Who’d have thought it? Kanye West, of “all things in excess” fame, a poster boy for personal debt. (Thank your lucky stars I didn’t start with “Kanye believe it?”)
Jokes aside, it’s a tough time for West. His wife gave birth to their second child three months ago, and it could be that he’s just coming to terms with the cost of another mouth to feed, clothe, entertain and educate, which might explain a Twitter outburst sharing his money problems.
On Valentine’s Day, he tweeted to his 19.5 million followers: “I write this to you my brothers while still 53 million dollars in personal debt … Please pray we overcome.”
It’s perfectly understandable that he’s reaching out for help when you compare what he earns with how much he owes. He makes an estimated US$20m to $30m a year, which means he’s in over his head by 212 per cent of his average income. Not a good DTI – debt to income – ratio.
Just to put it into perspective, Greece’s DTI (where GDP is taken as income) is 179 per cent, according to Trading Economics, a platform that provides global economic data, whereas Saudi Arabia’s is 1.6 per cent. Just think of the fuss that has surrounded their levels of debt to date.
That is nothing compared to the average American’s DTI though, estimated to be 370 per cent. In the United Kingdom, where the figure is less than half this per household, there is growing concern around predictions that things will get much worse by 2020, when the average household DTI is expected to reach 172 per cent – that’s higher than the previous peak that existed in the run-up to the financial crisis. So either Kanye has a great grip on his spending compared to his fellow Americans, or the country is headed for money meltdown on a spectacular scale.
When I refer to debt in the context of people like you and me, I mean adding up all outgoings – rent, credit card payments, loans, food, everything you spend on – not just payments due to service debt taken out.
Here in the UAE there are no reliable figures for this sort of thing. But if I were to hazard a guess I’d say personal DTI lies somewhere in between UK and US levels. I base this primarily on gut (never to be overlooked), as well as averaging out how agonisingly difficult it is for very solvent people I know to take out any debt in the UAE. This is because they are sole trader/small business types who don’t fit the UAE banking mould, compared to others who land themselves in hundreds of thousands worth of debt on an average salary.
My token number-crunching also takes into account the proportion of income spent on housing and utilities in this country. We’re talking an estimated low of 18 per cent all the way up to 52 per cent for some – with a larger proportion of people in the 30 to 40 per cent range. Scary stuff when you think that this should be the upper limit of all debt, or outgoings.
Have you worked out your DTI? If not, I suggest you do. It’s a way to measure your ability to manage payments you’re committed to each month, and be good for the money you borrow.
Add up your monthly outgoings and divide by your monthly earnings. Multiply by 100 and you get your ratio of debt to income.
It’s important you know this. Not only is it a key deciding factor for financial institutions, it also tells you at a glance how stretched you are.
As a general rule of thumb, a DTI of 50 per cent or more means you’re a bad debt bet. You have too little left over in your pot to pay back additional loans comfortably.
Various sites suggest we aim for 30 per cent DTI. I would say go for a lower figure.
There’s only one Kanye West, and you don’t want his burden. But note that the figure for his personal debt is just over a third of his current estimated net worth of $147m – so he’s very much quids in, and if for any reason he’d struggle, his fans are already on the case to bail him out. No such luck for the likes of you and me.
Nima Abu Wardeh is the founder of the personal finance website cashy.me. You can reach her at firstname.lastname@example.org and find her on Twitter at @nimaabuwardeh.
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