the cents of money

Financial statements, specifically net worth and the monthly budget, use your financial data to describe an individual’s or household’s financial condition. We use that data to calculate personal finance ratios as tools designed to evaluate your financial strength and position.

 Benchmarks can help you develop better financial habits in these areas: savings, retirement, spending, investing, debt accumulation, and reduction. These ratios can be easily calculated and give you a better sense of your true financial health and progress relative to your goals.

Net Worth And Budget Are Key Tools

Your net worth statement and monthly budget statement are the essential financial statements to create and update. As such, they hold the key to your current financial life. Net worth is a snapshot of your financial condition. To calculate net worth, use total assets or what you own less total liabilities, or what you owe. Hopefully, what you own is more than what you owe.

Your monthly budget is your income statement—total income sources less total expenses (fixed and variable expenses). If your income exceeds your costs, you have money to save. Add this money to your emergency fund, pay down debt, and invest for the future. When your expenses exceed your income, you will need to earn more income, borrow to pay costs, reduce spending, or combine these.

Related Posts:

10 Reasons Why You Should know Your Net Worth

How To Control Spending With A Simple Budget

Liquid Net Worth As A More Realistic View

Liquid net worth is an even better and more realistic benchmark because it focuses on your assets’ liquid nature. These assets can be quickly converted into cash with little or no loss of value. Although net worth remains a helpful gauge, it doesn’t differentiate your assets from their liquidating value.

As such, liquid net worth gives you a better understanding of your assets and your future needs, whether running out of cash or even exploring an opportunity. Drilling further down, the current ratio is among the best financial ratios. This ratio is easy to calculate and measures your liquidity position. Having financial flexibility allows you to react to and adapt to changing financial conditions like a recession and losing your livelihood.

Financial Advisor Will Help You With Your Plan

Bring your financial statements when you go to a financial advisor. They will review your information and prepare personal finance ratios. Once you can calculate these metrics, you can better assess where you stand financially now and over your life cycle.

However, you don’t need a professional. On the contrary, providing these statements and reviewing your financial ratios will go far to developing your financial plan. Your advisor can better help you meet your financial goals.

Related Post: How To Choose A Financial Advisor

 18 Personal Finance Ratios:

1. Liquidity Ratio

Liquidity refers to your ability to quickly convert assets into cash with little to no loss of principal. When you are liquid, you have the financial ability to pay for unexpected costs such as a loss of a job, death in the family, or your roof is leaking.

Monetary assets are the most liquid assets. These assets include cash, cash-equivalent securities or money markets, savings bonds, savings, and checking accounts. Use your liquid assets to support your fixed monthly expenses for 6 months.

Liquidity Ratio= Monetary Assets/ Monthly Expenses

Your monetary assets should support your fixed monthly expenses such as groceries, rent or mortgage, utilities, and a car loan for six months. A six ratio means that your monetary assets can pay for your basic needs of food, rent, utilities, and a car loan for the next six months, if necessary.

2. Emergency Fund Ratio

The liquidity ratio is linked very near to the emergency funds. This cushion for emergencies should be used for unforeseen events. Such events may mean job loss, family death, unexpected surgery, or immediate house repair. The emergency fund ratio works by using a targeted number of months that you believe is ample enough to support you through emergencies. If you are looking for six months or higher (and this is highly recommended at a minimum) to set aside in one fund that can be invested in a high yield savings account or money markets, then:

Emergency Funds Ratio= 6*Monthly Expenses

This ratio will give you a targeted amount of monetary assets needed to be comfortable for a possible emergency.

Related Post: Why You Need An Emergency Fund

3. Net Worth Ratio

Your balance statement measures your net wealth at a point in time. As you add to your assets, hopefully outpacing your liabilities, you will be getting wealthier.

Net Worth Ratio= Total Assets Less Total Liabilities

As discussed earlier, your total assets are what you own at its current market value. Your total liabilities are what you owe based on your debt obligations, notably the balances on your credit card debt, mortgage, car loan, and any other loans you have. The higher the positive number you have, the better off you are.

