20 Personal Financial Ratios You Need To Know

Personal finance can seem daunting. But success leaves clues. If you know how to calculate simple personal financial ratios, you can effectively measure your financial strength.

Here we provide 20 common personal financial ratios for you to use. You don’t need to track all 20. But knowing how to calculate the ratios and tracking some of them will help you on your path to building wealth.

Personal Financial Ratio Background: Savings Vs. Investing

In personal finance there is a distinction between savings and investments. Although these terms are used interchangeably at times in conversation, they are different.

In general, savings are assets that don’t risk the principal, or the money you put in.

For example, savings accounts are insured by the FDIC up to $250,000. As long as the interest rate you earn on the savings account is positive and you have less than $250k, you have little risk of losing the money you deposit.

Similarly, products like certificates of deposit (CDs), US Treasuries, and even cash value of a whole life insurance product are considered savings vehicles.

Investments are products that you do have the risk of losing your principal.

For example, if you invest in stocks and the market goes down when you sell, you may take less money out than you put in.

Investment products can be stocks, bonds, ETFs/mutual funds, and cash value of non-guaranteed life insurance (like index variable universal life (IVUL) or similar products).

Even though investments have the risk of losing your principal, they have a higher expected return. Historically, in order to grow your wealth, you need to invest in risk assets.

With that distinction made, let’s get to some personal financial ratios.

I) Balance Sheet Personal Financial Ratios

A balance sheet is a point in time snapshot of all the assets and liabilities you own. Assets are positive money accounts like your bank accounts, investments, property value, and insurance cash value. Liabilities are negative money accounts like mortgage, debt, and credit card balances.

You want to have more assets than liabilities.

Here are some common personal finance ratios using your balance sheet.

1) Net Worth

Although not technically a ratio, calculating your net worth is important enough to include on the list. This is a simple calculation where you take all your assets and subtract all your liabilities.

Net Worth = Total Assets – Total Liabilities

Ideally, you want a positive net worth and the higher your net worth the better.

Having more assets than liabilities means you have positive wealth. And tracking your net worth will let you know if you are growing your wealth or losing wealth over time.

2) Targeted Net Worth Ratio

From ‘The Millionaire Next Door’, this tells you approximately what your net worth should be at each age & income level.

Targeted Net Worth Ratio = Age x (Pre-tax Income / 10 )

If you make $200k and are 30 you would want a $600,000 net worth. But if you are 50 you would expect a $1 million net worth.

You can nit-pick about this personal finance ratio, but in general it serves as a good benchmark to use.

Ideally you want to be at or ahead of your targeted ratio.

3) Debt-To-Asset Ratio

Debt-to-asset ratio compares your total debt to your total assets. This is a measure of your financial strength and can be used to determine your capacity to take more debt.

Debt-To-Asset Ratio = Total Debts / Total Assets

A good target is <50%, indicating you have twice as many assets as you do debts.

The debt-to-asset ratio is very similar to your net worth, but instead of subtraction you use division to get a ratio. The reason it is helpful to look at both is that you can have a high net worth, but still be over leveraged. Take 2 people:

• Person A has $1,000,000 in assets and $990,000 in debt
• Person B has $11,000 in assets and $1,000 in debt

Both people have $10,000 net worth. But Person A has a debt-to-asset ratio of 99% vs Person B of only 9%.

[Professor B.T. Effer Note – In corporate finance, there is a difference between a liability and debt. For instances, wages that have not yet been paid out are a liability, but not a debt. However, in personal finance, nearly all of your liabilities can be considered debt. Don’t let the 2 different words confuse you.]

4) Net Debt Position

Net debt position compares your total debt to your liquid assets.

Net Debt Position = Total Debt – Cash & Cash Equivalents

Your net debt position tells you how much debt you would have if you used your cash to pay it down. Cash & cash equivalents are all your savings vehicles that are liquid. A positive net debt position indicates you have more debt than liquid savings.

It is important to compare your debt to your liquid assets. If all of your assets are locked up in illiquid investments, you may have to take big penalties to raise cash to pay debt obligations.

Generally, a lower net debt position indicates a stronger personal financial ratio.

5) Investment Assets-To-Total Asset Ratio

This is a measure of how much of your savings is being invested. This ratio tells you how much of your assets are in higher returning, but riskier investments.

Since you generally need to invest to achieve higher returns, once you have adequate liquidity, you want to increase this ratio.

