Key Takeaways
- Personal finance ratios can help you understand where you’re at and where you need to improve.
- Gauge your progress by tracking your emergency fund ratio, basic housing ratio, overall debt-to-income ratio and savings rate.
- Additionally, consider tracking your debt-to-total assets ratio, net-worth-to-total assets ratio, return-on-investments ratio and investment-assets-to-gross-pay ratio.
If you consult a financial planner or advisor for help managing your money, they’ll often use ratios to analyze your financial situation and make recommendations.
On the other hand, if you’re interested in a DIY money approach, calculating a few financial ratios yourself can offer insight into your financial strengths and weaknesses.
Here are eight common financial ratios that can help you evaluate where you currently stand:
1. Emergency Fund Ratio
Emergency fund ratio = cash/monthly non-discretionary expenses
An emergency fund is easily accessible money you keep for an unexpected event, like a job loss or sudden home repair cost. The emergency fund ratio measures how long your cash savings could cover your monthly essentials without any additional income. If your monthly expenses are $5,000 and you have an emergency fund of $20,000, for example, your emergency fund would last four months.
“I always suggest keeping an emergency fund covering 3 to 6 months’ expenses. This fund acts as your financial safety net, allowing you to manage unexpected bills, avoid foreclosure by…
