortgage debt, insecure home ownership and health: an exploratory analysis (Sociology of Health and Illness)
- The relationship between personal debt and specific common mental disorders (European Journel of Public Health)
- Well Being Evidence for Policy (NEF)
- Household Debt Holds Back Recoveries but Restructuring Can Help (IMF)
The Choices
Limited – You have one credit card with a $500 limit that you pay off every month and use to buy food for orphans.
Score: +1 Wealth
Low Leverage (<39% Debt-to-Income Ratio) – You have a car you can barely afford, a house whose mortgage payments cause you to wince, but its been years since your creditors sent the guys with baseball bats to your front door.
Score: +1 Risk
High Leverage (>39% Debt-to-Income Ratio) – Your minimum credit card payments represent the GDP of most small, island nations.
Score: +1 Risk, -1 Wealth, -1 Health, -1 Happiness