24 February, 05:55

# 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 February, 07:32
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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.