Financial Ratios

Stop Comparing your Finances with Others: 5 Financial Ratios to Keep you on Track over at Money Smart Life.

"Key Ratios
My wife and I sat down with a financial advisor a few years ago and she pointed out 5 key ratios to keep an eye on. Below I give the formula, an example calculation, and a recommended target for each ratio.

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%"


Ok: So here are mine...yikes

Liquidity Ratio
Formula: Liquid Assets / Monthly Expenses
Our Example: $400/$2000= .2
Target: 3-6 months I think that means we don't even make it pay check to pay check...hmmmm

Housing Payment Ratio
Formula: Monthly Housing Costs / Monthly Gross Income
Our Example: $1100 / $2400 = 45.83%
Target: Less than 28% YIKES! Yes I know we are in over our head with the house, but it is a really nice house & dh is under-employed at the moment, when we bought it, it wasn't this bad.

Solvency Ratio
Formula: Total Assets / Total Debt
Our Example: $150,500/ $100,000= 1.5
Target: Greater than 1.0 Yes Finally!!!

Savings Ratio
Formula: Savings per Year / Annual Gross Income
Our Example: $2,000 / $28,000= 7.14.%
Target: 8-25% depending on age I know we are low, but we are hoping for a much better summer in our food business this year

Debt to Income Ratio
Formula: Annual Debt Payment / Annual Gross Income
Our Example: $8700 / $28000= 31.07%
Target: Less than or equal to 30% Well we are just over the target & 1800 of that $ is actually a business loan (since we aren't open, with no $ coming in we are making the payments)

Ok, so I have a lot of house, need to increase my income & savings, but our debt to income ratio isn't as bad as I thought it was, I'd love it to be a lot lower though!!!