Personal finance ratios are a great way to gauge your financial health and retirement readiness. Financial planners use them to do a financial ratio analysis, but you could easily do this yourself.

Once you know how to calculate them, they are convenient tools that give you a big picture view of what’s working and what’s not.

Don’t be put off by any resistance to do math formulas – calculating personal finance ratios is super easy!

In this post, I’m going to explain 35 personal finance ratios to help you assess your current financial position. But, first, let’s go over what personal finance ratios are.

What are personal finance ratios?

A personal finance ratio is a comparison of two financial values to examine the relationship between them. A ratio is calculated by dividing one amount by another, and can be useful for tracking progress and revealing strengths and weaknesses in a financial plan.

Financial ratios are helpful tools to evaluate and measure financial health. These key metrics provide a snapshot of your current financial position and insight into making more profitable decisions with your money.

You don’t need a financial advisor to tell you how you’re doing with your finances. Personal finance ratios can give you a good indication if you’re saving enough, have too much debt, and if you’re on track to retire on time. They give you a helpful rule of thumb to follow so you can be confident you’re moving in the right direction.

1. Saving Rate

What is it?

The saving ratio indicates the percentage of income you save in a specific period of time, typically on an annual or monthly basis.

How do I calculate it?

Here is how you calculate your saving rate:

TOTAL SAVINGS ÷ GROSS INCOME = SAVINGS RATE

What values do I use?

Your savings can include the money you add to your bank savings accounts, money market accounts, emergency fund, retirement accounts, college funds, etc.

What you include in this ratio is up to you, and will depend on what form of savings you want to track. Some people don’t include their emergency or college funds when calculating this ratio, while others include all saving vehicles in this metric.

You gross income is the entirety of all of your income before taxes and other deductions are taken out. This includes employment paychecks and bonuses, business and side gig income, dividends and interest income, any income from rental properties, etc.

The values you use should all be accrued in the same time periods. So, if you add up how much you’ve saved in a month, then you would also use your monthly gross income.

Likewise, your total savings over the past year should be divided by your annual gross income. One benefit of calculating your monthly savings ratio is that you can make adjustments sooner if necessary.

What’s a good benchmark?

Your ideal savings ratio will depend on a few factors, like your age, time left until retirement, and your current savings.

If you have 30 years until you retire, saving 10-20% of your income should suffice. But if you only have 15 and you don’t have any savings, this percentage will need to be significantly higher.

How can this ratio be applied?

Let’s say you want to know your monthly savings ratio for all of your savings combined – emergency fund, college fund, savings accounts, and retirement funds.

Your total contributions for all of these accounts equals \$1,000 over the past 30 days. You calculate your gross income over the same period to be \$6,000.

Your current monthly savings ratio would be \$1,000 ÷ \$6,000 = .16 = 16%.

How can this ratio help me?

Knowing your savings rate will give you a realistic picture of what you need to do today to reach your saving goals. This metric is a very simple, but highly important, financial ratio, and reflects your ability to meet your future objectives.

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

2. Retirement Savings Metric

What is it?

Saving for retirement should be at the top of your financial goals list, and beginning as early as possible will maximize the benefits of compound interest.

There are a few common retirement saving vehicles that offer tax benefits and greater return. Some of these include employer-sponsored retirement plans like the traditional and Roth 401(k), the traditional and Roth IRA, traditional pensions, and annuities.

How do I calculate it?

Here is how you calculate your retirement savings metric:

PRIMARY INCOME x 25 = TARGET RETIREMENT SAVINGS

What values do I use?

Your primary income is the income you receive from your regular employment. This is the income that is typically generated from a full-time job, and doesn’t include temporary or inconsistent income.

What’s a good benchmark?

The metric itself represents the benchmark, which is 25x your primary income.

The multiple of 25 relates to the 4% rule created by William Bengen. Basically, the rule states that maintaining a savings withdrawal rate of 4% in retirement will allow your money to last the rest of your life. Multiplying 25 by 4% equals 100% – which explains the relationship between the two.

Like all ratios in this list, you should use this metric as a guideline and not a rule. You need to decide the lifestyle you want to have in retirement, as well as other income sources you’ll receive (like Social Security or an inheritance).

How can this ratio be applied?

As an example, let’s say you make an annual salary of \$80,000 a year. If you want to maintain this level of income during retirement, your target should be \$80,000 x 25 = \$2,000,000.

How can this ratio help me?

Once you calculate this number using your own values, you have a target to shoot for. It’s a good starting point to know how much you should be investing today.

3. Emergency Fund Ratio

What is it?

An emergency fund is like a safety net to catch you during financial hardships, such as a job loss, medical crisis, or sudden home repair cost. Without an adequate emergency fund, you will likely be using credit cards to cover these costs.

The emergency fund ratio applies directly to the money you set aside for unexpected expenses. It measures the length of time your emergency fund would cover your essential monthly costs.

How do I calculate it?

Here is how you calculate your emergency fund ratio:

EMERGENCY SAVINGS ÷ MONTHLY ESSENTIAL EXPENSES = EMERGENCY FUND RATIO

What values do I use?

Your emergency savings would be all funds that you’ve set aside for emergency expenses. Typically, this savings is kept in a separate account and not used for any other purpose.

Your monthly essential expenses are all those that are NON-discretionary. This includes all living costs that are not optional – such as your mortgage, insurance, food, and transportation.

What’s a good benchmark?

A good benchmark is to save enough to cover 3 to 6 months of essential expenses. Calculate this ratio using your own values to determine how much you need to save for emergencies.

How can this ratio be applied?

For example, if you currently have an emergency fund with a balance of \$10,000, and your monthly essential expenses total \$4,000, then your savings could cover \$10,000 ÷ \$4,000 = 2.5 months.

How can this ratio help me?

Emergencies are typically unexpected and sudden. You want to be prepared before they happen.

Knowing your emergency fund ratio will help you stay on track with building your savings, so an emergency doesn’t create a financial catastrophe.

4. Front End Ratio

What is it?

The front end ratio (also known as housing-to-income, or basic housing ratio) is an important calculation that lenders use to determine your ability to pay back a mortgage loan.

How do I calculate it?

Here is how you calculate your front end ratio:

MONTHLY HOUSING COSTS ÷ GROSS MONTHLY INCOME = FRONT END RATIO

What values do I use?

Housing costs are more than just a loan’s principal and interest. They also encompass property taxes, homeowner’s insurance, utility costs and HOA fees.

You gross monthly income is the sum of all of your income before taxes and other deductions are subtracted. This could include employment paychecks and bonuses, business and side gig income, dividends and interest income, etc.

What’s a good benchmark?

Typically, lenders prefer this ratio to stay below 28% for loan applicants. The lower you can get this ratio, the more affordable your housing costs will be.

How can this ratio be applied?

If your monthly housing costs totaled \$2,000, and your gross monthly income equaled \$8,000, then your front end ratio would be \$2000 ÷ \$8000 = .25 = 25%.

How can this ratio help me?