4. Targeted Net Worth Ratio (The Millionaire Next Door)

One of my favorite personal finance books, The Millionaire Next Door, is an oldie but goodie. I have read it at least twice and refer to it when teaching my college students about overspending—the book advocates saving and investing money. The high savers do a better job of maintaining and building your wealth. They use age as a factor in the calculation as some other ratios do.

Targeted Net Worth Ratio= Age x (Pretax Income/10)

Your targeted net worth provides you with an indication of what you should be worth after liabilities. As a 30-year old making $95,000 annually, your net worth should be $285,000. The calculate is 30 x (95000/10). This guidepost can help you reach your goals, particularly financial security.

5. The Current Ratio

Several ratios may seem familiar to you. The current ratio is a common one when analyzing the strength of a company’s balance sheet and its ability to meet its short term obligations. A current personal ratio is essentially the same.

It measures the household’s ability to repay a short-term debt in an emergency. The calculation matches short-term monetary (i.e., liquid assets) assets to short-term liabilities. The current ratio is the best benchmark to determine liquidity in your household. 

Current Ratio = Short term Cash Assets/ Short Term Liabilities

Liabilities are the debt payments owed in the current year. Current liabilities would include your monthly credit card balances, and other debt payments owed that year. A ratio of one or higher indicates you have more short term assets than debt, a sign of good financial health.

6. Debt-to-Asset Ratio

The Debt-to-asset ratio is a standard ratio for companies. Industrial firms tend to be more accustomed to higher debt levels because they are capital intensive. Individuals should not have high debt levels. This ratio focuses on the borrowing ability of the individual or household.

Total Debt-to-Asset Ratio= Total Liabilities/Total Assets

If you have a high debt-to-asset ratio, you should reduce your debt. It is essential to lower your overall costs for maximum financial flexibility long term. Certain loans are common to most of us. Total liabilities may include balances on the student loan, mortgage, car loan, and credit card debt.

Your liabilities should not go over 50% of your total assets. A 10% ratio or as little debt as possible is a great goal. Avoid high debt, or consider a debt reduction plan.

7. Debt-To-Income Ratio

A better way to look at whether your debt burden is too high is to compare it to your gross income, that is, the amount you make.

Debt-To-Income Ratio = (Annual Debt Repayments/Gross Income) x 100

Typically, when you are in your 20s-30s, your salaries are at the low end of your career.  You may be borrowing for a home or a car while still paying student loans. Your ratio should be no more than 36% of gross income and decline as you command higher salaries.

8. Debt-To-Disposable Income

It is worthwhile to look at monthly non-mortgage debt relative to monthly disposable income. Monthly disposable income is net of costs and taxes; and what is available for paying down debt, saving, and spending by the household.

Debt-To-Disposable Income = monthly non-mortgage debt payments/ monthly disposable income

The percentage should be 14% or lower. 15% or more is problematic and may reflect a household carrying too much debt.

9. Personal Cost of Debt

Carrying too much debt relative to income is problematic. This ratio looks at your cost of debt influenced by your credit mix and FICO score. If you have high monthly credit card balances, then you probably pay a high-interest rate on that debt. Card companies notoriously charge high-interest rates.

Also, your credit score matters. If you have a lower FICO score below 650, lenders will see you as a risky borrower and charge higher interest rates.

Pay Down High-Cost Debt

There are two types of debt reduction plans: Snowball Method (tackles the smallest debt first) and Avalanche Method (gets rid of the highest cost first). I prefer the Avalanche Method so that you can get rid of the highest interest cost of debt first. Try eliminating your credit card balances by paying your bills in full.

Related Post: How To Pay Down Your Debt For Better Financial Health

Personal Cost of Debt = (Loan 1/Total Debt)x(Interest Rate for Loan 1) + (Loan 2/Total Debt)x(Interest Rate for Loan 2)

Debt Amount Interest Rate % % of Total Debt Interest Rate x Weighting

Loan 1 $25,000 7.0% 42% 2.9%

Loan 2 $35,000 4.5% 58% 2.6%

Total $60,000 100% 5.5%

Your goal would be to reduce your higher-cost debt, that is, loan 1. You would first target reducing the $25,000 loan outstanding. In considering net worth, you want your assets to be a larger amount than your liabilities. Your investments should be ideally earning returns above your cost of interest.

