Financial ratios and comparing to general benchmarks are a tool to analyze your financial situation. They can be a good way to determine strengths and weaknesses and can help develop a realistic financial plan.
Below are some common ratios and benchmarks. These benchmarks are just a starting place. Your specific situation, goals, budget priorities and stage in the life-cycle need to be considered. Think of these benchmarks as a general guide.
Emergency Fund: The recommendation is to have enough money in a safe, liquid account so you can cover 3-6 months of non-discretionary expenses. Just how much depends on whether or not you have sick leave, disability insurance, and income stability. If 3 months seems like an overwhelming goal, start slowly. Saving $1.50 a day for 2 years will give you a nest egg of $1,095.
Savings to Income Ratio: If a person starts when they are 25-35 and saves & invests 10 – 13% of their income throughout their working years, they have a good chance at a comfortable retirement. A person who starts later in life or who has additional goals such as saving for children’s education will likely need to save and invest more than 10%.
Credit Card Usage Ratio: This is the amount of money charged on credit cards compared to the limits of those cards. This ratio will impact your credit score.
Example: Charge $1,000 a month and total credit card limits are $5,000. Usage ratio = 20%.
Recommended benchmark is to keep usage below 30%. This is true even if you pay the balance in full each month.
Housing Mortgage Ratio: Generally the recommendation is that no more than 30% of gross income should go for the mortgage. This includes principal, interest, taxes, and insurance (PITI).
Example: Gross income = $4,000 a month. A monthly payment of $1,200 could be considered affordable. Lenders may allow for 33% ratio. In this example that would allow for a monthly mortgage payment of $1,320.
Overall Debt: Overall debt includes mortgage debt, student loans, credit cards, and auto loans. The benchmark is 36% or less of gross income.
Example: Gross income = $4,000. Overall debt goal < $1,440. So with a $1,200 mortgage there is $240 left for other consumer debt payments.
Some lenders will stretch the ratio limit to 42%. In this example that would allow debt levels of $1,680.
Assets to Debts: The benchmark for the asset to debt ratio depends on our stage in the lifecycle. Ideally, closer to retirement, assets- such as investments and savings- are considerably greater than debts.
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