This metric will give you a good idea of how much house you can afford.

5. Mortgage Ratio

What is it?

A mortgage ratio is a simple rule of thumb that gives you a general idea of the amount of home loan you can afford.

How do I calculate it?

To determine your mortgage ratio, simply multiply your gross income by 2.5:

GROSS ANNUAL PRIMARY INCOME x 2.5 = MORTGAGE RATIO

What values do I use?

Your primary income is your main source of income, and usually refers to your full-time job. You may have secondary sources of income, like alimony or a side gig, which should not be included.

What’s a good benchmark?

The ratio represents the benchmark, which is 2.5x your primary income.

How can this ratio be applied?

If your gross primary income from your day job is \$75,000 a year, then a good rule of thumb is to apply for mortgages for \$75,000 x 2.5 = \$187,500 or less.

This does not mean that you can only consider houses worth this amount. If you are applying for a conventional mortgage, you’ll probably have to put down a minimum of 20% of the sale price.

So, with a primary annual income of \$75,000, you could potentially look at homes valued at \$234,000 or less:

\$234,000 x 20% down payment = \$46,800

\$234,000 – \$46,800 = \$187,200 mortgage loan

How can this ratio help me?

This personal finance ratio will give you a ballpark figure for the amount of mortgage you may be able to afford.

6. Loan to Value

What is it?

The loan-to-value (LTV) ratio is the relationship between an outstanding home loan amount and a home’s appraised value. It is the percentage of a home’s value that is being borrowed.

How do I calculate it?

Here is how you calculate the loan-to-value ratio:

CURRENT LOAN BALANCE ÷ CURRENT APPRAISED VALUE = LOAN-TO-VALUE

What values do I use?

The current loan balance is the amount that’s remaining on the mortgage. The current appraised value is what the home is currently appraised for.

What’s a good benchmark?

High loan-to-value ratios are typically considered a borrowing risk for a mortgage loan. This could result in higher interest rates, or having your application denied.

Most lenders will give more favorable rates if the LTV is at 80% or below. Factors that can lower the LTV include a larger down payment, a lower sales price, and a greater appraised value.

How can this ratio be applied?

Let’s say you make an offer of \$190,000 on a home that’s valued at \$200,000. Your offer is accepted, and you put 20% down (\$190,000 x 20% = \$38,000). This means your mortgage would be \$190,000 – \$38,000 = \$152,000.

Using these numbers, your LTV would be \$152,000 ÷ \$200,000 = .76 = 76%.

How can this ratio help me?

When you’re in the market to buy a home, the LTV ratio is a helpful measurement to determine the size of down payment you’ll need to keep your LTV below 80%.

If your LTV is above 80%, then you will likely have to pay private mortgage insurance and a higher interest rate.

As a homeowner, your LTV should go down as your property value goes up and your mortgage balance decreases.

7. Investing Metric

What is it?

The investing ratio is a measurement to help you decide how your investment portfolio should be allocated between high-risk (such as stocks) and low-risk (e.g., bonds) investments. This ratio is largely influenced by age, and should be used as a general rule of thumb.

The formula calculates the percentage of a portfolio that should be invested in higher-risk investment vehicles, such as stocks and other equities. The remainder would then be put into safer options, such as bonds and annuities.

As you get older, the percentage in stocks and equities will decrease, which means less risky investment decisions the closer you get to retirement.

How do I calculate it?

Here is how you calculate the investing ratio:

120 – CURRENT AGE = INVESTING RATIO

What values do I use?

If you prefer to hold to current investing trends, you would use the recommended value of 120 and the age you are today.

However, there are some people who use the value of 100 or 110 for this ratio, depending on their own longevity estimate.

What’s a good benchmark?

The calculation itself is the benchmark, but you should only consider this as a starting point. There are several factors that will affect how you balance your portfolio, and you should consider all of them when determining asset allocation.

How can this ratio be applied?

As a 30-year old, you have several years to weather the ups and downs of the stock market. Therefore, you can take on more risk with your investments.

You could consider investing 120 – 30 = 90% in higher-risk options like stocks, and only about 10% in bonds.

However, if you’re 57, then retirement is a lot closer and you don’t want to put as much of your retirement funds at risk. This means that 120 – 57 = 63% is a better allocation toward stocks. The rest is safer in bonds and annuities.

How can this ratio help me?

This metric is useful for gauging appropriate asset percentages in your investment portfolio. Because of its simplicity, you should only use it as a general starting point when deciding your risk appetite.

8. Return on Investments

What is it?

The return on investments ratio (ROI) measures the past performance or potential future return of investment assets.

How do I calculate it?

To determine the ROI on an investment, you will first need to calculate the net return, which is simply the difference between the initial value and the current value.

Once you know the net value, you can calculate the ROI:

(NET RETURN ÷ COST OF INVESTMENT) x 100% = RETURN ON INVESTMENT

What values do I use?

To determine the ROI of your investment, you’ll need to know the quantity you purchased. For example, this may be 100 shares of stock.

For the net return, you’ll need to know both the initial value and final value of the investment. Subtracting the former from the latter will give you the net return.

Your cost of investment equals the total you paid for the investment.

What’s a good benchmark?

The ROI can vary widely with your investments, depending on their risk and the market conditions. However, a return of 7% or more is typically considered an ideal ratio for stocks. This is also the average annual return for the S&P 500.

How can this ratio be applied?

Let’s look at a very simple example.

Perhaps you purchased 100 shares at \$10 per share, one year ago. The current value of the shares is \$11. This would make your net return equal:

(\$11 – \$10) x 100 = \$100

Your cost of the investment was 100 x \$10 = \$1,000.

Using these values, we can now calculate your ROI as:

\$100 ÷ \$1000 = 10%

How can this ratio help me?

The ROI ratio will tell you how well (or not so well) your investments are performing. Although an ideal return is generally considered between 7% and 10%, you should allow your financial goals to inform your targeted returns.

9. Investment Assets-to-Gross Pay Ratio

What is it?

The investment assets-to-gross pay ratio is a helpful metric to gauge your progress toward long-term financial goals (like retirement). This ratio indicates how well you can replace your income with cash savings and investment assets once you’re retired.

How do I calculate it?

Here is how you calculate the investment assets-to-gross pay ratio:

(TOTAL CASH + INVESTMENT ASSETS) ÷ GROSS PAY = INVESTMENT ASSETS-TO-GROSS PAY RATIO

What values do I use?

For this ratio, add up all of the cash savings for your long-term goal and the value of your investments. Take this total and divide it by your annual gross pay (before taxes and deductions).

What’s a good benchmark?

This metric should increase as you age, because it reflects your progress toward a long-term goal. So, a 25-year old should have a much lower ratio than someone in their 50s.

Here is a list of benchmarks to consider by age:

 AGE % OF ANNUAL GROSS PAY 25 20% 30 60-80% 35 160-200% 45 300-400% 55 800-1000% 65 1600-2000%

How can this ratio be applied?

Let’s consider a 55-year old with a gross annual income of \$90,000. He has cash savings of \$150,000 and investment assets worth \$700,000.

