If you consult a financial planner or advisor for help managing your money, the first thing they’ll do is use ratios to analyze your financial situation and enable them to make recommendations about asset allocations, debt repayment and more.
On the other hand, if you’re interested in a DIY money approach, calculating these simple 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 nondiscretionary 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 the number of months your cash savings could cover your monthly essentials without any additional income.
Experts typically recommend maintaining an emergency fund in cash amounting to three to six months of monthly nondiscretionary expenses like bills, rent, utilities and groceries.
2. Basic Housing Ratio
Basic housing ratio = housing costs/gross pay
The basic home ratio can help homeowners and renters determine the sort of housing they can afford. It’s also important for those who want to qualify for a conventional mortgage.
Experts typically suggest housing costs should be less than or equal to 28% of your gross pay. For example, if you earn $5,000 per month, your rent should be no more than $1,400. When you calculate this ratio, however, note that homeowner costs include principal, interest, property taxes and home insurance.
3. Broad Housing and Other Debts Ratio
Broad housing ratio = housing costs + other debt payments/gross pay
This ratio is a broader version of the basic housing ratio. In addition to housing debts, it measures the percentage of income you spend on other recurring debts like student loans, car loans or credit card payments.
Experts recommend that all debts should not be more than 36% of your income. So, if your monthly income is $5,000, your housing costs and other debts should be no more than $1,800 per month.
[READ:14 Easy Ways to Pay Off Debt]
4. Savings Rate
Savings rate = savings + employer match/gross pay
Your savings rate is the portion of your income that you put aside for retirement or other long-term goals. “A good rule of thumb is to save 10% to 15% of your income each month,” James Allen, certified public accountant, says. “This will help you build up a healthy savings cushion.”
The ideal savings rate can vary widely, however, according to goals and age. For example, the closer to retirement you are when you start saving, the higher your savings rate should be.
[READ: How Much Should You Contribute to a 401(k)?]
5. Debt to Total Assets Ratio
Debt to total assets ratio = total debt/total assets
Your debt to total assets ratio measures the portion of your assets that creditors own. As you begin to repay debts like a personal loan or mortgage, your ratio goes down. Debt to total assets is typically highest in younger people and declines with age. The lower your ratio as you near retirement, the better.
6. Net Worth to Total Assets Ratio
Net worth ratio = net worth/total assets
Your net worth is your assets minus your liabilities. The net worth ratio, also known as the solvency ratio, determines the percentage of your total assets that you own. By tracking it, you can watch your wealth grow over time, which can be encouraging if you’re in the midst of repaying debts.
A net worth to total assets ratio of about 20% is common for younger individuals, while it should be closer to 90% to 100% for individuals in retirement — indicating the elimination of debts.
[Read: How to Calculate Your Net Worth.]
7. Return on Investments Ratio
Return on investments = ending investments – beginning investments + savings/beginning investments
The return on investments ratio measures the performance of your investment assets over the course of one year to give you a sense of how they’re performing. In the formula above, beginning investments are asset values from the preceding year and ending investments are asset values at the end of the current year.
An ideal return on investments ratio falls between 8% and 10% but your goals, time frame and risk tolerance will determine your specific performance goals.
8. Investment Assets to Gross Pay Ratio
Investment assets to gross pay ratio = investment assets + cash)/gross pay
One easy way to measure progress toward saving for retirement is to calculate your investment assets to gross pay ratio. It measures your ability to replace your gross pay with your savings when you reach retirement age.
Common benchmarks for this ratio vary by age: It starts at around 0.20:1 for those in their 20s and grows to around 20:1 as one nears retirement.
Whether you decide to DIY your financial planning or enlist the help of a professional, these ratios can help you gain a better understanding of where you stand and where you need to focus.
More from U.S. News
7 Strategies to Keep Your Financial Plan on Track
Be Ready for the Unexpected With an Emergency Fund
8 Personal Finance Ratios You Should Be Tracking originally appeared on usnews.com
Update 03/17/23: This story was published at an earlier date and has been updated with new information.
