To assess your overall financial health or focus on a specific area, you can use key financial ratios to detect strengths and weaknesses in your personal finances. While a small business might calculate its net profit margin, inventory turnover, quick ratio, return on equity and asset turnover, some personal financial ratios focus on liquidity, credit utilization, savings and your debt in relation to your income and assets. You can easily calculate these metrics using personal financial statements such as your bank and lender statements, credit report and budget.
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1. Personal Liquidity Ratio
If you're interested in how long your savings would last during unemployment, you can use your personal liquidity ratio to find out. This ratio especially comes in handy if you've been building up an emergency fund as it will show if you have at least the recommended three to six months of your regular expenditures saved up. Having even more funds offers additional security if you get in a tough financial spot.
Look at your bank statement to get your latest savings account amount. Next, add up all your regular monthly expenses. You can divide your total savings by total monthly expenses to get the number of months covered. Check this ratio as often as you like as you continue to build your savings.
2. Credit Utilization Ratio
Your credit utilization ratio shows how much you're using of the credit you have available. It has a strong effect on your credit score since using too much of your available credit can make lenders think you're overextended and a bigger risk. Generally, you'll want this ratio to be 30 percent or less, but having it 10 percent or less is even better.
Calculating this benchmark requires checking your credit report or other financial statements and adding up all your current debt amounts. Next, find your credit limit for each account and add those up to get your total credit. You can then divide your total debt by the total available credit for this ratio. You'll especially find this process handy as you work toward paying down debt, so you might calculate it monthly.
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If your personal savings ratio falls under 15 percent, consider checking your budget to lower unnecessary expenses or seek additional income opportunities.
3. Debt-to-Income Ratio
If you're doing a financial analysis before applying for new credit, you should calculate your debt-to-income (DTI) ratio to see if it's no higher than the recommended rate of 43 percent. This ratio measures your debt payback ability in relation to your monthly gross income (rather than net income), and mortgage lenders particularly use it to determine if you can afford a potential mortgage.
To calculate this ratio, add up the monthly payments for your long-term debt and short-term obligations and divide that sum by your gross monthly income. If it's above 43 percent, consider either reducing existing debts or boosting your income to reduce the burden on your finances. When doing this ratio analysis, know that aiming for a much lower DTI ratio helps further minimize your financial risk.
4. Personal Net Worth
Similar to how a company uses its debt-to-equity ratio to see its worth minus what it owes, you can calculate your net worth to assess your personal financial standing. You'll want your net worth to be positive and eventually continue growing throughout your life. However, it's common for it to be negative early in life due to student debt and a potentially lower income.
You'll start by adding up your total assets (using market value for personal items like homes and cars). Next, you'll add up any long-term and current liabilities. Subtract the total liabilities from your total assets to get your net worth. If it's negative, then you owe more than you own, and this suggests that you take actions such as paying off debts, investing money, expanding your income sources and cutting costs.
5. Personal Savings Ratio
While the liquidity ratio shows how far your savings will go, your personal savings ratio demonstrates how well you're regularly contributing to your savings in relation to your income. Therefore, it helps with both setting your budget and improving your financial management. You should generally aim to stash away 15 to 20 percent minimum of your monthly earnings to sources such as retirement and personal savings accounts.
You'll need to know your monthly gross income and typical monthly savings amount. You can then just divide the income by the savings to see the percentage of your earnings that you're contributing to savings. If the ratio falls under 15 percent, consider checking your budget to lower unnecessary expenses or seek additional income opportunities. If your savings amount or income changes, you should recalculate this ratio.
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