This means his investment assets-to-gross pay ratio would be:

(\$150,000 + \$700,000) ÷ \$90,000 = 9.44 = 944%

This percentage means he can replace his annual gross pay 9.44 times – which is a little under 10 years. His goal will be to continue growing his retirement fund and savings until this ratio reaches a minimum of 2000%, which is a replacement period of 20 years.

How can this ratio help me?

You can use this ratio as a target for your cash savings and investments. Consider it a rough estimate for replacing your current income for a 20-year retirement.

Just like any other personal finance ratio on this list, this metric should not be used as a stand alone measurement. Your personal finances will have unique circumstances that should be considered when determining how these ratios can guide you.

10. Investment Assets to Total Assets Ratio

What is it?

This personal finance metric measures the percentage of your total assets that are being invested.

How do I calculate it?

Here is how you calculate the investment assets-to-total assets ratio:

INVESTMENT ASSETS ÷ TOTAL ASSETS = INVESTMENT ASSETS-TO-TOTAL ASSETS RATIO

What values do I use?

Investment assets are those that are held for the purpose of generating a return for future additional income. These could include a mutual fund, stocks, bonds, real estate, and retirement funds such as 401(k)s and IRAs.

Your total assets include all assets of financial value that you own. This encompasses cash and near cash assets, and illiquid assets (real estate, antiques, art, etc), as well as short-term and long-term investments.

What’s a good benchmark?

Here is a list of benchmarks to consider by age:

 AGE PERCENTAGE 20s 10% or greater 30s 11% to 30% or greater 40s & Older 31% or greater

How can this ratio be applied?

As an example, let’s say you have \$8,000 in a brokerage account, \$10,000 invested in stocks, \$250,000 in your 401(k), and \$80,000 in real estate. This equals \$348,000 for investment assets.

Next, you would add the remainder of your assets to your investment assets value. Let’s say your home is appraised at \$400,000, your vehicles are worth a total of \$40,000, cash savings equal \$30,000, and other assets are valued at \$25,000. This would make your total assets equal \$348,000 + (\$400,000 + \$40,000 + \$30,000 + \$25,000) = \$843,000.

Once you have these two values, you can calculate your investment assets-to-total assets ratio:

\$348,000 ÷ \$843,000 = .41 = 41%

How can this ratio help me?

The investment assets-to-total assets ratio helps you keep track of where you’re putting your saving dollars. It’s important to have a good balance between financial investments and other personal assets.

11. Asset Allocation

What is it?

Asset allocation (another term for diversifying) refers to how you choose to distribute your savings in various investments, so you can balance risk and return in a portfolio. This investment strategy helps you adjust the percentages of each investment asset according to your risk tolerance.

How do I calculate it?

Your personal asset allocation is the sum of your investments and savings, such as:

(% STOCKS) + (% BONDS) + (% MONEY MARKET SECURITIES) + (% CASH SAVINGS) = 100% INVESTMENT PORTFOLIO

What values do I use?

Stock investments include those equities that provide variable returns, while bonds are considered fixed-income securities because they pay a fixed amount of interest.

Money market securities include Treasury Bills, Certificates of Deposit, and money market mutual funds. Short-term securities with maturity periods less than 90 days are also known as cash equivalents.

Cash savings include legal tender, bills, coins, checks, and those funds in checking and savings accounts.

What’s a good benchmark?

Your ideal asset allocation will depend a lot on your age and risk tolerance, and could range from conservative to aggressive. So, you should change yours over time, as you get closer to retirement age.

Here are some common benchmarks according to risk tolerance:

 RISK TOLERANCE ASSET ALLOCATION Conservative 60-65% Bonds / 25-30% Stocks / 5-15% Cash and Equivalents Moderate 35-40% Bonds / 50-55% Stocks / 5-10% Cash and Equivalents Aggressive 25-30% Bonds / 60-65% Stocks / 5-10% Cash and Equivalents

How can this ratio be applied?

If you are in your late 50s and want to retire within 5 years, your risk tolerance will probably be conservative. Therefore, you’ll want to consider balancing your portfolio so you have more money invested in fixed-income securities, less in stocks, and some in cash-like equivalents.

Here is an example of a conservative portfolio:

63% Bonds + 27% Stocks + 10% Cash Equivalents = 100% financial assets

The investing ratio (see #7 on this list) can also help you apply an appropriate asset allocation according to your age.

How can this ratio help me?

Using this personal finance ratio will keep you in line with an appropriate asset allocation for your retirement timeline. As you get closer to retiring, you will want to take on less risk to increase financial security.

12. Net Worth

What is it?

Net worth is commonly defined as everything you own minus everything you owe. In other words, it’s the value of all of your assets if you were to sell everything you own, after you pay off all your debts.

How do I calculate it?

Here is the basic formula to calculate your net worth:

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

What values do I use?

Your assets are everything you own that have monetary value, such as cash, real estate, vehicles, and net returns from investments.

Liabilities are all of your debts – auto loans, credit card balances, student loans, mortgage, medical bills, etc.

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 assets that give you the most realistic result.

What’s a good benchmark?

Your net worth may be negative for a long time, when you are building your career and have little equity in your home. As you get older, you want your net worth to consistently get larger over time. This demonstrates an increase in income, a decrease in debt, or both.

Here some common benchmarks for net worth according to age:

 AGE NET WORTH 30s 50% of Annual Salary 40s 2x Annual Salary 50s 4x Annual Salary 60s 6x Annual Salary

How can this ratio be applied?

As an example, let’s assume you have assets valued at \$500,000. This include your home’s appraised value of \$325,000, investments worth \$125,000, vehicles valued at \$35,000, and other assets worth \$15,000.

Also, you calculate your debts to total \$235,000. This is the sum of your \$200,000 mortgage balance, \$25,000 car loan, and \$10,000 credit card debt.

Your net worth would then be calculated as:

\$500,000 (assets) – \$235,000 (liabilities) = \$265,000.

If you are 55 years old, and your annual salary is \$65,000, then you are in a healthy range for net worth.

How can this ratio help me?

Your net worth is a measurement of your total wealth, and a good indicator of your financial health.  The higher the number, the greater financial stability you have.

13. Millionaire Next Door Wealth Ratio

What is it?

This ratio (also known as targeted net worth) was created by the authors of the book “The Millionaire Next Door”, and indicates what your net worth should be as you’re building wealth.

The value represents a position in one of three categories:

1. An under accumulator of wealth (UAW) – Actual net worth is 50% or less than targeted net worth
2. An average accumulator of wealth (AAW) – Actual net worth is close to targeted net worth
3. A prodigious accumulator of wealth (PAW) – Actual net worth is twice the targeted net worth

How do I calculate it?

The equation to determine your target net worth ratio is:

(AGE x GROSS INCOME) ÷ 10 = TARGETED NET WORTH

What values do I use?

Your age is your current age. Your gross income is the total of pre-tax annual household income from all sources except inheritances. This includes earned income from paychecks and bonuses, as well as unearned income from investment interest and dividends.

