How to Analyze Financial Statements and Credit Reports

Knowing your debt in relation to your income is crucial to budgeting. Whether you are organizing your monthly finances or applying for a bank loan, your debt-to-income ratio is the most telling aspect of your financial situation. Banks want to see no more than 40 percent of your monthly income allotted to your monthly debt. To determine if your ratio is in range, analyze the data in your financial statements against the data in your credit report.

Instructions

1

Retrieve at least two years of financial statements. Federal tax returns are the best gauge of your finances, but W2s and pay stubs work as well.

2

Calculate your average income from your tax returns. Add the adjusted gross income for each year. Divided that total by the number of years you are utilizing. For example, if you made $75,000 in 2009 and $100,000 in 2011, you made $175,000 in that period. Divide that figure by two to get $87,500 -- your average yearly income. Divide that figure by 12 to get $7,292 -- your average monthly income

3

Calculate your average income from your W2s if tax returns are not available. Add wages for each year. Divide that total by the number of years you are using. Divide that figure by 12 to get your average monthly income. The only difference between the W2s and tax returns is that you use "wages" as opposed to "adjusted gross income."

4

Calculate your average income from your pay stub if you don't have W2s or tax returns. Locate your year-to-date earnings. Divide that figure by the number of months that have passed in the current year. For example, if you have made $35,000 by July 15, divide $35,000 by 6.5 (since six and a half months have passed). The resulting figure is $5,385. This is your average monthly salary.

5

Obtain a copy of your credit report. You can get one free copy in a 12-month period from AnnualCreditReport.com.

6

Review the credit report and eliminate items that have been paid off, duplicate items and items that do not belong to you.

7

Add up the monthly payments of all legitimate open items.

8

Divide your monthly debt payments by your average monthly income. For example, if you have $2,500 in monthly debt, and your income is $7,292, your debt-to-income ratio is 34 percent. This means 66 percent of your monthly income is available after servicing your debt.