For example, stocks generate higher pretax returns of 9% over the long term, or 6%-7% aftertax returns. Therefore, you should look to carry debt at lower costs than stock returns.

 Businesses look at borrowing capital for projects. They seek projects that can generate returns above their cost of capital. Your household is your business. Similarly, you want to earn higher returns in your investments than your borrowing.

10. Solvency Ratio

Could you pay all of your debt using existing assets if you had to due to unforeseen events? This ratio helps you to determine if you are able to take care of your obligations.

Solvency Ratio = Net Worth/ Total Assets

Net worth equals total assets, less total liabilities. The solvency ratio indicates the individual’s ability to repay all the existing debt with the assets. We add debt to acquire assets that we hope will be worth more than the debt. The higher the ratio, the better your financial condition.

11. Investment Assets-To-Total Assets Ratio

The more you save and invest, the better your road to being wealthy. This metric shows you how well you are doing in accomplishing your financial goals.

Investment Assets-To-Total Assets Ratio= Investment Assets/Total Assets

Throughout your life, you want to accumulate investment assets. These assets include stocks, bonds, money markets, mutual funds, and retirement accounts. Using the power of compound growth, they should expand in your 20’s and beyond. Target a ten ratio when you are in your 20s. As you age,  your investment assets should expand, pushing your percentage higher.

12. Savings Ratio

Savings should be one of the most critical parts of your household’s financial goals. Adopt a “Pay Yourself First” attitude. Your monthly budget should call for savings to be at least 10% of gross income. That should be just a start.

Savings Ratio = Savings/Gross Income

Savings refer to money in the bank, liquid funds, deposits, money markets, and other liquid funds, such as your emergency fund. Gross income is your total income source on your budget and includes what you earn, side businesses, bonuses, dividends, and interest income.

Your savings rate should be at least 10% of gross income. Savings may be challenging to do when you first start to work. As your salary or what you make rises, it should get more comfortable to put money away for savings. A healthy savings ratio of 20% would be a bonus (pardon the pun).

13. 50-20-30 Budget Ratio

Harvard Professor, now Senator Elizabeth Warren is known as a bankruptcy expert. Warren popularized this ratio in her book written with her daughter in 2005, “All Your Worth: The Ultimate Lifetime Money Plan.” 

Essentially, you are allocating your aftertax income into three budget buckets:

• 50% of your spending is for your needs, notably housing, utilities, groceries, car payments, and other needed fixed expenses.
• 20% of your budget is saved and can pay down debt, emergency fund, and investing or combination.
• 30% are for your wants: discretionary or flexible spending for entertainment, vacations, and shopping. After your priorities, the remaining amount is for your desires.

Start Budgeting Early

Budgeting is tricky when you are younger and just starting in your life. You may be carrying student debt and renting an apartment while your salary is at the beginner’s level. On the other hand, you have fewer costs to monitor, so make it a good lifelong habit. Use it as a motivational tool to save more and spend less. Be diligent in improving your money management skills. 

Related Post: 10 Ways To Better Manage Your Spending

14. Mortgage Ratio

This ratio is a standard metric you will encounter when you get a loan to pay for your home. Borrowing for your home is usually the most considerable amount of your total debt. Your home may be an appreciable asset. As such, it is often referred to as “good debt” versus other kinds of debt, especially credit cards, which are more expensive and harmful debt.

When you buy a home, buyers usually put down 20% and borrow 80% of the home price you negotiated. A fixed 15-year or 30-year mortgage will determine your monthly payments. A shorter mortgage is desirable if you are willing and able to pay higher monthly payments. You will be paying lower interest costs over the loan’s life overall than the 30-year mortgage.

Mortgage Ratio = 2.5 x Primary Income= Mortgage Payment

If you make $120,000 annually (reasonable if you are dual earners), you should not borrow more than $300,000 for a house priced at $375,000. Calculating total home loan is based on $300,000/.80 (or borrowing 80% of the price). Some buyers like to put down more money, say 30%, to drop the amount you need to borrow.

