Personal Financial Ratios
Liquidity Ratio
How many months an individual can meet living expenses when experiencing a loss of income? Some call this your runway. (3 – 6 months)
Liquid Assets (cash) / Monthly Expenses = Liquidity RatioAsset-to-Debt Ratio
How much do your assets exceed your debt? (greater than 1)
Total Assets / Total Debt = Assets-to-Debt RatioDebt-to-Income (Debt Service) Ratio
What percentage of your income must be used to service debt? (36% or less)
Annual Debt Payments / Annual Gross Income = Debt-to-Income RatioDebt Payments-to-Disposable Income Ratio
Disposable income is take home pay minus contributions. We call it “real income”. The debt is short term debt or consumer debt, so we take out the mortgage payment. (14% or less)
Monthly Nonmortgage Payments / Monthly Disposable Income = Debt Payments-to-Disposable IncomeSolvency Ratio
How susceptible are you to filing bankruptcy. The solvency ratio is your ability to pay off all your existing debts with your assets. Net worth is total assets less total liabilities. Total assets include the debt.
Total Net Worth / Total Assets = Solvency Ratio