5 Key Personal Financial Ratios You Need to Know
Personal financial ratios are powerful tools that can help you understand your financial situation and make better decisions about your money. They allow you to track your progress, identify areas for improvement and measure your financial well-being. Here are 5 key personal financial ratios you should be aware of:
Debt to Income Ratio: This ratio compares your total monthly debt payments to your total gross income. A low debt to income ratio (less than 36%) is considered to be healthy, as it means that you have a manageable amount of debt. A high ratio (over 36%) indicates that you may be carrying too much debt and may be overextended financially.
Savings to Income Ratio: This ratio compares the amount you're saving each month to your total income. A high savings to income ratio (over 20%) is considered to be healthy, as it means that you're saving a significant portion of your income and are building financial security.
Current Ratio: This ratio compares your current assets (cash, checking, savings, and other assets that can be easily converted to cash) to your current liabilities (debt that is due within 12 months). A ratio of 1:1 is considered to be healthy, as it means that you have enough liquid assets to cover your short-term liabilities.
Credit Utilization Ratio: This ratio compares the amount of credit you're currently using to the total amount of credit available to you. A low credit utilization ratio (less than 30%) is considered to be healthy, as it means that you're not maxing out your credit cards and have the capacity to take on additional debt if necessary.
Investment to Income Ratio: This ratio compares the value of your investments to your total income. A high ratio (over 20-30%) is considered to be healthy, as it means that you have a significant amount of investments relative to your income which will help you generate more wealth and financial security for yourself.
It's important to note that these ratios are general guidelines and may not be applicable to everyone, your individual situation and financial goals may affect what is considered healthy for you. However, understanding and tracking these ratios can help you identify areas where you may need to improve your personal finances and make a plan for achieving your financial goals.
Additional tips:
Review your ratios regularly: Regularly reviewing your ratios can help you identify any changes in your financial situation and make adjustments accordingly.
Understand the factors driving your ratios: Understanding the factors that drive your ratios can help you identify where you can make changes or adjustments to improve your financial situation.
Use different ratios to evaluate different goals: Different ratios can help evaluate different aspects of your finances, it is important to use the ratios that are most relevant to your specific financial goals.
Seek professional help: If you need help understanding or interpreting your financial ratios, consider seeking advice from a financial advisor or a professional accountant.
Conclusion
Personal financial ratios are powerful tools that can help you understand your financial situation and make better decisions about your money. By tracking key ratios such as debt to income ratio, savings to income ratio, current ratio, credit utilization ratio and investment to income ratio, you can gain insight into areas of your personal finances that may need improvement and make a plan for achieving your financial goals. Remember to regularly monitor your ratios, understand what is driving them and seek professional help if needed. By using these ratios as a tool, you will be able to evaluate your current financial situation and set yourself up for financial success.