What’s a good benchmark?

The ratio value is the benchmark – it represents the net worth you should target by a certain age.

However, you can compare your target net worth to your actual net worth to give you an idea of how close you are to achieving your wealth goals.

If you find that your actual net worth is less than 50% of your targeted net worth, then you’re considered an under accumulator of wealth (UAW) and you should strive to increase your saving efforts.

If your actual net worth is on par with your targeted net worth (AAW), then you are on track with building enough wealth to create a retirement lifestyle similar to what you have now.

If your goal is to build millions by retirement (PAW), then you should continue to increase your net worth until it is at least twice the amount of your targeted net worth.

How can this ratio be applied?

First, total the gross annual income for your household. For example, perhaps you bring in \$75,000 from your regular job, and investment returns of \$10,000 per year. Together they equal \$85,000. Also, let’s assume you are currently 53 years old.

Your targeted net worth would be:

(53 x 85,000) ÷ 10 = \$450,500

If your current net worth is less than \$225,250, then you would be considered an under accumulator of wealth, and behind on your savings.

If your current net worth is \$453,000, then you would be categorized as an average accumulator of wealth, and on track to retire on time.

And, if your current net worth is over \$901,000, then you would be a prodigious accumulator of wealth, and should be a multi-millionaire by the time you retire.

How can this ratio help me?

Considering which category you’re in will give you some guidance with your saving habits. If you find that your current net worth is less than half of your targeted net worth, then you know you need to make better decisions when it comes to spending.

14. Basic Liquidity Ratio

What is it?

The term “liquidity” refers to your ability to turn your financial assets into cash. For personal finance purposes, the level of liquidity reflects one’s potential to cover committed expenses with liquid assets such as cash and cash equivalents.

The value of the ratio represents the number of months your liquid assets could cover your regular living costs. This metric is also known as a coverage ratio.

This useful ratio can help you know how prepared you are for a financial crisis like a job loss or medical emergency. It answers the question, how long will my savings last if I lost all sources of income?

How do I calculate it?

Here is how you calculate a basic liquidity ratio:

LIQUID ASSETS ÷ MONTHLY EXPENSES = LIQUIDITY RATIO

What values do I use?

Liquid assets include those in the form of cash and cash equivalents, such as checking and saving accounts, Treasury bills, savings bonds, and money market funds. Any financial asset that can quickly be turned into cash without losing significant value is considered a liquid asset.

Monthly expenses are all of your regular household expenses over a 30-day period. This includes both necessary (non-discretionary) and unnecessary (discretionary) expenses.

This ratio would not consider assets such as real estate, vehicles, or retirement accounts.

What’s a good benchmark?

Most personal finance professionals advise clients to have an ideal liquidity ratio that covers 3 to 6 months of expenses. This could help you cover several months of living expenses in the event of a sudden financial emergency.

How can this ratio be applied?

As an example, we’ll assume you have \$20,000 in cash savings, and cash equivalents worth a net value of \$10,000. Also, your monthly household expenses add up to \$6,000. Using these values, we could calculate your liquidity ratio to be:

(\$20,000 + \$10,000) ÷ \$6,000 = 5

Using the formula, we find that your liquidity ratio is 5, which means your liquid funds could cover 5 months of expenses.

How can this ratio help me?

The financial liquidity ratio is a simple but important calculation and a good indicator of financial security. Its value indicates how long you can be supported solely by your liquid assets.

This is important to know if you suddenly lose your job and have no primary sources of income for an indefinite period of time.

15. Liquid Assets to Net Worth

What is it?

The liquid assets-to-net worth ratio calculates the percentage of an individual’s net worth that is cash and cash equivalents.

How do I calculate it?

Here is how to calculate the liquid assets to net worth ratio:

LIQUID ASSETS ÷ NET WORTH = LIQUID ASSETS-TO-NET WORTH RATIO

What values do I use?

Liquid assets are those monetary assets that can quickly be converted to cash. They could include money in bank accounts, money market funds, and Treasury bills.

Your net worth is the value of your total financial assets, minus all debts owed.

What’s a good benchmark?

The common benchmark recommended for this ratio is a minimum of 15%.

How can this ratio be applied?

This is a simple ratio to apply to your own finances. Simply add up all of your cash and cash-equivalent assets and divide the total by your net worth.

Perhaps you have \$15,000 in your bank accounts, and a money market fund with a balance of \$20,000. This means your liquid assets would total \$35,000.

Using the calculation above (#12), we know that your net worth is \$265,000.

Now, we can determine your liquid assets-to-net worth ratio:

\$35,000 ÷ \$265,000 = .13 = 13%

How can this ratio help me?

It’s important to have a reasonable percentage of your assets in cash or near-cash form. This will prepare you for unexpected circumstances that require fast access to cash.

However, if your percentage is too high, you will be missing out on greater returns possible through long-term investments.

16 Net Investment Assets to Net Worth

What is it?

This personal finance ratio measures the percentage of an individual’s net worth that is held in investment assets.

How do I calculate it?

Here is how to calculate the net investment assets-to-net worth ratio:

(INVESTMENT ASSETS – ALL FEES) ÷ NET WORTH = NET INVESTMENT ASSETS-TO-NET WORTH RATIO

What values do I use?

Investment assets are those tangible and intangible assets that return profits, such as stocks, bonds, mutual funds, cash equivalents, real estate, and retirement savings.

The returns realized could be in the form of capital gains, interest income, dividends, annuity payments or rental income. When you subtract any administrative fees, you are left with the net value of your investment assets.

Net worth, as described in #12 above, is the total of your assets minus your liabilities.

What’s a good benchmark?

As a general benchmark, a good target is 50% or more.

How can this ratio be applied?

Let’s say you calculate the net value of your stocks at \$47,000, annuities at \$25,000, and a mutual fund at \$75,000. This adds up to net investment assets valued at \$147,000.

Using the calculation above (#12), we know that your net worth is \$265,000.

Now, we can determine your net investment assets-to-net worth ratio:

\$147,000 ÷ \$265,000 = .55 = 55%

How can this ratio help me?

If you want to be prepared for a comfortable retirement, it’s important to keep a significant portion of savings invested in assets that can generate a healthy return.

17. Solvency Ratio

What is it?

Use this ratio to determine if you could pay off all of your debt using only the assets you currently own.

How do I calculate it?

Here is how to calculate the solvency ratio:

NET WORTH ÷ TOTAL ASSETS = SOLVENCY RATIO

What values do I use?

Net worth, as described in #12 above, is the total of your assets minus your liabilities.

Total assets would be the value of your assets that you used to calculate net worth. This could include cash and cash equivalents, real estate, vehicles, and net returns from investments. You could even choose to account for your antiques, collectibles, jewelry and art collection.

What’s a good benchmark?

In general, a solvency value of 50% or greater is considered ideal. However, this ratio should vary based on age.

