The term personal finance ratios might give you flashbacks to math class, learning various formulas, equations, and ratios. Back then, if students looked like they were zoning out, your teacher might have told you “pay attention, this will be useful to you later.” Well, this time, you don’t have to wait—a lot of the equations below will be useful to you right now!
Let’s learn more about what ratios are and fourteen of the top money ratios you can use today!
What is a personal finance ratio?
In mathematical terms, a ratio is essentially a way to compare two numbers. Since finance is all about numbers, that can come in handy in many ways especially when making financial calculations!
You can use ratios to keep track of many different aspects of your financial situation—from cash flow to savings to tips for retirement planning and more.
A traditional ratio is expressed as a divisible number, but some of the ones below use multiplication or subtractions instead.
Ultimately, just think of it as a way to track your money and how you use it. Keeping a record of your money ratios can also illuminate how these numbers change over time.
14 of the most useful personal finance ratios
The best way to explain the ratios is just to start showing you examples! So below, we’ll explain how to use each one and why they can be helpful to your journey.
1. Monthly cash flow ratio
Monthly expenses divided by monthly income
The monthly cash flow formula helps you understand what percentage of your income is dedicated to your monthly expenses. Think about the cash flow ratio as how much cash flows in vs flowing out.
Start by adding up all your regular income from jobs, side gigs, investment income, etc. You can use a gross figure or your actual take-home pay (aka net income) after taxes.
Then, create or refer to your spending journal or a budget template or tool to see how much you spend every month. Don’t include savings or investments in your spending calculations (that has its own personal finance ratio)! Everything else is fair game: necessities, car payments, fun money, gifts, monthly debts, etc.
If you spend around $2,000 monthly and make $2,500, your cash flow ratio would be $2,000 / $2,500 = 80%. It tells you that 80% of your income is spent on expenses.
2. Savings ratio
Monthly savings divided by monthly income
This is basically the flip side of the one above. Instead of telling you how much you’re spending monthly, it tells you your savings rate.
Include all kinds of savings here. Whether you’re putting money in a savings account, your company’s 401(k), your personal IRA, an investment account, or even setting aside physical cash, it qualifies.
Using the same monthly numbers as above, let’s say you’re putting the rest of your money ($500) towards savings and investments.
Your monthly savings ratio would be $500 / $2,500 = 20% savings rate. You can also do the same to find your annual savings ratio. That way, you can decide if you want to save more to live better or if the amount you save makes sense.
3. Emergency fund ratio
Essential monthly expenses x 6
An emergency fund exists to protect you in the event of unexpected expenses or job loss. It’s money you want to keep easily accessible so you can use it as soon as needed.
As a full-time freelancer, I’ve had months where I have a ton of clients and projects, as well as months where business is a little slower. My emergency fund gives me peace of mind that I won’t be in a dire situation if my work schedule changes.
Since the common wisdom is to save 3-6 months of expenses in your emergency fund, this ratio reflects that. Simply multiply your essential monthly expenses by 6 to come up with your target for a fully stocked emergency fund.
When I say “essential,” I mean you might be cutting out some of your “fun” budgets for this one. Just include the things you can’t live without (housing, utilities, food, health insurance, etc).
Our example person may normally spend $2,000 a month, but let’s say that they can pare down their essential expenses to $1,500. $1,500 * 6 = $9000 would be the target for their emergency fund.
Keep this money in an interest-bearing account—ideally, a high-yield savings account. That way, it will remain accessible whenever you need it, but the interest will help you grow your money while it’s there!
4. Liquidity ratio
Liquid assets divided by monthly expenses
The liquidity ratio is one of the personal finance ratios closely tied to your emergency fund since they both revolve around the idea of liquidity. Put simply, liquid assets refer to (A) cash or (B) other financial assets you can quickly convert into cash.
Money in a checking, savings, or money market account is highly liquid. If you have savings bonds you can cash in any time, they’re liquid.
If you have stocks, bonds, index funds, and other “cash equivalents” or other highly liquid investments that you can easily sell on the market, they would qualify as liquid, too. (However, their value fluctuates more, so it’s not a stable number).
Of course, you can’t just sell your house on a whim for quick cash, so that’s a great example of a non-liquid asset. Money stored in retirement accounts is also illiquid since withdrawals are subject to lots of rules and take time.
Once you have these figures, running the liquidity ratio formula will reveal how many months your liquid net worth could support you. So for someone with $20,000 in liquid assets who spends $2,000 a month, it’s $20,000 / $2,000 = 10 months of covered expenses.
5. Debt-to-assets ratio
Total liabilities divided by total assets
Now we’re getting into some potentially less fun territory: a couple of debt ratios. Don’t be scared if your numbers are higher than you’d like at first. It’s all part of your debt reduction journey!
If you don’t know where you’re starting from, you’ll just be stumbling around in the dark, hoping your debt will be gone one day.