Related post: 7 Steps To Buying A Home

15. Total Debt Service Ratio (aka Front End Ratio)

This ratio is what lenders crunch when looking at how capable you are in servicing your housing debt.

Total Debt Service Ratio = Monthly housing costs/ Gross monthly income

The housing costs are primarily your mortgage costs and property costs. Lenders look at a 28% ratio as desirable, with anything over 36% being excessive. This ratio is sometimes called the 28/36 rule.

16. Life Insurance Ratio

The life insurance ratio is simple, but this benchmark should be a starting point. Life insurance is essential for families, particularly with children. Single people should consider a policy as well, but their needs may be different. Insurance sales folks will use this ratio to start a discussion on your circumstances.

Life Insurance Ratio = 10 x Primary income

If you make $100,000 a year, the ratio indicates that you get a $1,000,000 policy. Consider what your family needs to protect with the life insurance policy. The amount of your policy needs to cover your household’s fixed expenses and your children’s needs, including college costs.

A single person buying a $1,000,000 policy may be excessive. However, if your household has three young children with only one spouse working, that amount may not fully cover your family adequately.

Related Post: A Beginner’s Guide To Insurance

17. Investing Ratio

This ratio guides you to the stock asset allocation in your investment portfolio. Generally, the younger you are, the more you can tolerate risk as opposed to someone approaching retirement. Age plays a big factor in this ratio.

Investing Ratio = 120 – Age

If you are 25 years old, then 120 less 25, your portfolio could allocate 95% stocks/ 5% bonds. Stocks carry higher risk producing higher returns than bonds. As you age, your risk tolerance goes down with lesser years to accumulate growth in your portfolio. A 50-year-old should be moving their allocation to 70% stocks/30% bonds. For many closing in on retirement, a 50%/50% or less is appropriate.

The ratio is a gauge for asset allocation in your portfolio. Take your circumstances and risk appetite into consideration.

Related Post: 10 Tips To Diversify Your Investment Portfolio

18. Retirement Savings Ratio

There is a Chinese proverb: “Don’t wait until you’re thirsty to dig a well.” 

Saving for your retirement should begin as early as possible so your nest egg can benefit from compound growth. As soon as you start your first job, you should take advantage of your employer’s sponsored retirement plans, usually a 401K, and begin contributing to your account. Save enough to earn your employer’s matched contribution. Open a Roth IRA plan.

Retirement Savings Ratio = 25 x Primary Income

If you make $100,000, your retirement savings should amount to $2.5 million. This ratio is also called the 25X Rule.

This ratio complements the 4% Withdrawal Rule developed by William Bengen in his study, “Determining Withdrawal Rates Using Historical Data.” The 4% withdrawal rule means that you should be able to live during retirement by withdrawing 4% of $2.5 million in assets, or $100,000. It is not a coincidence that 25 x 4% equals 100%. The math at least works perfectly.

Bengen was a financial planner from MIT. His study said that if you withdraw 4% of your assets annually (his analysis pegged the number closer to 4.15%), your retirement savings could last 35 years. Others have said 4% was too conservative and a better withdrawal rate is closer to 3%.

The point of this ratio is to use it as a guideline rather than something etched in stone. You need to figure out what kind of lifestyle you will have in retirement. 

Related Post: Saving For Retirement In Your 20s

Final Thoughts

These financial ratios are useful as a starting point to understanding your financial health. They do not take the place of a sound financial plan. Gathering your financial data to develop a net worth statement and a monthly budget plan is essential. It may help you identify the risks you have when carrying too much high-cost debt. If so, change your spending and reduce credit card debt. Get in financial shape!

Use the ratios to see where you stand relative to your financial goals and make changes to how you save, spend, borrow, and invest.

Thank you for reading!

Let us know what ratios you find most useful. Do you know of a ratio we missed and should include? Please let us. We would like to hear from you.

Running out of cash can be a frightening experience. It is one thing when you are in a restaurant, and you leave your wallet at home. However, it can be quite stressful to realize you have a potential cash flow problem coming down the pike.