As a young adult just getting started in a career and putting 3% down for a new home, your solvency ratio will be much less. However, as you get older and prepare for retirement, your solvency ratio should get higher as you increase your income, pay off debt, and build your net worth.

The higher your solvency ratio, the more financially secure you are.

How can this ratio be applied?

Let’s use the net worth we calculated in #12, which was \$265,000, and the total assets we got in #10, which equaled \$843,000.

With these numbers, your solvency ratio would be \$265,000 ÷ \$843,000 = .31 = 31%

How can this ratio help me?

The solvency ratio will tell you what percentage of your total assets isn’t carried with debt, and gives you a big picture view of how your wealth is growing, and debt levels are diminishing, over time.

18. Current Ratio

What is it?

A current ratio represents one’s capacity to meet short-term debt payments with short-term assets only. With this metric, you can measure how long your financial assets could cover your debt obligations due within one year.

How do I calculate it?

To calculate your current ratio, use the following formula:

TOTAL CURRENT ASSETS ÷ TOTAL CURRENT LIABILITIES = CURRENT RATIO

What values do I use?

Current assets include cash savings and other liquid assets that can be converted to cash within one year.

Current liabilities refer to all debt payments due within one year. This would comprise of monthly minimum payments for credit cards, auto loans, student loans, mortgage loans or rent, etc. for one year’s time.

What’s a good benchmark?

If your current assets equaled your current debts, this would mean your current ratio is 1, and you have enough liquid assets to cover one year of debt payments. However, that would mean you would deplete your liquid assets and have no cash left.

Shooting for a current ratio greater than 1 – for example, 1.5 or 2 – would give you greater financial stability and flexibility if you were ever faced with a serious financial crisis that lasted several months.

How can this ratio be applied?

Perhaps your cash savings total \$10,000, money market funds equal \$10,000, and you have a Certificate of Deposit valued at \$25,000 that matures within 3 months. This would equal \$45,000 in current assets.

This would result in a current ratio of \$45,000 ÷ \$35,000 = 1.28

How can this ratio help me?

Knowing your current ratio will help you plan wisely for financial emergencies that last up to one year. If you can build your liquid assets to a value that’s twice your current debts, you’ll be able to avoid unfortunate consequences, such as going into default, getting evicted, or damaging your credit score.

19. Debt-to-Income (DTI Ratio)

What is it?

The debt-to-income ratio measures the percentage of your household income that’s being spent on paying off debt. Lenders use this metric to determine your ability to repay loans.

It’s also known as the personal debt service ratio, and reflects a balance between debt and income.

How do I calculate it?

Here is how to calculate your debt-to-income ratio:

TOTAL MONTHLY DEBT PAYMENTS ÷ MONTHLY GROSS INCOME = DEBT-TO-INCOME RATIO

What values do I use?

Your monthly debt payments are comprised of credit card payments, student loans, auto loans, mortgage payments, and all other monthly debt obligations you may have. If you rent rather than own, add in your monthly rent payment.

Gross income includes all forms of monthly income, before taxes and deductions are taken out. This could be paychecks, interest income and dividends, child support and alimony, side hustle income, etc.

What’s a good benchmark?

Lenders typically do not want to see a debt-to-income ratio greater than 36%. However, the lower you can keep this ratio, the more financially stable you will be.

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 favor your credit history and be open to working with you. If your DTI is too high, they will see you as a borrowing risk.

How can this ratio be applied?

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 = .27 or 27%

How can this ratio help me?

This personal finance ratio will give you an idea of how well you are paying down your debts. A high DTI will adversely affect your ability to acquire new debt, as well as prevent you from qualifying for the lowest interest rates.

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

20. Non-mortgage Debt-servicing Ratio

What is it?

This personal finance ratio is similar to the debt-to-income metric (#19), except it measures only the percentage of income that is applied toward non-mortgage debt.

How do I calculate it?

Here is how to calculate your non-mortgage debt-servicing ratio:

(MONTHLY DEBT PAYMENTS – MONTHLY MORTGAGE PAYMENT) ÷ (MONTHLY GROSS INCOME) = NON-MORTGAGE DEBT-SERVICING RATIO

What values do I use?

Similarly to the DTI ratio (#19), the monthly debt payments include all payments for consumer debt, such as credit cards, student loans, auto loans, bank loans, etc. You would not add your monthly mortgage payment to the total.

Gross income includes all forms of monthly income, before taxes and deductions are taken out. This could be paychecks, interest income and dividends, child support and alimony, side hustle income, etc.

What’s a good benchmark?

Considering this ratio measures the percentage of your income going toward consumer debt payments, you should try to keep this number as low as possible. Generally, a value of 15% or less is considered a healthy ratio.

How can this ratio be applied?

Let’s say that all of your monthly debt payments, except for your mortgage payment, adds up to \$1,000. Also, your gross income comes to \$7,000 a month. This would mean your non-mortgage debt servicing ratio would be \$1,000 ÷ \$7,000 = .14 = 14%.

How can this ratio help me?

This ratio will help you keep in check the amount of consumer debt you take on. If your percentage is 20% or higher, this is a good indication that you should stop acquiring more debt and focus your efforts on paying off the debt you have.

21. Household Debt Service Ratio

What is it?

Also known as the financial obligations ratio, this helpful metric compares the combined debt of a household to after-tax income.

How do I calculate it?

Here is how to calculate the household debt service ratio:

MONTHLY HOUSEHOLD DEBT PAYMENTS ÷ MONTHLY AFTER-TAX INCOME = HOUSEHOLD DEBT SERVICE RATIO

What values do I use?

Monthly household debt consists of the total debt payments in one month for a single household. It includes credit card debt, bank loans, student loans, mortgage loans, lease payments, payday loans, and any other debt that accrues interest and requires payments.

After-tax income (also known as disposable income) is the amount of income you receive after all taxes have been taken out. It’s the money available to spend and save at your discretion.

What’s a good benchmark?

The lower your household debt service ratio, the greater financial stability you have. A high number means you are spending a significant percentage of your after-tax income on debt payments.

Keeping the percentage at 25% or lower puts you in a good position to keep up with debt payments and have enough disposable income to set some aside in savings.

How can this ratio be applied?

First, you would need to total your monthly payments for all debt balances. For example, perhaps your debt payments add up to \$2,000 each month. In addition, your after-tax income comes to \$8,000 a month. This would make your household debt ratio be \$2,000 ÷ \$8,000 = .25 = 25%.

How can this ratio help me?

Knowing your household debt service ratio will help you determine if you’re carrying too much debt. Many financial ratios use gross income as a factor, but this ratio uses your after-tax income. This gives you a more realistic picture of your financial health.

22. Debt to Assets Ratio

What is it?

This personal finance ratio compares one’s debt obligations to total assets, and reflects a person’s borrowing position. An individual’s debt to assets ratio determines their ability to acquire more debt.

How do I calculate it?

Here is how to calculate the debt to assets ratio:

TOTAL DEBT ÷ TOTAL ASSETS = DEBT TO ASSETS RATIO

What values do I use?