Investment Assets-To-Total Asset Ratio = Investment Assets / Total Assets

When you are young and have little assets and investments, this ratio may be low, but over time it should increase.

6) Personal Weighted Average Cost of Capital (WACC)

Your personal WACC tells you the average interest on all of your debt. This is a helpful metric to use to understand how your average debt payments compare to current loan APRs.

To calculate your personal weighted average cost of capital you multiply each balance by the interest rate then divide by the sum of all balances. If you owe $200,000 mortgage at 4%, $20,000 student loans at 5%, $5k credit card balance at 24%, and $10,000 car loan at 3% then:

• $200,000 x 4% + $20,000 x 5% + $10,000 x 3% + $5,000 x 24% = $10,500
• $200,000 + $20,000 + $10,000 + $5,000 = $235,000
• $10,500 / $235,000 = 4.47%

Personal WACC = { (Loan Balance 1 x APR 1) + (Loan Balance 2 x APR 2) +… + (Loan Balance N x APR N) } / (Loan Balance 1 + Loan Balance 2 + … + Loan Balance N)

Personal WACC = Average APR on all loans

A higher WACC indicates a higher cost of debt. This is likely due to having high interest debt like credit cards or all your debt having a high APR due to a poor credit score.

Ideally, you want your personal WACC to be as low as possible.

If you have high-interest debt, you want to pay it off or refinance it into a lower APR account. Therefore, if you are carrying a credit card balance you can do a balance transfer or, even better, use the “Purchase To Transfer”^TM Method.

If you have high APR on all your accounts it is likely due to having a poor credit score. You should work on improving your credit score and then looking to refinance.

II) Liquidity Personal Financial Ratios

Liquidity ratios are some of the most important, but least utilized, ratios around. Liquidity is a measure of how readily accessible (ie-‘Liquid’) your assets are. If you have a lot of cash available, you are able to pay for expenses without needing to sell assets or take on additional debt.

“One of the most important things in personal finance is liquidity.”

-Professor B.T. Effer

Liquid assets include checking, savings, emergency fund, short-term (< 1yr) CDs & Treasuries, etc. These are assets that you can access quickly and don’t have principal at risk.

You may be able to sell stocks and have money in 2-3 business days. BUT, if the market goes down a lot you have a lot less than you thought. For this reason, volatile assets that can go down in price are usually not considered as part of liquidity.

7) Liquidity Ratio

Liquidity Ratio is a measure of how long you could pay your current monthly expenses before needing to sell assets or take on more debt. If all your liquid assets could cover 3 months of expenses, then your liquidity ratio would be 3.

Liquidity Ratio = Liquid Assets / Monthly Expenses

The majority of your liquidity should be your emergency savings. It is generally recommended that you have at least 3-6 months of expenses in a high-yield savings account.

Ideally, the higher your liquidity ratio the better. Although, after a certain point, you may have too much money in low-return savings vehicles and not enough invested. Typically, a liquidity ratio over 15 may mean you should invest more.

8) Emergency Fund Ratio

Your emergency fund ratio is very close to your liquidity ratio. But your emergency fund ratio only looks at your separate emergency fund and the bare bones expenses you could get by on. This is a measurement of how long you could survive in an actual emergency.

Emergency Fund Ratio = Emergency Fund / Monthly Nondiscretionary Expenses

Your emergency fund ratio will likely be larger than your liquidity ratio. Therefore, similar to your liquidity ratio, higher is generally better. A ratio of 6 would mean in a crises you could scrape by for 6 months.

9) Current Ratio

Taken from corporate finance, the current ratio is a measure of a company’s ability to meet short-term obligations. You can view it as a measure of your near-term financial strength.

Short-term liabilities are the total debt payments owed in next 12 months. This includes credit card balances, mortgage/car/loan payments, etc.

Current Ratio = Short-term Cash Assets / Short-term Liability payments

A current ratio greater than 1 means you have enough cash-like assets to cover a years worth debt payments.

Current ratio differs from the previous 2 liquidity ratios as it is only looking at debt expenses not total cost of living expense.

10) Savings Ratio

Your savings ratio tells you how much of your monthly income is going to liquid assets. Remember savings are money going to cash & cash equivalents and investing is going to longer duration products generally.

Savings Ratio = $ Savings / Gross Income

“Pay yourself first” is a common saying for making sure you are saving enough of your income. When you are building your emergency fund, 10% savings ratio is a good starting point.

