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Affordability Formula:
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The Affordability Calculator helps determine if you can afford additional financial commitments by analyzing your income, expenses, and existing debt. It uses a standard financial ratio to assess your financial capacity.
The calculator uses the affordability formula:
Where:
Explanation: The formula calculates what percentage of your debt payments could be covered by your disposable income (income minus expenses). A ratio above 36% indicates you can likely afford additional financial commitments.
Details: Proper affordability assessment is crucial for maintaining financial health, avoiding over-indebtedness, and making informed financial decisions about loans, mortgages, or major purchases.
Tips: Enter your total monthly income, all monthly expenses, and total monthly debt payments. Use accurate, up-to-date figures for the most reliable assessment. All values must be positive numbers.
Q1: Why is 36% the affordability threshold?
A: 36% is a commonly used benchmark in financial planning that indicates a healthy balance between income and debt obligations, allowing for savings and unexpected expenses.
Q2: What counts as "expenses" in this calculation?
A: Include all regular monthly expenses such as rent/mortgage, utilities, groceries, transportation, insurance, and other necessary living costs.
Q3: Should I include my potential new debt in the calculation?
A: No, use only your current monthly debt payments. The result indicates whether you can afford additional debt based on your current financial situation.
Q4: What if my ratio is below 36%?
A: A ratio below 36% suggests you may be over-extended financially and should avoid taking on additional debt until you improve your financial situation.
Q5: Are there other factors to consider beyond this calculation?
A: Yes, also consider your emergency fund, savings goals, job stability, and future expected income changes when making financial decisions.