You may also hear the debt-to-assets ratio called a solvency ratio. (Typically, “solvency ratio” is a term used for companies more often than individuals.) It’s a way to see whether you can pay off your debts by selling your assets.
Start by adding up your college loans, any consumer debt like credit cards, personal loans, car loans, and whatever other kind of debt you carry.
Then, calculate the value of your key assets, including all savings and investment accounts, paid-off vehicles, and personal valuables.
If you have $10,000 in total liabilities and $40,000 in total assets, you have $10k / $40k = 25% as much debt as assets.
Is a house counted as an asset or liability?
What about your home? Is a house an asset or a liability? It’s both! Unless your mortgage is paid off, you have equity in your house and debt at the same time.
Homeowners can choose whether or not to add their remaining mortgage balance as debt and home equity as an asset in this ratio.
Keep in mind that since mortgages are the largest loans most people will have in their lives, including it can make your ratio seem skewed. If you like, you can run the numbers with and without the home factored in to see the difference.
6. Debt-to-income ratio
Annual debt payments divided by annual income
This is one of the personal finance ratios that will help you figure out how much of your income is being funneled toward your debts each year.
To start your equation, look at the debts you gathered above. But this time, add up your yearly payments towards each of them.
One exception is that if you’re a homeowner, it’s best to exclude mortgage debt from this equation—that’s a surefire way to kill your ratio! (Plus, housing payments fall more into normal expenses than debt payoff.)
Next, you’ll divide your annual debts by your annual income. Normally, people use their gross income rather than net income for this calculation. Include any income from side gigs and alternative sources as well.
As your debts shrink, the result of this ratio will, too! But if you’re adding new debts or paying things off too slowly, compound interest might increase your debt payments and, subsequently, this ratio.
Someone making $15,000 in annual debt payments while earning $50,000 a year is paying $15k / $50k = 30% of their income to their debtors.
For companies, a similar ratio called the “debt servicing ratio” helps lenders assess a business’s debt repayment ability.
7. Net worth ratio
Total assets minus total liabilities
The net worth ratio is going to be short and sweet! Grab the same numbers you used in #5, but instead of dividing, we’ll simply subtract.
Assets minus liabilities help you calculate your net worth! It’s motivating and fulfilling to watch this number grow over time.
$40,000 assets – $10,000 liabilities = $30,000 net worth.
8. Debt to net worth ratio
Total liabilities divided by net worth
This is very similar to the debt-to-assets ratio.
However, you aren’t just comparing total debt to total asset value with this one. Instead, you’re comparing your debt to the net worth figure from #7—where debt has already been subtracted from your asset value.
The ratio is meant to help you determine how much debt you’ve taken on relative to your net worth.
If your ratio is over 100%, you may feel over-leveraged and struggle with payments. The lower the result, the more comfortable you’ll feel with your debt levels.
$10,000 liabilities / $30,000 net worth = 33% debt to net worth ratio.
9. Housing-to-income ratio
Monthly housing costs divided by monthly income
You’ve probably heard some advice for spending a certain percentage of your income on housing. In the past, the rule of thumb number was 30%. Now, there’s a slightly more detailed model called the 28/36 rule.
The first part (28) means you should aim to spend no more than 28% of your income on your total house payment, including taxes and insurance.
The second part (36) adds your mortgage payment to all your other debt payments and recommends that this total not exceed 36% of your income. It’s effectively the same thing as your debt-to-income ratio from #6 (but a mortgage-inclusive version).
The 28/36 rule is a way to help you weigh whether your home purchase would put you in too much debt.
For instance, if a potential home purchase would bump you too far over the 36% debt-to-income figure, you might want to look at cheaper properties. Otherwise, you run the risk of becoming house poor!
If you’re spending $1,000 a month on housing while making $3,500, you’re spending $1k / $3.5k = just about 28% on housing.
10. Needs/wants/savings budget ratio
50/30/20, 60/20/20, or other
Want a personal finance ratio that gives you a quick guide on dividing your expenses? There are several ways to do this.
Usually, the simplest methods involve breaking down your expenses into needs, wants, and savings. Needs are everything you can’t live without, wants are the nice-to-haves, and savings are what you put aside for your future.
The 50/30/20 rule
One common budget ratio is called the 50-30-20 rule. In this formula, 50% of your income goes to necessities, 30% is reserved for discretionary income, and 20% gets saved.
Let’s see how this might work for someone who makes $3,000 a month. The 50/30/20 ratio would mean $1,500 goes to needs, $900 to wants, and $600 to savings/investments.
Other percentages
All of these numbers can be tweaked depending on your situation.
So if you’re spending 60% of your income on necessities, you might want to aim for more of a 60 20 20 breakdown or even the 70-20-10 budget.