Over time as your liquidity improves and your income increases, you should be investing more of your money. Therefore, this ratio should decrease.

11) Solvency Ratio

Your solvency ratio tells you your ability to repay all your debts. The solvency ratio takes your net worth divided by your total assets.

Solvency Ratio = Net Worth / Total Assets

Your net worth is your total assets minus your total liabilities. Therefore, taking your net worth over your total assets is is a measure of your ability to repay all existing debt with your assets.

For example, if you have $500,000 in assets and $400,000 in liabilities for a $100,000 net worth, your solvency ratio is 20%. This means if you used your assets to pay down all outstanding debt, you would be left with 20% of your assets.

Compare that to someone with $500,000 in assets but only $100,000 in liabilities for a net worth of $400,000. They would have a solvency ratio of 80%.

The higher your solvency ratio the better. A higher solvency ratio means you have higher assets relative your liabilities.

III) Income Personal Financial Ratios

Income ratios compare your current earnings to your debt payments. Unlike balance sheet and liquidity ratios which only look at your assets, income ratios capture your earnings. This makes income ratios some of the most useful for personal finance.

12) Debt-Servicing Ratio (Debt-to-Income Ratio)

Your debt servicing ratio (DSR) is another view on your debt load, but this time compared to your income. DSR is comparing your monthly debt payments to your monthly income. This tells you how much of what you earn is going to pay fixed debt costs.

Debt-Servicing Ratio = Total Monthly Debt Payments / Total After-Tax Income

Comparing your debt to your income is especially helpful if you are young. You may not have had enough time to invest in assets. Therefore, your debt-to-asset ratios may look bad even if your debt is a small part of your earnings.

As your income increases and you pay down your debts, this ratio should improve greatly.

Your debt-servicing ratio should be less than 36%, but the lower it is the better.

13) Non-Mortgage Debt-Servicing Ratio

Non-mortgage debt-servicing ratio is just like the debt-servicing ratio above, but you remove your mortgage payment. This tells you the non-mortgage debt load you have.

Non-Mortgage Debt-Servicing Ratio = ( Total Monthly Debt Payments – Monthly Mortgage Payment ) / Total After-Tax Income

Having a non-mortgage debt-servicing ratio of less than 10% is ideal. This means all of your non-mortgage debt payments are less than 10% of your income.

However, when you are young you likely have non-mortgage debt like student loans. Therefore, your non-mortgage debt-servicing ratio may be higher.

IV) Budget & General Personal Financial Ratios

There are also ratios for your personal finance and budget setting purposes. These are more general use ratios that help you with your planning and allocating.

14) 50/30/20 Budget Ratio

The 50/30/20 rule is a budgeting ratio for how to allocate your money. It states that your after-tax income should be allocated as:

• 50% for essentials like mortgage, debt, utilities, basic groceries, and other fixed expenses you need to live
• 30% for your wants or discretionary spending like entertainment, upgrades to basic expenses, vacations, etc.
• 20% for saving and investing like an emergency fund, extra debt repayments, and investing

50/30/20 Ratio = 50% Essentials + 30% Wants + 20% Savings & Investing

Budgeting can be tricky when starting out when your income is low. But budgeting is one of the best ways to make a plan and stay on track.

Over time, as your income increases, you should aim to increase your savings and investing. This ensures you aren’t experiencing lifestyle creep and help accelerates your path to financial freedom.

15) Mortgage Ratios

A home is typically the largest purchase you will make in your lifetime. As such, it is important to not over-extend and buy more house than you can afford.

There are a few mortgage rules to be aware of but the main ratio is the housing ratio.

Housing Ratio = Housing Costs / Gross Pay

In this formula, your housing costs include you mortgage (interest & principal) as well as your escrow items like homeowners insurance and property taxes.

The maximum your housing ratio should be is 30%, but a number less than 25% is relatively good target.

By ensuring your home purchase fits within your budget, you will free up extra cashflow for investing and growing your wealth.

16) Life Insurance Ratio

Life insurance is vital to your personal financial needs. It makes up a core piece of the protection pillar of the 5 pillars of personal finance.

In general, you pay premiums to an insurance company and in return, if you die during the coverage period, the insurance company will pay a death benefit to your loved ones.