By exercising financial discipline, you can avoid some everyday stresses. Having a large emergency fund when unforeseen events happen can soften the blow of sudden but necessary expenses. And yet, many Americans have not put enough savings aside for life’s uncertainties. Having liquidity has become even more apparent during the pandemic. High job losses, business closures, and medical needs have put financial strains on many of us.

Finding financial happiness is more than just making money. To achieve your short-term and longer-term financial goals, you need to know and understand your financial position. Preparing financial statements, as businesses do, will help you evaluate strengths and weaknesses.

Think of your family household as a business. The family balance sheet is your net worth statement, providing you a snapshot of your financial condition. To avoid liquidity problems in good or bad times, the current ratio is among the best ways to measure your family’s ability to pay debt obligations within a year.

Personal Net Worth As A Key Benchmark

Net worth is a great way to review your personal financial data accounts at a point in time. It is calculated using your total assets: what you own less total liabilities, or what you owe. Hopefully, what you own is over what you owe.

Using data from your net worth, you can analyze many different key personal financial ratios to develop better habits. We have written about various financial benchmarks in money management: savings, retirement, spending, investing, debt accumulation, and reduction. These ratios can be easily calculated and give you a better sense of your financial health and progress relative to your goals.

Liquid Net Worth As A More Realistic View

Liquid net worth is an even better and more realistic benchmark because it focuses on your assets’ liquid nature. That means those assets that can be quickly converted into cash with little or no loss of value. Although net worth remains a helpful gauge, it doesn’t differentiate your assets from their liquidating value.

As such, liquid net worth gives you a better understanding of your assets and your future needs, whether running out of cash or even exploring an opportunity. Drilling further down, the current ratio is among the best financial ratios. This ratio is easy to calculate and measures your liquidity position. Having financial flexibility allows you to react to and adapt to changing financial conditions like a recession and losing your livelihood.

What Is The Current Ratio?

When measuring your current ratio, your focus is on existing assets. You can convert into cash within a year and current liabilities due within the year. The current ratio is sometimes referred to as the working capital ratio. Businesses, analysts, and investors have used these formulas seeking strong balance sheets that predict which companies can best pay their short-term debt obligations. Similarly, a family household can use the ratio to know whether they can rely on having enough short-term assets readily available to pay your short-term debts.

Who Evaluates Your Current Ratio

This ratio is essential to avoid money shortfalls but may highlight your liquid position to maximize your business growth or family wealth. Investors use the current formula to search for companies with strong balance sheets to weather economic downturns. Lenders review your financial statements, crunching numbers to judge their risk exposure by your ability to pay your loans. Financial advisors use your data to help you develop your goals and strategies to achieve your financial plan.

Our Focus

• Define and calculate the current ratio.
• Understand the ratio and its limitations.
• Strategies to improve our financial position.

The Current Ratio Definition

The current ratio relates current assets to current liabilities and is easy to calculate. It helps you to understand your liquidity position within the short term period of one year. Liquidity refers to the ability to convert your assets into cash with little or no loss of value. The quick ratio is a close cousin to the current ratio but uses a shorter time frame of 90 days or less and uses receivables. As such, the quick ratio is more attuned to the liquidity of businesses as opposed to households.

Certain assets, particularly financial assets, tend to be easier to convert as marketable securities with values. What other holdings can you sell quickly to convert into cash?

Not All Assets Are Equal

Before we had kids, we enjoyed collecting art and antiques. We happened to make these purchases at the peak of that market. Once we had kids, our tastes dramatically changed. So did the art and antique market, which collapsed around the Great Recession. Try selling those items in a hurry! We sold many pieces well below the price we paid and learned a valuable lesson. Asset categories matter. A current ratio measures the household’s ability to liquidate those assets to meet their short-term obligations without additional borrowing.

Although there may be differences in assets and liabilities of a household or business, the calculation is pretty much the same. Cash inflows and cash outflows are often a trade-off between having liquidity and using your surplus cash for growth.

Current Ratio Formula = Short term Assets/ Short Term Liabilities.

Current liabilities reflect the debt payments owed in the current year. That would be your monthly credit card balances, and other debt payments owed that year. A ratio of one or higher indicates you have more short term assets than debt, a sign of good financial health.