Total debt would consist of current balances for all loans and consumer debts, such as a student loan, mortgage loan, auto loan, personal loan, and credit cards.

Total assets are the entirety of one’s tangible and intangible possessions. These would include the current value of all financial investments, real estate and property, cash and cash-equivalents, antiques and collectibles, etc.

What’s a good benchmark?

The ideal debt to asset ratio is between .3 and .6. This means that the total of your debts (as listed above) would be between 30% to 60% of the current value of your total assets.

However, to minimize debt is always a wise financial decision, so keeping this metric as low as possible will set you up for greater financial security.

How can this ratio be applied?

If your total liabilities equal \$400,000 and your total assets were valued at \$900,000, then your debt to assets ratio would be \$400,000 ÷ \$900,000 = .44 = 44%.

How can this ratio help me?

This measurement will inform you of your borrowing position – that is, if you’re in a good position to borrow debt at a low rate.  The higher the ratio, the greater debt risk you become to lenders.

Use this metric to determine if you need to focus on paying down your debt balances.

23. Net Debt position

What is it?

The net debt formula compares total debts to liquid assets. The value of this metric indicates one’s ability to meet all current debt obligations using cash and cash equivalents.

How do I calculate it?

Here is how to calculate your net debt position:

(SHORT-TERM DEBT + LONG-TERM DEBT) – (CASH + CASH EQUIVALENTS) = NET DEBT POSITION

What values do I use?

This calculation requires the sum of all debts, both short-term and long-term. This could include mortgage loans, personal loans, student loans, any credit card outstanding balance, etc.

The total of your debts are then subtracted from the sum of your cash savings and cash equivalents. Cash equivalents are short-term investment funds that can be converted to cash quickly, such as Certificates of Deposit, Treasury Bills, and money market funds. Typically, they do not include stock equities because they fluctuate in value.

What’s a good benchmark?

A positive net debt position means you have more debt than liquid assets. This is very common with personal finances (as opposed to a corporation). Very few people have enough cash to pay their entire debt balances!

The goal is to get as close to zero as possible. The smaller the sum, the better financial position you’ll be in.

How can this ratio be applied?

To apply this ratio to your own finances, you would add up your short-term and long-term debt balances first. Perhaps your total debt balances come to \$250,000.

Then, you would calculate the total value of your cash and cash equivalents. Let’s say this adds up to \$95,000.

Using these values, we could see that your net debt would be \$250,000 – \$95,000 = \$155,000

How can this ratio help me?

This calculation gives you a good indication of your ability to pay off all debts using your cash savings and other liquid assets. If you have a positive net debt position, you should prioritize debt payoff and cash savings.

24. Demand Debt Ratio

What is it?

The demand debt ratio reflects your ability to pay off all demand debt (also known as callable debt) if necessary. Demand debt is any debt that a lender can demand you pay back at any time. This includes any debt that does not have a specific length of term or payback schedule.

How do I calculate it?

Here is how to calculate your demand debt ratio:

(Liquid + sellable assets) ÷ Total demand debt = Demand debt ratio

What values do I use?

If you want to know your demand debt ratio, you would consider the total of your cash savings, cash equivalents, and any assets that could be sold quickly for cash. In other words, all of the funds available to you to pay the debt being demanded.

Demand debts are those that don’t have any set payoff timeline, such as credit cards or medical bills. Fixed loans, such as a mortgage or auto loan, are not considered demand debts.

What’s a good benchmark?

There is no recommended benchmark for this ratio, but you do want to keep the value greater than 1. A demand debt ratio below 1 means that you have more demand debt than liquid assets, which can put you in an unstable financial position.

How can this ratio be applied?

As an example, let’s say your cash savings and sellable assets add up to a value of \$20,000, and your credit card balances total \$12,000. This would mean your demand debt ratio would be \$20,000 ÷ \$12,000 = 1.67.

How can this ratio help me?

This personal finance ratio can be used with other metrics to determine your financial stability. Having more demand debt than you can repay with cash is an unstable position you want to avoid.

25. Personal Cost of Debt

What is it?

It costs to borrow money, and this ratio can tell you the total interest rate you’re paying across varied interest rates.

How do I calculate it?

Here is how to calculate your personal cost of debt as a rate:

[(LOAN 1 ÷ TOTAL DEBT) x (LOAN 1 INTEREST RATE)] + [(LOAN 2 ÷ TOTAL DEBT) x (LOAN 2 INTEREST RATE)] = PERSONAL COST OF DEBT

What values do I use?

To calculate your personal cost of debt, you would need the balance and interest rate of every debt you currently have. You can refer to your credit card bills, mortgage statement, auto loan bill, etc., to find this information.

What’s a good benchmark?

Of course, you want to minimize your cost of debt by qualifying for the lowest interest rates possible. Your benchmark should be that percentage which is below the annual rate of return on your investments.

As a general rule of thumb, you could target a value of 4.5% or lower for your cost of debt. This is because the long-term average return on the stock market is about 7% per year, which comes out to approximately 4.5% after taxes.

To lower your cost of debt, focus on paying off your balances with the highest interest rate first.

How can this ratio be applied?

Calculating your personal cost of debt ratio requires knowing the balance of each of your debts, the interest rate for each debt, and the total of your debts.

Perhaps you have 3 debt balances. A car loan, a student loan, and one credit card.

Your car loan balance is \$8,000, with an interest rate of 8%.

Your student loan has a balance of \$20,000, at an interest rate of 5%.

And, your credit card has a balance of \$3,000, with an interest rate of 12%.

The total of these three debt balances equals \$8,000 + \$20,000 + \$3,000 = \$31,000.

Now, we can calculate the personal cost of debt as an interest rate:

[(\$8,000 ÷ \$31,000) x .08] + [(\$20,000 ÷ \$31,000) x .05] + [(\$3,000 ÷ \$31,000) x .12] = .06 = 6%

How can this ratio help me?

This personal finance metric will inform you if you’re paying too much in debt interest. Using this information, you can decide if you need to improve your credit score, transfer debt to lower-interest options, and which debt balances to pay off first.

Knowing your cost of debt can also guide you in prioritizing debt payoff or investments.

26. Credit Utilization (Debt to Limit Ratio)

What is it?

This ratio calculation (also known as the debt-to-limit ratio) lets you know the percentage of your available revolving credit limits that are currently debt balances. With this metric, you can know how much of your total available credit you’re using, and what is still available.

How do I calculate it?

Here is how to calculate your credit utilization ratio:

TOTAL REVOLVING DEBT BALANCES ÷ TOTAL REVOLVING CREDIT LIMITS = CREDIT UTILIZATION RATIO

What values do I use?

Credit utilization ratios are calculated with revolving credit only. This means all credit cards, and other lines of credit that do not have a specific end-date.

Therefore, debt such as mortgage loans or auto loans are not considered in this ratio.

What’s a good benchmark?

Financial experts commonly advise keeping a credit utilization rate of 30% or less. This will help you maintain a favorable credit score and qualify for lower interest rates.

