Personal Finance Ratios
There are seemingly countless ways to measure financial health for both individuals and corporations. In earnings reports, companies use complicated calculations and ratios to inform investors—and the general public—regarding the health of their business. However, the average American can use these principles to assess their own financial health.
Formally known as “average propensity to save,” the personal savings ratio is the amount of income saved for an individual or household. According to the Federal Reserve Bank of St. Louis, the average saving rate was just under 5 percent for Americans in 2016. Historically, the average savings rate in any given year since 1959 has been about 8.5 percent.
As its name would indicate, a debt-to-income (DTI) ratio is the proportion of an individual’s monthly debt payments in relation to his or her gross monthly income. Many lenders use DTI as a primary indicator of worthiness of loans because it gauges the individual’s ability to cover loan payments. Though there is no consistent, unilateral recommended ratio, it is popular convention that a DTI over 40 percent will make it more difficult to secure a loan.
This ratio is used to determine how an individual is able to make ends meet in the event of an emergency. Liquidity is calculated by taking all liquid assets (such as non-qualified accounts and cash) divided by fixed monthly expenses (like debt payments). It is commonly suggested that an individual should have 3-6 months’ worth of expenses in liquid assets.
The debt-to-asset ratio is calculated by taking an individual’s total debt divided by their total assets. Though this ratio is primarily used in relation to a company’s finances, it is used to help lenders understand an individual’s borrowing habits, specifically how much of their net worth is tied up in hard assets.