Andrew
If you seek out a financial planner or advisor for help managing your money, the first thing they’ll do is conduct an analysis of your financial situation. A big part of that analysis will come down to ratios.
Emergency fund ratio
An emergency fund is easily accessible money set aside for an unexpected event, like a job loss or sudden home repair cost. This ratio measures the number of months your cash savings could cover your monthly essentials without any additional income. Experts typically recommend an emergency fund in cash amounting to three to six months of monthly non-discretionary expenses.
Basic housing ratio
The basic home ratio can be useful for homeowners and renters to determine what sort of housing individuals can afford. This ratio can also be important for those seeking to qualify for a conventional mortgage. Experts typically suggest that housing costs should be less than or equal to 28 percent of your gross pay. When calculating this ratio, note that housing costs include principal, interest, property taxes and home insurance.
Broad housing and
other debts ratio
This ratio is a more broad version of the basic housing ratio. In addition to housing debts, this ratio measures the percentage of income spent on housing and other recurring debts, and it may be particularly useful for those carrying other large debts, like a student loan, car loan or credit card payments. Experts suggest all debts be no more than 36 percent of an individual’s income.
Savings rate
Your savings rate is the portion of your income you put aside for retirement or other long-term goals. A typical savings rate benchmark is 10 percent to 13 percent, but this benchmark can vary widely by goals and age. For example, the closer to retirement you are when you start saving, the larger your savings rate should be.
Investment assets
to gross pay ratio
One easy way to measure your progress toward saving for retirement is to calculate your investment assets to gross pay ratio. This ratio measures your ability to replace your gross pay with your savings when you reach retirement age. Common benchmarks for this ratio vary by age, starting at around 0.20:1 for individuals in their 20s and ideally growing to around 20:1 as a person ages. — wtop.com
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