I have working hard over the last few months of reorganizing my personal finance system with the following goals in mind:
1. Reduce/Eliminate Paper Statements
2. Streamline Money Management
(My wife is finally using MS Money rather than excel spreadsheets to track expenses.)
3. Create Annual Reports (Cash Flow, Expenses, Net Worth)
4. 10-Year Financial Plan (Includes forecasting income and net worth)
5. Inventory Personal Assets with estimated value
6. Backups (MS Money files, statements, tax returns, etc.)
7. Create a Document Inventory for important papers.
I am in the final stages of step 3 of organizing my personal finances. One of the final steps is to create performance measures. My online research has lead to the ratios below. What other personal financial ratios do you track?
Key Ratios
Liquidity Ratio
Formula: Liquid Assets / Monthly Expenses
Our Example: $68,070/$6,892 = 9.9
Target: 3-6 months
Housing Payment Ratio
Formula: Monthly Housing Costs / Monthly Gross Income
Our Example: $825 / $7585 = 10.88%
Target: Less than 28%
Solvency Ratio
Formula: Total Assets / Total Debt
Our Example: $265,570 / $146,654 = 1.81
Target: Greater than 1.0
Savings Ratio
Formula: Savings per Year / Annual Gross Income
Our Example: $18,000 / $91,000 = 19.78%
Target: 8-25% depending on age
Debt to Income Ratio
Formula: Annual Debt Payment / Annual Gross Income
Our Example: $9900 / $91,000 = 10.88%
Target: Less than or equal to 30%
Savings Rate
Calculate what percentage of your income you are saving on an annual basis. Typically,
you’ll want to save a minimum of 10% a year. This would include 401(k) contributions and Individual
Retirement Account contributions. If your employer matches your 401(k) contributions, you can include
those contributions as part of your annual savings.
Annual Net Worth Rate
Debt to Net Worth Ratio
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EXAMPLES
**************************************************************************
Salary $110,000
Mortgage $125,000
Auto Loan $25,000
Investments $260,000
Annual Savings $10,000
Employer 401(k) Match $3,000
Based on these statistics, the hypothetical individual ratios are as follows:
Savings to Income: $260,000 / $110,000 = 2.36
Debt to Income: ($125,000 + $25,000) / $110,000 = 1.36
Savings Rate to Income: ($10,000 + $3,000) / $110,000 = 11.8 %
A hypothetical example - Let’s look at a typical 50-year-old dentist. Together with his 48-year-old wife, they have a combined income of $225,000. This family has the following financial circumstances:
Income: $225,000
Mortgage: $200,000
Auto loan and lease: $25,000
Consumer debt: $3,000 (monthly revolving balance on credit cards - not paid off)
Total savings: $700,000 ($400,000 in investments and practice sale value of 50 percent of practice production of $600,000, equaling $300,000)
Annual savings: $24,000 ($20,000 for dentist, $4,000 for spouse)
Employer 401(k) match: $4,000 (for spouse)
Based on this scenario, the couple has the following Personal Financial Ratios:
Savings to Income: $700,000 ÷ $225,000 = 3.11
Debt to Income: $200,000 + $ 25,000 + $3,000 = $228,000 ÷ $225,000 = 1.01
Savings Rate to Income: $24,000 + $4,000 = $28,000 ÷ $225,000 = 0.124 = 12.4 percent
Let’s evaluate how our hypothetical couple is doing. Savings to Income is low (3.11 vs. target of 4.0), Debt to Income is moderately high (1.01 vs. target of 0.75), yet Savings Rate to Income is very good (12.4 percent vs. target of 9.5 percent). A strong Savings Rate to Income will bring other ratios in line within a couple of years assuming no other changes.
