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24 September, 15:55

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)

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  1. 24 September, 16:31
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    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.
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