Where Do You Stand on These Financial Ratios? (Free Money ...

Dough Roller lists a set of financial ratios and gives guidelines on where each of us should stand in relation to them. These can be used as a sort of financial check-up to see if you're on track. Here they are along with where I fit into each one (FYI, I cut out the five (yes, FIVE!) debt ratios since I have no debt, including a mortgage, hence they are all "0" for me -- which made for some boring reading for you all if I included them):

• Emergency Fund Ratio (Liquid Assets/Monthly Expenses) -- The generally accepted rule of thumb is that you need 3 to 6 months of expenses in an emergency fund.

I currently have about four months' salary saved or ten months of expenses in very liquid assets. Yes, this is another benefit of living on far less than you make. ;-)

• Doomsday Fund Ratio (Financial Assets/Monthly Expenses) -- How long could you last with no income at all?

They put this in terms of months (and don't give an exact guideline), but at my current level of assets, debt (none), and spending (low), it works out to about 19 years.

• Net Worth Ratio (Net Worth / (yearly income * age / 10)) -- You want this ratio to be 1 or higher.

I'm just a bit over 2 at this point, but this ratio seems a bit unfair since it lists your most recent income (which, for most people, is your highest annual income ever) and assumes you've been saving a portion of this level of income since you started working (which is impossible since you've only made this amount for one year.) The older you are (and thus the higher level of income you have), the more this impacts you.

I'm thinking something like this would be better:

• Net Worth / (gross income earned since working / year you've been working)

So if you have a net worth of $150,000 and have made $1,000,000 in your career (20 years at $50k average per year), you've been able to convert 15% of your total earnings to net worth. Seems to me that anything above 10% would be "good", but I'll let you all comment on whether or not I'm even in the ballpark.

In the end, the number that really counts is simply "net worth" -- how much you own after all your debts are paid.?

• Retirement Fund Ratio (Retirement Savings / Yearly Income) -- The goal is to retire with at least 12 times your annual income.

I dislike retirement planning sites/ratios/calculators, etc. that use yearly INCOME as some sort of benchmark. I think yearly EXPENSES is much more accurate. Look at this example:

• Retirement savings: $500,000
• Yearly income: $100,000
• Yearly expenses: $50,000

This person lives well below his income and thus has 10 years of living expenses saved for retirement. This seems like a meaningful number to me. The fact that he has five years of his income saved up seems much less important.

I have 10 times annual income saved and 22 years of annual expenses. See what I mean?

How about you? Where do you stand on these ratios? Are you happy with your progress or not?

Source: http://www.freemoneyfinance.com/2012/02/where-do-you-stand-on-these-financial-ratios.html

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