**************************************************************************
REFERENCES
**************************************************************************
http://zmod.org/?p=16
http://moneysmartlife.com/stop-comparing-your-finances-with-others-five-financial-ratios-to-keep-you-on-track/
1. Reduce/Eliminate Paper Statements
2. Streamline Money Management
(My wife is finally using MS Money rather than excel spreadsheets to track expenses.)
3. Create Annual Reports (Cash Flow, Expenses, Net Worth)
4. 10-Year Financial Plan (Includes forecasting income and net worth)
5. Inventory Personal Assets with estimated value
6. Backups (MS Money files, statements, tax returns, etc.)
7. Create a Document Inventory for important papers.
I am in the final stages of step 3 of organizing my personal finances. One of the final steps is to create performance measures. My online research has lead to the ratios below. What other personal financial ratios do you track?
Key Ratios
Liquidity Ratio
Formula: Liquid Assets / Monthly Expenses
Our Example: $68,070/$6,892 = 9.9
Target: 3-6 months
Housing Payment Ratio
Formula: Monthly Housing Costs / Monthly Gross Income
Our Example: $825 / $7585 = 10.88%
Target: Less than 28%
Solvency Ratio
Formula: Total Assets / Total Debt
Our Example: $265,570 / $146,654 = 1.81
Target: Greater than 1.0
Savings Ratio
Formula: Savings per Year / Annual Gross Income
Our Example: $18,000 / $91,000 = 19.78%
Target: 8-25% depending on age
Debt to Income Ratio
Formula: Annual Debt Payment / Annual Gross Income
Our Example: $9900 / $91,000 = 10.88%
Target: Less than or equal to 30%
Savings Rate
Calculate what percentage of your income you are saving on an annual basis. Typically,
you’ll want to save a minimum of 10% a year. This would include 401(k) contributions and Individual
Retirement Account contributions. If your employer matches your 401(k) contributions, you can include
those contributions as part of your annual savings.
Annual Net Worth Rate
Debt to Net Worth Ratio
**************************************************************************
EXAMPLES
**************************************************************************
Salary $110,000
Mortgage $125,000
Auto Loan $25,000
Investments $260,000
Annual Savings $10,000
Employer 401(k) Match $3,000
Based on these statistics, the hypothetical individual ratios are as follows:
Savings to Income: $260,000 / $110,000 = 2.36
Debt to Income: ($125,000 + $25,000) / $110,000 = 1.36
Savings Rate to Income: ($10,000 + $3,000) / $110,000 = 11.8 %
A hypothetical example - Let’s look at a typical 50-year-old dentist. Together with his 48-year-old wife, they have a combined income of $225,000. This family has the following financial circumstances:
Income: $225,000
Mortgage: $200,000
Auto loan and lease: $25,000
Consumer debt: $3,000 (monthly revolving balance on credit cards - not paid off)
Total savings: $700,000 ($400,000 in investments and practice sale value of 50 percent of practice production of $600,000, equaling $300,000)
Annual savings: $24,000 ($20,000 for dentist, $4,000 for spouse)
Employer 401(k) match: $4,000 (for spouse)
Based on this scenario, the couple has the following Personal Financial Ratios:
Savings to Income: $700,000 ÷ $225,000 = 3.11
Debt to Income: $200,000 + $ 25,000 + $3,000 = $228,000 ÷ $225,000 = 1.01
Savings Rate to Income: $24,000 + $4,000 = $28,000 ÷ $225,000 = 0.124 = 12.4 percent
Let’s evaluate how our hypothetical couple is doing. Savings to Income is low (3.11 vs. target of 4.0), Debt to Income is moderately high (1.01 vs. target of 0.75), yet Savings Rate to Income is very good (12.4 percent vs. target of 9.5 percent). A strong Savings Rate to Income will bring other ratios in line within a couple of years assuming no other changes.
**************************************************************************
REFERENCES
**************************************************************************
http://zmod.org/?p=16
http://moneysmartlife.com/stop-comparing-your-finances-with-others-five-financial-ratios-to-keep-you-on-track/
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