Current Assets In The Household Balance Sheet

Your family may own various assets, ranging from monetary assets (or financial and more liquid assets), tangible assets (e.g., cars, houses, or furniture), and diverse investment assets. The current ratio relies on liquid assets able to quickly convert into cash with minimal loss in value. You can sell your car but at a depreciated rate and potentially below its fair market value depending on condition, mileage, and use.

A typical example of current assets your family household may have:

• Cash On Hand $500
• Savings Accounts $1,500
• Emergency Savings Account $1,200
• Checking Accounts $1000
• Tax Refund Due $400
• Money Market Accounts $3,000
• Marketable Securities (eg. stocks, bonds) $45,000, includes $4,500* in cash
• CDs $1,000
• Cash Value of Life Insurance Policies $15,000
• *Cash portion only.
• Total Current Assets $28,100

Summing up the amounts of $500 +$1,500 +$1,200 + $1,000 + $400 + $3,000 + $4,500 + $1,000 + $15,000 equals $28,100 in total current assets.

Notice that I only added 10% of the marketable securities, or $4,500. You don’t want to inflate current assets. It is best not to count on your investments. Instead, add only the cash portion. Markets can be volatile, often impacting values in the short-term, but you want to opportunity for the securities to bounce back.

Use Caution When Determining Your Current Assets

As a long-term investor, I have experienced declining stock values in my portfolio many times. A range of factors causes market turbulence, such as an unstable economy. Although tempting, it may not be wise to sell your marketable securities like stocks and bonds.

As we saw with the pandemic in the spring of 2020, stocks tumbled but returned reasonably quickly to acceptable values. Panicking is never a good time to sell stocks in a plummeting stock market, only to sell some of your winners. Don’t rely on your investments as current assets if you have a long term perspective. It would be best if you considered a small portion, say 5%-10% of your investment accounts as cash in the short term.

Don’t Count On Retirement Or College Savings

Retirement or college savings accounts are long term assets designed for your financial future. When you set up 529 College Savings accounts for your children, you build a fund for tuition and other costs. Likewise, when you are saving for your retirement through your company-sponsored 401K and IRA plans.

These accounts are the last places you should withdraw money and should not be considered liquid assets. They provide tax-deferred benefits as well as compounding growth as long as you leave the money in place. Besides, withdrawing money from these funds usually causes potential tax liabilities and penalties on these long term assets. Generally, this is usually a costly move. It is better to look elsewhere first for cash.

Some families have side hustles or start-up businesses, which may add some current assets such as customer accounts receivables, inventories, prepaid expenses, and notes receivable expected within the year. If you do include existing business assets, make sure to add your business’s current liabilities as well.

Current Liabilities In The Household Balance Sheet

This category is for current obligations that you owe within the current year. Managing your debt is critical to a good current ratio and having financial flexibility. It can mean the difference between financial success or strain for you and your family. Typical accounts that are due within the year:

Outstanding credit card balances of $6,000

Line of credit balances, associated with a flexible loan that you may access as needed and repay immediately or over time with interest. $1,000

Auto loans or leases due $5,400

Student loans $4,500

A mortgage loan, maintenance, or rent payments due $12,000

House Equity Line of Credit (HELOC) if you borrowed money., unused.

Installment Loans for household appliances, electronics, furniture $1,000

Any other short term loans coming due.

Total Current Liabilities $28,900

Total current liabilities are the sum of the amounts of $6,000 +$5,400 +$4,500+ $12,000 + $1,000= $28,900

What A Current Ratio Reveals

To calculate your current ratio, you divide total current assets by total current liabilities. Looking at the current ratio, we divide $28,100 by $28,900, equaling a current ratio of 0.97, very close to 1.0.

A score of 1 means that your current assets match your current liabilities. However, you may want to target a more desirable rate of 2, indicating better asset coverage of the household’s debt obligations due within a year. A 2 current ratio means for every dollar of liability; you have $2 in existing assets.

What stands out in current liabilities is $6,000 in outstanding credit card balances weighing on current liabilities. This amount grows faster, given the high-interest rates charged by credit card issuers. A year from now, that amount will increase to $7,000 (assuming no other borrowing on your card), possibly outpacing current asset growth, bringing your current ratio down.