For example, if you have \$25,000 in credit available, you should keep your debt balances at \$7,500 or less.

How can this ratio be applied?

Let’s say you have 3 credit cards. The first has a credit limit of \$6,000 with a balance of \$1,000. The second has a limit of \$12,000 with a balance of \$5,000. And the third has a limit of \$15,000 with a balance of \$3,000.

Your utilization rate would then be (\$1,000 + \$5,000 + \$3,000) ÷ (\$6,000 + \$12,000 + \$15,000) = .27 = 27%

How can this ratio help me?

If your credit utilization rate exceeds 30%, you will start to experience a negative impact on your credit score. It also indicates an excessive reliance on debt, which can cause lenders to see you as a high-risk applicant.

Check your percentage to determine if you need to focus your efforts on paying down your debt balances, and improving your financial habits so you’re not acquiring more debt.

27. 50/20/30 Budgeting Ratio

What is it?

This calculation is unique, in that it will help you optimize your budget and allocate your income so you can meet your financial goals. Senator Elizabeth Warren created this popular budget guideline to help others with their budgeting efforts.

Also known as the “percentage breakdown budget”, it’s become a common budgeting method due to its simplicity and effectiveness.

How do I calculate it?

Each number in the ratio’s title represents a percentage of your income that you apply to a budget category. The three categories include needs, wants, and savings.

50% ESSENTIAL SPENDING + 30% NON-ESSENTIAL SPENDING + 20% SAVINGS = 50/30/20 BUDGETING RATIO

What values do I use?

With this budgeting ratio, you would need to separate all of your monthly expenses into the 3 categories.

So, essential spending would be those expenses that are necessary to live. This would include housing costs, utilities, groceries, transportation, and other necessary expenses. These would make up 50% of your budgeted after-tax income.

Non-essentials would be those costs that are optional and flexible, such as subscriptions and memberships, entertainment, dining out, clothing, vacations, etc. You would allot 30% of your after-tax income to these expenses.

Lastly, you would dedicate 20% of your budget to savings, investing, and debt payoff.

What’s a good benchmark?

The ratio is the benchmark. You would strive to maintain the optimal 50/30/20 percentages in your budget.

However, every budget is personal, and you’ll need to decide if this structure is the best for your personal situation. You may decide to increase your savings percentage, or decrease your discretionary costs.

How can this ratio be applied?

Perhaps your primary net income is \$7,000 per month. Using the 50/30/20 budget ratio as a guide, you would want to keep all of your essential expenses close to \$3,500. Also, you should spend no more than \$2,100 on non-essential expenses, and you should have \$1,400 available for savings and debt payoff.

How can this ratio help me?

This is a simple, straightforward budgeting model that can be applied quickly to your income. There are only 3 categories to monitor and update, which helps make the budgeting habit easier to stick to.

If you’ve struggled with budgeting in the past because it just seemed too complicated, try the 50/30/20 budget. You may find that it’s all you need to keep your finances in order and accomplish your future goals.

28. Personal Net Cash Flow

What is it?

An individual’s personal net cash flow is not a ratio of two values, but rather a profitability metric that calculates the sum of one’s cash inflows and outflows.

This value indicates the amount a person has gained or lost once all expenses have been subtracted from income, and reflects one’s capacity for savings.

How do I calculate it?

Here is how to calculate your personal net cash flow:

TOTAL MONTHLY AFTER-TAX INCOME – TOTAL MONTHLY EXPENSES = PERSONAL NET CASH FLOW

What values do I use?

Your income could include your monthly take-home income, any investment interest or dividends, alimony or child support, side hustle income, and any source that generates a cash inflow for you. The key is to use income after taxes and deductions have been taken out.

Expenses consist of all discretionary and non-discretionary costs that are covered by your income, such as all of your bills, debt payments, food costs, gas and transportation costs, entertainment, subscriptions, etc.

What’s a good benchmark?

Generally, having a net cash margin that accounts for at least 15% of your income will give you enough to meet your saving goals and pay off debt.

How can this ratio be applied?

If you brought in an after-tax income of \$7,000, and your total monthly expenses equaled \$6,200, then your net cash flow would be \$800. This means you would have 11% of your take-home pay to put in savings and investments.

How can this ratio help me?

Checking your personal net cash flow will help you make profitable decisions with your budget. If you get a negative value, this means your expenses are greater than your income, and you probably rely too much on debt.

This is an indicator that you need to cut expenses or increase income.  Try to increase your net cash flow so you can have more cash available for savings.

29. Passive Income Ratio

What is it?

If you are interested in generating passive income as part of your cash flow strategy, this ratio will help you understand how close you are to replacing your regular income.

How do I calculate it?

Here is how to calculate your passive income ratio:

PASSIVE INCOME ÷ NON-PASSIVE INCOME = PASSIVE INCOME RATIO

What values do I use?

Passive income is all income generated without your direct involvement. This could include income from investments, rental income, or certain online businesses.

Non-passive income is the income you generate from a regular day job or side hustle, where you actively perform tasks or create products or services in exchange for payment.

What’s a good benchmark?

Your target ideal ratio depends on your financial goals. If you are trying to completely replace your primary income, then your goal would be a ratio of 1 or greater. If you would be happy just replacing half of your primary income, then you would shoot for a ratio of .5, which represents 50% of your primary income.

How can this ratio be applied?

As an example, let’s say you had an online business that generated a passive income of \$2,000 each month. You also received \$200 a month in investment income.

In addition, your regular day job brought in \$5,000 a month. You also made \$200 a month from your side hustle with a drive-sharing company.

Your passive income ratio would then be (\$2,000 + \$200) ÷ (\$5,000 + \$200) = .42 = 42%

How can this ratio help me?

Passive income should be a part of every person’s financial strategy. There are several good reasons for this, such as securing an income even if you become unable to work due to injury or illness.

Also, primary income is typically an exchange of time for money, and our time is limited. With passive income, you are not reliant on how many hours you work, and you can scale as high as you want.

Checking your passive income ratio is also helpful to track how close you are to financial independence.

30. Side Hustle Income Ratio

What is it?

Side hustles are separate from your regular day job, but can be a great source of additional income. Typically, a side hustle is a job that is more flexible and gives you more control over the hours you work and the income you make.

This ratio will tell you what percentage of your total income is from your side hustles.

How do I calculate it?

Here is how to calculate your side hustle income ratio:

GROSS SIDE HUSTLE INCOME ÷ GROSS PRIMARY INCOME = SIDE HUSTLE RATIO

What values do I use?

Your side hustle income is all gross income generated from your side hustles. Sides hustles are typically part-time jobs where you take an active role in exchange for payment. Some side hustles include driving for a drive-sharing company, or offering services such as dog-walking or house sitting.

Your primary income is the gross income from your regular day job. Typically, this is your full-time job that provides the majority of your income.

What’s a good benchmark?

Your target side hustle ratio will depend on your financial goals. If you would like to increase your regular income by 50%, then you should shoot for a ratio of .5 or more. This would give you a healthy margin for additional savings and debt payoff.

