# Personal Finance Ratios: Got Targets?

These 7 ratios will help to assess your current financial position and direct you to the place you want to be!
Calculating ratios to determine the current financial position

The measurement of your personal financial performance & position, by the use of simple ratios, is a remarkable way to WIN with money. Personal finance ratios are tools used by almost every financial planner and coach to help set goals for their clients.

In a Harvard MBA study (The Harvard MBA Business School Study on Goal Setting), 84% of the students had not set goals, 13% set goals but had no concrete plans, and 3% had set goals with concrete plans…

The result:

• The 13% of those who set goals were making more than double than the other 84%!
• The 3% of those who had both set goals & plans were making 10 times more than the 84%!

This basic study affirms the truth that great things come to those who set goals and plans! Not necessarily those who wait…

So what does this have to do with financial ratios?

Financial ratios have been used for years to measure a company’s or a person’s financial performance. Why? – Because they have the ability to tell you the strengths and weaknesses of a company or even a person! Yes… The good, the bad & the ugly…

While they have the ability to show you the good, the bad and the ugly, these measurements can also be used as targets during goal-setting and in the development of plans!

Although they might appear to be bland math calculations, the ratios below can take your personal financial position to the next level if you decide to use them to your advantage.

Each ratio asks a question about your finances that you will find the answer to in calculating your ratio. Preceding the question is the ratio itself. This is where you will fill in the blanks.

Then I’ve provided for you an example scenario to help you do it yourself. And lastly, I give you a brief analysis of what the experts say!

### Monthly Savings Rate

Question: How much of your monthly net income goes to saving?

Ratio: Monthly Savings / Monthly Net Income = Current Savings Rate

Example: Let’s say you currently save \$200 a month and you make \$2,000 a month (\$200/\$2,000 = .1 or 10%)

Analysis: Experts say it’s good to save around 10-20% of your net income consistently.

### Current Savings Ratio

Question: How much of your savings do you have compared to income? This can be measured in years or months.

Ratio: Total Savings(yearly or monthly)/Net cash inflow

Example: Let’s say you have \$30,000 in the bank saved up and your current monthly income is once again \$2,000 (\$30,000/\$2,000 = 15) So you have 15 months’ worth of income saved up!

Analysis: This number you obviously would like to be as high as possible.  However, it is most important to manage the expenses to savings rate.  Which leads to the next ratio…

### Emergency Savings Ratio

Question: How many months’ worth of expenses can you cover with your savings?

Ratio: emergency fund or regular savings/monthly expenses= emergency savings ratio

Example: Let’s say you have \$6,000 in your emergency fund (or just \$6,000 in your savings) and your monthly expenses total \$1,545 (\$6,000/ \$1,545= 3.88).  This means you can survive 3.88 months living the same way if you had to!

Analysis: Emergency funds are typically for when you lose your current income. However, they can also cover unexpected costs like medical expenses or car bills, so you should also compensate for both.  Experts recommend having 3-6 months expenses saved in case of an emergency. Although this ratio might vary per person, I would recommend more than just 3-6 months simply because other unexpected things can all happen at the same time.  Sometimes when it rains, it pours….

### Mortgage Housing Ratio

Ratio: Housing costs (principle + interest payments, taxes & insurance) / Gross yearly income

Example: Let’s say your yearly housing costs as \$16,800 (\$1,400 per month) & your yearly gross income is \$78,000 (\$16,800/ \$78,000 = .2154 or 21.54%)

Analysis: The commonly agreed upon mortgage housing ration is that your yearly housing costs should be no more that 28% of your yearly gross income. This ratio is a good target to strive for.  However, strive for it to be lower so that you can have more money for other things like paying down debt, saving, investing, or giving.

### Debt Payments Ratio (excluding housing costs)

Question: How much of your income goes to paying off debt?

Ratio: Monthly debt payments / monthly NET income

Example: Let’s say your monthly debt payments are \$500 per month and your income is \$3,500 per month (\$500/\$3,500 = .143 or 14.3%)

Analysis: Experts say anything over 20% is BAD. In my opinion, consumer debt is a dangerous world.  I’d avoid as much debt as possible. Only purchase that which you can pay back with very little interest. If you struggle with this, read my post on overspending!

### Credit Usage Ratio

Question: How much of your credit limits are you using?

Ratio: Current Balance/Credit Limit

Example: Let’s say your current balance is \$250 and your credit limit is \$2,500 (\$250/\$2,500 = .1 or 10%) Thus your credit usage rate is 10%

Analysis: According to Credit Karma, using less than 30% of your limit is recommended. However, the less you use, the better your score!

**Special note: If you want to win with your credit cards, pay off the full amount every statement period avoiding interest! Also, never miss a payment as this will hurt your credibility.**

### NET Worth Ratio

Question: What is your net worth?

Ratio: Total Assets (everything you own) – Total Liabilities (everything you owe)

Example: Let’s say all of your cash, investments, property, real estate, etc., is \$677k and you have \$100k of debt (677k – \$100k = \$577k). Therefore, your net worth is \$577k!

Analysis: There’s no set amount that experts recommend. This is simply a measurement of your wealth. Obviously it’s best to be in the positive, not the negative. If you’re in the negative, get Dave Ramsey’s book to teach you how to kill debt and be in the positive:The Total Money Makeover: A Proven Plan for Financial Fitness

Now, in each ratio I’ve included a recommended threshold. It would be to your benefit to calculate where you currently stand under these ratios, and then set some targets for yourself to obtain.

Learning these simple math formulas can do great things for your financial acumen and your personal financial performance! Not only that but if you get your numbers within these recommended ratios, your credit score will greatly improve!

I hope you find these personal finance ratios beneficial along your journey to financial freedom!

Cheers & God Bless!

Matt

DISCLAIMER: The opinions, analysis and statements presented in this article and on this site are solely my opinion (based on my own research), not affiliated with any past, present or future employment or business affiliation. This post contains affiliate links of the products that I recommend, which means if you purchase products through the link, I’ll receive a small commission. This helps support the blog and the time and effort put into it. Thank you for the support!!

• Jay
9 August 2017 at 11:13 am

Excellent post! Definitely something I am currently working towards and struggle with. Thanks for the share

• Matt
9 August 2017 at 11:22 am

Thanks Jay! I appreciate you taking the time to comment! Its okay to struggle. Running these ratios are definitely daunting at first but once you get running with them they’ll have benefits!

• Albert Fang
31 December 2017 at 9:06 am

Great post! Just recently discovered your blog and just wanted to say, keep it up! Liking what I am seeing thus far.

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