Limitations Of The Current Ratio

Be honest about what you include for this analysis. Don’t inflate your current assets or understate your current liabilities. Consider any trade-offs like paying off fast-growing card balances, even if that means current assets will go down from using your cash. While “cash is king,” too much cash may mean you need to allocate more to growing your retirement or investment assets.

That can mean an opportunity cost to you and your family by not maximizing your wealth generation potential. The opportunity cost of any decision is the cost of the next best alternative that must be foregone. Keeping cash in your savings account instead of a retirement amount shortchanges your nest egg in the long run.

Strategies To Increase Your Current Ratio And Overall Financial Position

Spend Less

To improve your current asset position relative to liabilities, evaluate your spending patterns. Overspending or impulse buying can lead us to buy things we can’t afford or need. For example, when we are looking at our favorite sites, we come across a beautiful coat. We don’t look away even though it is out of our price range and we just bought a lovely coat a few weeks ago. Present bias is a bias that stimulates our need for immediate gratification at the expense of our need to save. Rather than saving, we will be increasing the balance on our credit card. When we shop, we are often subject to marketers exploiting our biases, as we discuss here.

Track Your Spending

If you are susceptible to overspending, try tracking your monthly bills. You may be surprised at how many things you thought you needed but haven’t even used. Return those items or learn how to control your spending better. Review your budget for places where you may reduce some obvious costs. You may be binge-watching more than ever as you sign up for all the new streaming options.

Last year, I found that Craig had downloaded hundreds of dollars worth of Kindle books over two weeks. I was surprised, but when I brought it to his attention, he was even more shocked.

Due to the pandemic, we have spent less on entertainment, vacations, and other typical places before social distancing. As a result, we may have even picked up some good habits like cooking more, engaging in DIY projects, and even doing without some luxuries. We all want to get back to our everyday lives, see friends and family, but that shouldn’t mean losing any financial discipline we gained.

Consider your financial goals when accumulating assets. Be mindful of their potential appreciation value and the respective market. Our arts, rare books, and antiques served their purpose for many years. However, we took a significant loss when we transitioned to a different lifestyle and a growing family. Falling in love with the art on the wall and the furniture are nice but were not suitable investments.

Boost Income

Many people are struggling due to the coronavirus-related economic downturn. You may have lost your job, had your hours reduced, or want to boost your income. Think about what solutions suit you best. If you like your firm and want to advance there, consider expanding your skills and knowledge. Talk to your boss about ways you to increase your training to be helpful to your department.

Even if you are delighted with your current situation, always consider ways to invest in yourself throughout your career. Many people worked remotely due to social distancing. You want to continue to do so as a work/life balance or cost-savings measure and ready to do it long term. Another way to earn more is to take on a part-time job or do some freelancing. Consider options that fit with your current family lifestyle and can be financially beneficial.

Allocate Some Savings To Investments

Even if you only have a small amount of savings, begin to invest as early as you. However, before taking that step, make sure you have first set aside an emergency fund for unforeseen events. When you are young, you have a long-term horizon that allows you to take on more risk and handle the volatility.

Manage Your Debt Properly

Pay your credit card balances on time and in full, so your debt doesn’t grow on a compound basis. Carrying card balances is a big weight on your current ratio and hard to manage when you pay on average 16% APR. Your debt may continue to grow faster than your current assets. This is an untenable situation. Eventually, it will difficult to find liquidity when you need to.

Don’t buy a bigger home than you can afford or need. Consider a shorter mortgage, such as 15 years, to pay less total interest on the price of your home. Yes, your monthly mortgage will be bigger, but for a shorter time and less cumulative interest. Refinance your mortgage if you are paying a higher mortgage rate than currently offered.

Final Thoughts

Using financial benchmarks, notably the current ratio, are useful as a starting point to understanding your financial health. Evaluating your financial strength and position can move you towards meeting your goals and achieving success. Having sufficient liquidity to deal with potential struggles in the future may be the difference between financially comfortable or strained. Preparedness and financial discipline are essential for you and your family.

This article originally appeared on Your Money Geek and has been republished with permission.

.