Determining the Debt Payments–to–Income Ratio. Louise McIntyre’s monthly gross income is $2,000. Her employer withholds $400 in federal, state, and local income taxes and $160 in Social Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit payments for Visa, MasterCard, and Discover cards are $35, $30, and $20, respectively. Her monthly payment on an automobile loan is $285. What is Louise’s debt payments–to–income ratio? Is Louise living within her means? Explain. (Obj. 3)

The correct answer is 27.2% and Not living with her means.

Explanation:

According to the scenario, the given data are as follows:

Gross income = $2,000

Taxes = $400 + $160 = $560

IRA = $80

So, Net income = $2,000 - $560 - $80

= $1,360

Now, Cards payment = $35 + $30 + $20 = $85

Automobile loan = $285

So, Debt = $285 + $85 = $370

Now, we can calculate the debt payment to income ratio, by using following formula:

Debt payment to income ratio = $370 ÷ $1,360

= 0.272 or 27.2%

And, As debt payment to income ratio is more than 20%, Louise is not living with her means.