How Do You Measure Your Financial Success?

You do not have to be a billionaire to consider yourself to be financially successful. If you have a roof over your head, food on your plate, loving family and friends, you are already in a good class.

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.

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.

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 The liquidity ratio is linked very closely to the emergency fund. This cushion is essentially a cash fund for emergencies in unforeseen events such as job loss, death in the family, unexpected surgery, or immediate house repair.

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.

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.

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.

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.

Financial ratios are proper as a starting point to understanding your financial health. They do not take the place of a sound financial plan.

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