5 Important Personal Finance Ratios To Follow For Retirement Planning

Graph representing personal finance ratios

5 personal finance ratios to stay on track

Personal finance ratios are a great way to gauge your readiness for retirement.

Once you know how to calculate them, they are convenient tools that give you a big picture view of your financial health.

They also simplify the seemingly complicated path to financial success.  Knowing what to track with which metric gives you a guide to increasing your wealth and reaching an end goal.

Thirdly, tracking various financial metrics will reveal the strong and weak points in your money management.  Identifying the areas that are slowing down your progress will allow you to become more efficient and effective at saving for your retirement.

This post reviews 5 personal finance ratios you should track for your retirement planning:

  1. Net worth
  2. Savings Rate
  3. Debt-to-income Ratio
  4. Liquidity Ratio
  5. FI Metric

Get this FREE Monthly Metric Tracker to start tracking these important personal finance metrics!


1. Net Worth

Your net worth is a good indicator of your financial health.

For one, it’s not completely dependent on your income.

If you are very wealthy but have a lot of debt, you could have a negative net worth.

Here is the basic formula to calculate your net worth:

ASSETS (What You Own) – LIABILITIES (What You Owe) = NET WORTH 

There are different ways to determine your assets.

Some people include only major assets such as real estate, investments, and cash.  Others include everything down to the china.  It’s up to you, just choose those which give you the most realistic result.

It’s good to remember that it’s not the actual number you need to be most concerned about.  What is of greater significance is your net worth’s growth over time.

You want your net worth to consistently get larger

This demonstrates an increase in income, a decrease in debt, or both.

As your savings rate increases, so will your net worth, because a positive savings rate means you are acquiring greater assets.  See the next financial metric to learn how to calculate your savings rate.

If you want to know more about net worth and why it’s important, you can read my post How To Calculate Net Worth.

2. Savings Rate

Your savings rate is a personal finance ratio that shows you the amount of money you have left over after you’ve paid all of your expenses.

In other words, it’s the percentage of income you save in a specific period of time.

You’ll need to know what your income and expenses are to calculate this ratio.

If you follow a budget then you already have a system in place that can tell you what they are.

Here is how you calculate your savings rate:


If you don’t follow a budget, you’ll need to track these numbers throughout the month so you have accurate data to input into the formula.

There are standard benchmark percentages that financial planners suggest you maintain in order to reach your retirement goals, and those depend partially on your age and how much time you have left until you retire.

If you have 30 years until you retire, saving 10-15% of your income will suffice.  But if you only have 15 and you don’t have any savings, this percentage will need to be significantly higher.

Knowing your savings rate will give you a realistic picture of what you need to do today to reach your retirement goals. 

You may realize that downsizing and cutting expenses are necessary actions to take, or increasing your income by getting a second job.

3. Debt-to-Income Ratio

As you prepare for retirement by steadily increasing your savings rate, you’ll also want to be purposeful about lowering your debt.

A good way to keep track of your progress with paying down debt is with the debt-to-income ratio (DTI).


For example, if your monthly debt payments total $1,800 and your monthly gross income equals $6,500, then your DTI would be:

$1,800 / $6,500 = .28 or 28%

Financial lenders take into consideration your DTI when you apply for a loan.

Most will look for a DTI of 30% or lower, but you should really try to get it as low as you can.  Especially when you retire, you’ll want your DTI to be as close to 0% as possible!

This personal finance ratio will give you an idea of how well you are paying down your debts

If it consistently gets lower month to month, you know you’re staying on track with your debt paydown plan.  If it starts to increase you’ll be aware that your debt is creeping back up.

If your DTI starts getting close to 40-50%, you know you’ll need to step up your efforts to get more debt paid off.

Also, the lower your DTI ratio, the better your credit score and the more likely lenders will be open to working with you.  If your DTI is too high, they will see you as a higher risk.

4. Liquidity Ratio

This metric will let you know how long you can be supported solely by your liquid assets.

The total of these assets would usually be considered an emergency fund.

It’s a very simple but significant calculation and a good indicator of financial security.

All you have to do to calculate your liquidity ratio is divide your liquid assets by your total monthly expenses.


If you are in a situation where your emergency savings are your only source of money, then it’s critical that you reduce your monthly expenses to the bare necessities.

This might mean eliminating extras like entertainment, dining out, monthly subscriptions, etc.  Be sure you use this minimum required budget when calculating this ratio.

As you prepare for retirement, you should try to avoid withdrawing any funds from your retirement accounts. 

It’s critically important that you build an emergency fund that can last a minimum of 6 months so your retirement savings can continue to grow.

5. Financial Independence Metric

Your Financial Independence (FI) number tells you what net worth you’ll need to accumulate before you can retire and live solely off of your savings.

