How Do You Measure Your Financial Success

To measure financial success, use specific personal financial ratios and qualitative factors to evaluate your financial health. These benchmarks can help you develop better financial habits in savings, spending, retirement, investing, and debt payoffs.

Have An Emergency Fund That Can Absorb A Financial Shock

Having liquidity on hand for emergency purposes provides much-needed peace of mind. Liquidity refers to your ability to easily 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 job, death in the family, or your roof is leaking.

Liquidity Ratio Monetary assets are liquid investments. The average household can include cash, money markets, savings, and checking accounts. As such, they should be able to provide liquidity to pay your fixed monthly expenses.

Emergency Fund Ratio

An emergency fund ratio works ample enough to support you through these unknowns for a targeted timeframe. If you are looking for six months or higher (and this is highly recommended) to set aside in one fund investing in a high yield savings account or a money market account

Net Worth Ratio

Net worth is your personal balance sheet measuring your net wealth at a point in time. As you add to your assets, hopefully outpacing your liabilities, you will be getting wealthier. Another financial measure is your liquid net worth which strips out non-liquid assets.

Targeted Net Worth Ratio (The Millionaire Next Door)

The more successful millionaires are the prodigious accumulators of wealth (PAWs). They tend to be less extravagant, as most of us believe of millionaires. Instead, PAWs lived frugally, often buying used cars. As such, they accumulated and retained their wealth. This ratio uses age as a factor in the calculation, as some other ratios do.

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. An alternative way to calculate the Debt-To-Income ratio is looking at your total debt balances compared to your income.

Savings Rate-To-Income Ratio

Savings should be one of the essential 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.

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 have a high price of debt. Card companies notoriously charge high-interest rates.

What are the qualitative ways of being financially successful?

- Being Financial Independent - Debt-Free And Financially Flexible -Don’t Fight About Money With Your Spouse - Passionate About Your Career Job - Don’t Compare Your Financial Situation To Others - Enjoy Learning And Picking Up New Skills

Financial ratios are proper as a starting point to understanding your financial health. They do not take the place of a sound financial plan. Although they have limitations, like age specificity, these metrics can move you to the next goal post. Consider qualitative measures of what being financial success is. What we all want is to be able to say that we had a life well spent.

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