Question

Louise McIntyre’s monthly gross income is $3,500. Her employer withholds $820 in federal, state, and local income taxes and $370 in Social Security taxes per month. Louise contributes $220 each month for her IRA. Her monthly credit payments for VISA and MasterCard are $125 and $120, respectively. Her monthly payment on an automobile loan is $315.

a. What is Louise's debt payments-to-income ratio? (Enter your answer as a percent rounded to 2 decimal places.)
b. Is Louise living within her means?

Answer 1

1. 26.79%

2. No

Step-by-step explanation:

a. The computation of debt payment to income ratio is shown below:

The income would be equal to

= Monthly gross income - federal, state, and local income tax - social security taxes - IRA

= $3,500 - $820 - $370 - $220

= $2,090

And, the debt payments equal to

= Visa card + master card + automobile loan

= $125 + $120 + $315

= $560

So, the debt payment to income ratio would equal to

= $560 ÷ $2,090

= 26.79%

b. we conclude that debt percentage is more than the monthly payments.