There are 5 main methods to determine your life insurance needs:

16.1) Income Ratio

The simplest rule is to multiply your income by 10 (or 12 or 15) and purchase that much life insurance. If you make $100k a year and use a 12x multiplier, you would have $1.2 million of life insurance coverage.

16.2) DIME Formula

DIME stands for Debt, Income, Mortgage, and Education. Under the DIME method you sum up all your debt, your mortgage balance, and any money you want to leave for dependents education. Then you add an income multiplier for the number of years you want to provide income.

For example if you want to provide 20 years of income, you would take your annual income multiplied by 20. You add that multiple of income to your debt, mortgage, and education to get your entire life insurance coverage needs.

16.3) Human Life Value / Projected Future Income

Human life value states that you should have enough insurance to replace all your projected future income. The method requires some calculation & projecting what you think your future career income will be.

However, you can estimate the human life value as:

• 30x annual income in 20s
• 25x annual income in 30s
• 20x annual income in 40s
• 15x annual income in 50s
• 10x annual income from 61-65
• 1x NET WORTH from 65 on

16.4) Percent of Income Spent on Premiums

Under this method, you buy as much life insurance as you can within your budget. Therefore, you start with how much you can spend on premiums and max out the death benefit you purchase.

Since term insurance is typically the cheapest, you likely want to mostly purchase term. A good strategy to use would be a term insurance ladder approach.

16.5) DEEM Formula ^TM

The DEEM formula is like the DIME formula with one major difference. Instead of using a multiple of income (I), you use a multiple of your annual expenses. If you make $100k a year, but only spend $50k a year, you would use the $50k for your multiplier. You then multiply your expenses by the number of years you want to provide coverage for.

17) Credit Utilization Ratio

Your credit utilization ratio compares how much credit you are using to your total available credit. It is one of the major components that goes into your credit score.

Credit Utilization Ratio = Total Revolving Debt Balance / Total Revolving Debt limits

Revolving debt is any non-fixed debt, and credit cards typically make up all of peoples revolving debt.

The lower your credit utilization ratio, the better for your credit score.

There are 2 ways to improve your ratio. You can either:

• Pay down balances on existing credit cards, or
• Increase your max available credit by opening new cards or increasing your existing lines of credit.

18) Investment Allocation Ratio

As you approach retirement, you may want to de-risk your investment portfolio. This is due to not wanting big negative returns right before you retire.

It is commonly recommended to use an equity allocation that takes into account your age. For example, 100 or 120 minus your age as the percent allocation to stocks.

Investment allocation ratio = (120 – Age)%

Under this rule, you would decrease your allocation to stocks by 1% per year and increase your allocation to historically less volatile assets like bonds by 1% per year.

This is very similar to what target-date funds do for you.

19) Retirement Savings Ratio

Retirement savings ratio tells you what amount of income you need to be able to reasonably retire. The most common rule is the 4% rule which states you can probably withdraw 4% of your initial retirement nest egg each year. Withdrawing 4% has historically given you a very good chance of not running out of money.

Retirement Savings Ratio = 25 x Annual Income

A 4% withdrawal is equivalent to taking your annual income amount and multiplying it by 25x. ( 1/ 25 = 4%).

There are many alternative versions of this rule such as a 2% rule (50x your income) and having enough dividend cashflow to match your annual expenses.

20) Car Purchase Ratio

Cars are another large purchase people make. And car loans are one area many people over-extend themselves on. The best rule of thumb for car buying is the 20/4/10 rule. This rule states that you:

• 20% down payment
• 4 year max car loan length
• 10% of your monthly income on car costs

Your car costs include the price of the loan payment, car insurance, and any property taxes you pay.

20/4/10 Car Purchase Ratio = 20% down & 4-year loan & max 10% of income on car costs.

This rule covers a bit of everything:

• 20% down keeps you from overspending by taking out a big loan
• 4-year max loan length keeps you from paying too much interest with a longer loan
• 10% max payment ensures your not paying too much of a fixed cost each month

If you are getting a new or used car, this is an all-encompassing rule to follow

The Final Word – Personal Financial Ratios

Personal finance is important. With these 20 personal financial ratios, you will be able to get a holistic view of your financial situation.

You don’t need to use all 20 personal financial ratios. Albeit, setting up the calculations one time in a spreadsheet and having them update isn’t hard. However, having one or 2 from each of the main groups is a good way to ensure you have all your bases covered.

Frequently Asked Questions (FAQs):