18 Personal Finance Ratios You Should Know

Personal financial ratios can give you a picture of your proper financial health and progress relative to your goals  These benchmarks can help you develop better financial habits in these areas: savings, retirement, spending, investing, and debt management.

18 Personal Finance Ratios:

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.

1. Liquidity Ratio

2. Emergency Fund Ratio

The liquidity ratio is linked very near to the emergency funds. You should use this emergency cushion 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 to support you through emergencies.

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

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

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.

5. The Current Ratio

The current ratio is the best benchmark to determine liquidity in your household. 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.

6. Debt-to-Asset Ratio

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

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 100s

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.

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.

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