What Are Your Money Ratios?

by Galia Gichon on February 8, 2010

grades

You know how much you are earning.  You know how much you owe.  You know how much you have in the bank.  But that is where your “know” ends.  If you don’t know any of these numbers, take a deep breath and call me 212.734.0433!  Many of my clients are in a similar situation.  If you do know; good for you and keep reading.

Remember back in school when grades came out, you panicked but then instantly knew how you performed. Wouldn’t it be great if there were a grade for our personal finances?  Well, there is – sort of….  You can look at your FICO credit score and gauge what the banks and lenders think of you.  While that is a super helpful number, it isn’t very personal.

If you are ready for a more thorough financial checkup, consider figuring out your money ratios.  Here are 2 key money ratios to tackle: DEBT and SAVINGS RATIOS.  How did you perform?  If you aren’t sure what your number is or you are discouraged by your “grade”, take a deep breath and get your support – either through a friend or by calling me.  Don’t not do anything.  It won’t go away.

Debt Ratio

* What is your gross monthly income?

* What are your fixed payments on a monthly basis? Include the following: mortgage and maintenance or rent, car, other loan payments such as home equity loan, personal loan, student loan payments, alimony or child support and credit card payment (If you are paying off a high balance, put more than the minimum payment – enough to make a dent in your debt repayment).

For example:

Gross monthly income:  $8,333

Fixed payments:  $3,177

(mortgage $2,000 + car payment $300 + cre.dit cards $600 + student loan $277)

To calculate your Debt Ratio, divide your fixed monthly payments by your gross monthly income.

For example:

$3,177 / $8,333= 38%

In this example, the Debt ratio is 38%.  Ideally, you would like to keep your DEBT RATIO less than 20% but lenders like to see it below 30%.



Savings Ratio

Now that we tackled your debts and loans, let’s move on to your savings.  To figure out your savings ratio, answer the following questions:

* What is the amount you saved last year in retirement plans, short-term savings, taxable investment accounts? Include any dollars your employer matched.

* What was your gross annual income?

For example:

401k annual savings: $6,000

Employer match savings: $1,000

Short-term savings: $3,000

Total savings: $10,000

Gross annual income:  $100,000

To calculate your Savings Ratio, divide your annual savings by your annual income.

For example:

$10,000 / $100,000 = 10%

In this example, the Savings Ratio is 10%.  Ideally, you would like it to be 19%.  This number is from a report in “Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement” by Charles J. Farrell, J.D., LL.M.  His research shows that most individuals that want to retire at a certain age and income, need to save 19% of their annual pay.  This is a rough estimate but the numbers made sense.

Most of us are not saving close to that number.  But it is a huge step in the right direction if you find out your ratios and motivate to raise them.  Plug your numbers in and let me know your “grades”.

{ 1 comment… read it below or add one }

Kenia April 29, 2010 at 4:41 pm

This is awesome. I’m a big numbers person (aka ‘nerd’) so now I’m going to go home and figure this out! lol

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