Before I explain the details behind this metric, here is the formula:


First, you’ll need to figure out your projected annual spending when you’re retired.  You can either base that amount on current costs and then adjust your FI number each year for inflation, or you can include inflation in your calculation.

Your annual spending will very likely be different than what it is now, based on all of the changes that retirement brings and your goals for it.  But to get started, you can track your spending now to get an idea of what they may be in the future.

Once you have a number for your annual spending, you’ll need to decide on a withdrawal rate.  This rate is the percentage you’ll consistently withdraw from your retirement savings year after year, also adjusting for inflation.

The standard guideline is 4% (based on an exhaustive study in the mid-90s).

Of course, this is just a guideline, and you can use a withdrawal rate higher or lower than that.  But, it’s a good place to start.

When you have estimated your projected annual retirement spending, and you’ve decided on a withdrawal rate, you can then determine your FI number by using the equation above.

So, for example, if you project that your annual retirement spending will be $65,000, and you’ve decided your withdrawal rate will be 4%, then your FI number would be:

($65,000 x 100) / 4.0 = $1,625,000

This number represents the net worth needed in order to be financially independent and completely live off of savings.

Now, this calculation assumes a couple of important details.  First, that your retirement will last 30 years.

Of course, if you are still alive after this long then you could have a real problem if you’ve depleted your savings.  On the other hand, if you end up staying in the workforce longer than expected, your withdrawal rate could possibly be increased.

The second assumption is that your portfolio consists of stocks (50-75%) and bonds (25-50%).  However, the allocation is up to you and will depend on market conditions as you continue to build your fund.  You’ll need to determine how much investment risk you’re comfortable with.

And just as an additional note, some professionals will simply suggest you multiply your projected annual retirement spending by 25 to get your FI number.

This is because many will recommend using the 4% rule, and if you divide a number by 4% it’s the same as multiplying that same number by 25:

$65,000 x 25 = $1,625,000

There are some unknowns with your FI number such as future inflation rate and market conditions.

And that’s why it’s important that you revisit it once a year.  The variables will probably change often, so look over your numbers annually as you get closer to retirement, then make adjustments as necessary.

Video: How to calculate your net worth

How to improve your personal finance ratios

Once you’ve calculated your own personal finance ratios, you may feel a little disheartened.  Seeing those unforgiving numbers can certainly be a wake up call, reminding you it’s time to get serious about your financial future!

Don’t be discouraged – you need to know the truth about where you’re at so you can figure out where you’re going.

If you’ve come face to face with the fact that you haven’t saved enough, or you’re in too much debt, find hope in knowing there are actions steps you can take to improve your metrics.

First, do what you can to drastically cut expenses.

  • Start with any discretionary spending, like buying clothes, eating out, going to the movies, etc.  Make a commitment to reduce these unnecessary costs, at least temporarily.
  • Refinance any debt to get the lowest rates, so you can start paying it off faster.  Begin with your mortgage, where you’ll likely experience the largest savings.
  • Review your monthly bills and determine what can be either reduced or eliminated.  Cut cable, find a cheaper phone plan, reduce your utilities.

If you’re not on a budget, start one so you can be tracking your spending.

Reducing your monthly expenses can help improve your personal finance ratios, but if you want to reach your goals faster, you’ll probably need to increase your income.  Here are a few ideas:

  • Ask for a raise, or apply for a promotion at your present job.
  • Invest in additional education or training so you can qualify for a higher paying position.
  • Get a side job that offers a few extra hours in the evenings or weekends.
  • Start your own side hustle by providing a service you already enjoy doing.

There are many ways you can generate more income, just be open to the opportunities that are available. 

To give you some ideas, you can read my post about 25+ ways to make extra money.

Don’t discount small changes.  Many little steps can add up to a big difference!

Start tracking these important personal finance metrics today with this FREE Monthly Metric Tracker!


5 personal finance ratios in summary

Personal finance ratios are a great way to track your financial health.  Understanding what they represent and how to use them will help you know when you need to make important adjustments.

They are also a great starting point for creating financial goals.  You can take these formulas and tailor them to your specific situation.

These numbers are not static.  You will need to revisit them from time to time to make updates that fit your life as you get closer to retirement.

Just remember, your numbers will be different than anyone else’s.  You must decide your own benchmarks and not get caught up in what neighbor Joe is doing down the street. 

There are standard guidelines that will help you make realistic goals but in the end, you’re the only one that can determine what’s right for your retirement.

Tracking your personal finance ratios is a powerful strategy to help you achieve your financial goals. 

Knowing your net worth, savings rate, debt-to-income ratio, liquidity ratio and FI metric can help you be more intentional with your financial decisions.

Don’t leave your retirement to chance – make a commitment to assessing your own financial health periodically so you can be successful at reaching your goals.

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5 Important Personal Finance Ratios To Follow For Retirement Planning

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