How can this ratio be applied?

Let’s say you have a full-time job during the week, and you work one side hustle on the weekends. Your weekday job brings in \$6,000 a month, and your side hustle makes you \$2,000 a month.

Your side hustle income ratio would be \$2,000 ÷ \$6,000 = .33 = 33%

How can this ratio help me?

This ratio is helpful to know what percentage of your primary income could be replaced with your side hustle income. It’s also helpful to know if your side hustles are generating a higher hourly income than your regular job.

For example, if your side hustle ratio is 50%, then your side hustles are bringing in gross income equal to 50% of your primary income. But, if you’re only working 20 hours a week with your side hustles, this means your side hustle hourly rate is greater than your primary  job.

31. Life Insurance Coverage

What is it?

Life insurance isn’t for everyone, but it can be an important part of a financial plan if you’re married, have children, or just need to ensure an income for someone else after you die.

This metric will inform you if you have enough life insurance coverage for your personal circumstances.

How do I calculate it?

Here is how to calculate your target life insurance coverage:

PRIMARY ANNUAL INCOME x 10 = TARGET LIFE INSURANCE COVERAGE

What values do I use?

For this ratio, you would use your annual gross income from your primary job. This is the income you rely on regardless of any side hustle or passive income, and should be enough to support you and your family.

What’s a good benchmark?

The life insurance ratio is the benchmark. A target of 10x your annual gross primary income should be sufficient for most people’s needs.

However, you should consider the unique financial needs of your family in the event of your death. The coverage you decide on should at least cover all necessary expenses, like housing, food, clothing, transportation, etc. Some people also include enough coverage to pay for other costs, such as college or retirement expenses.

You should also factor in your spouse’s income. If your partner brings in 50% of your total annual income, you may decide to have a smaller policy. But, if you have 4 young kids and a stay-at-home spouse, you may want more.

This benchmark is just a starting point for your discussion with a life insurance agent.

How can this ratio be applied?

If you make \$80,000 a year from your primary job, then you should target a life insurance policy for \$800,000.

How can this ratio help me?

Because of life’s uncertainty, it’s important to have a plan in place if the worst possible scenario happened. Setting up your loved ones for financial security even after you die is one of the most loving things you can do for them. This ratio will help you make the right decision for your family.

32. Inflation Hedge

What is it?

Inflation is defined as the decreased value of a currency, which lessens one’s buying power. A smart financial strategy is to invest in assets that generate a historical return greater than the rate of inflation. This calculation will inform you if you are staying ahead of inflation with your inflation hedge investments.

How do I calculate it?

Your inflation hedge ratio will reflect the relationship between your annual rate of return on an inflation hedge investment and the current rate of inflation. You can calculate this ratio with the following formula:

ANNUAL INVESTMENT RATE OF RETURN ÷ RATE OF INFLATION = INFLATION HEDGE RATIO

What values do I use?

You would need to know the rate of return you realized over one year with your inflation hedge investment. Take this percentage and divide it by the current rate of inflation.

What’s a good benchmark?

You will always want your inflation hedge ratio to be greater than 1, which means the return on your investments is staying ahead of inflation. A value less than 1 means your returns are not keeping up with inflation.

How can this ratio be applied?

If you realized an annual rate of return of 9% for your mutual fund, and the rate of inflation is 3%, then your ratio would equal 3. This would mean your rate of return is 3x that of inflation.

How can this ratio help me?

Seeing a positive return with your investments does not always mean they’re profitable. You should also consider how inflation affects the actual value of your portfolio. This ratio will let you know if your investing efforts are building or diminishing your buying power.

33. Tax Burden Ratio

What is it?

Your tax burden is the amount of tax you are responsible to pay. This includes income tax, sales tax, property tax, etc. You should know the percentage of your gross income that is going to taxes, so you can make smart decisions that will minimize your tax burden.

How do I calculate it?

Calculating your tax burden is as simple as dividing total taxes by your income:

TOTAL TAXES ÷ GROSS INCOME = TOTAL TAX BURDEN

What values do I use?

Taxes consist of any tax you are responsible to pay. This would include federal and state income tax, sales tax, property tax, gift tax, estate tax, payroll tax, and excise tax.

Your gross income is the annual income you make before taxes and deductions are taken out.

What’s a good benchmark?

The thing about taxes is that they are decided for you. However, you can make financial decisions that will lower your tax burden.

Charitable giving and retirement fund contributions are just a couple of ways you can decrease your tax rate. Talk to a professional who can give you smart tax advice for how you can minimize your tax burden, so you can keep more of your income.

How can this ratio be applied?

Taxes can be quite complicated, and changes are made on almost a yearly basis. Check the appropriate websites (Federal, state, and county) to find your current tax brackets and percentages.

How can this ratio help me?

34. Financial Freedom Ratio

What is it?

You can use the financial freedom ratio to measure how close you are to retiring and living solely on investment income.

How do I calculate it?

Here is how to calculate the financial freedom ratio:

(MONTHLY INVESTMENT INCOME + MONTHLY SAVINGS WITHDRAWAL) ÷ MONTHLY EXPENSES = FINANCIAL FREEDOM RATIO

What values do I use?

When you can draw enough investment income and cash from savings every month to cover all of your monthly expenses, then you no longer need to rely on a regular paycheck.

Your investment income includes all dividends paid on stocks, capital gains from real estate investments, and interest earned on a savings or money market account.

Your savings withdrawals are taken from the principal balances in your savings, checking, money market, and retirement accounts. A monthly savings draw in addition to your monthly investment income should be enough to cover all of your monthly expenses in order to achieve financial freedom.

The total of your monthly expenses is flexible, and you could choose to live on a bare bones budget in order to achieve financial freedom earlier. However, if you want to travel or move to a big city, then your expenses will likely increase, and you’ll need more income.

What’s a good benchmark?

To achieve financial freedom, you’ll need a ratio of 1.

How can this ratio be applied?

If your investment income plus your savings withdrawal equals \$5,000 a month, but your monthly expenses total \$7,000, then you’ll need to keep saving.

However, reducing your expenses by \$2,000 a month would help you get to a ratio of 1.

How can this ratio help me?

The financial freedom ratio is a useful measurement to help guide your investment and saving efforts. It’s a simple and flexible guideline that you can refer to as you’re building wealth and working toward retirement.

35. Financial Independence Ratio

What is it?

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.

How do I calculate it?

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

ANNUAL SPENDING ÷ WITHDRAWAL RATE = FINANCIAL INDEPENDENCE RATIO

What values do I use?

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.

What’s a good benchmark?

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.

How can this ratio be applied?

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 ÷ .04 = \$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 (see #2 on this list).

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

How can this ratio help me?

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.

How to improve your personal finance ratios

Once you’ve calculated your own financial 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 financial 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, etc.

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 50+ ways to make extra money.

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

In summary: financial ratios can help with your goals

Personal finance ratios are a great way to assess your financial life and do your own financial analysis. Understanding what they represent and how to use them will help you know when you need to take corrective action.

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