11. Retirement ratio
25x your annual expenses
Ever find yourself asking, “Can I retire yet?” Once you stop working, you want to be confident that your savings and investments will be able to continue funding your life.
It’s a tried-and-true method for understanding what you need in retirement. It’s also based on something called the 4% rule, which refers to the idea that a retiree can safely withdraw 4% of their savings each year with little risk of running out.
Calculating your retirement expenses
Look at your current annual expenses and try to figure out if they’ll be higher or lower in retirement. Perhaps you’ll have a paid-off house by then and eliminate rent/mortgage expenses.
On the flip side, you might want to try full time traveling or have extra for medical care. It never hurts to pad the numbers, but the 25x expenses formula is a great place to start.
Someone who spends $50,000 a year would ideally want $50,000 * 25 = $1.25 million to retire confidently.
12. Credit utilization ratio
Sum of credit card balances divided by total available credit
Your credit card utilization ratio helps show how effectively you manage your available credit. High utilization could signify that you have an unhealthy reliance on debt.
Utilization is also a big factor in determining your FICO credit score, so it’s worth paying attention to if you’re trying to improve your credit. Understanding and managing this ratio can positively impact your creditworthiness and financial well-being.
Figuring out your credit utilization
To calculate it, take the current sum of your revolving credit account balances and divide it by the total credit limits across all your accounts.
A lower credit utilization rate helps your credit score. Avoid going over a 30% credit utilization ratio—keeping it at or below the 10% range is ideal. Focus on paying off outstanding debts and limiting the balances you carry from one month to the next.
Consider a scenario where your credit card balances amount to $2,000, and your total credit limits across all cards are $10,000. The credit utilization ratio would be $2k / $10k = 20%. This indicates that you’re using 20% of your available credit.
The good thing about utilization is that it essentially changes every month. Even if you have a high ratio for one month, you can pay down your balances and return to a low utilization in no time.
13. Student loan debt to starting salary ratio
Total amount of student loan, divided by expected starting salary
College is notoriously expensive. And unless you know how to get a full ride scholarship or have a college fund, it can be hard to stare those student loan offers and interest rates in the face and ask yourself, is it worth it?
The debt-to-salary ratio provides a simple guide for college students and their families to help answer this question. Will your degree be worth the debt in the long term?
This formula helps you determine the maximum loan amount to borrow for a particular degree program.
How do I tell if my college degree will be worth it?
Since you can’t predict the future, it’s impossible to calculate the exact ROI (return on investment) for a college degree. But you can look at the job market in your target field and determine what starting income you can expect after graduation. Websites like salary.com can help with this research.
Your results will also help you plan a realistic debt repayment schedule for your college loans. As a rule of thumb, students should limit their debt-to-starting-salary ratio to less than 100% to repay the loans over approximately a 10-year period. (Of course, interest rates can affect the exact timeline.)
So, let’s say you take out $30,000 in loans, and your anticipated starting income is $50,000. The debt to starting salary ratio would be $30,000 / $50,000 = 60%. The result indicates that your debt would be 60% of your expected starting salary, which is relatively conservative and reasonable.
On the other hand, borrowing $60,000 for a degree that leads to an average starting salary of $30,000 does not make as much financial sense. That would put the ratio result at 200%—double the recommended amount.
No matter what your degree costs, enroll in our free student loans 101 course bundle to ensure you clearly understand how they work.
14. Loan-to-value ratio
Remaining mortgage amount on a property, divided by its appraised value
The loan-to-value (LTV) money ratio is a crucial metric in the realm of real estate financing. Lenders reference this ratio as a part of the mortgage approval process. They also consider it for refinancing and home equity line of credit (HELOC) applications. A low LTV is good because you owe less on the loan.
Whether you’re a current homeowner or a prospective first time home buyer, this personal finance ratio will be relevant to you.
How the LTV ratio works for new home buyers
If you’re buying a home, your initial LTV will depend on the size of your house down payment. Let’s say you put 20% down on a house valued at $200,000, so your down payment is $40,000 and your mortgage is $160,000.
That makes your LTV ratio equation $160,000 / $200,000 = 80%.
If you only put 10% down, you’ll be left with an LTV of 90%. Higher LTVs on new home purchases can come with additional costs, like higher mortgage interest rates and private mortgage insurance (PMI).
The larger your down payment is, the smaller your LTV will be, and vice versa. Saving up at least a 20% down payment will get you the most favorable terms.
How the LTV ratio works for homeowners
For current homeowners, the LTV represents how much equity has built up in your home, i.e. how much of the mortgaged property you own. This figure also determines whether you can refinance at a lower interest rate or access a home equity line of credit.
Your LTV will decrease as you pay your mortgage, but it can also change if your appraised property value changes.
In some cases, LTV can increase if a property’s market value drops. It can happen if there’s property damage (e.g. from flooding) or a recession hits. But it’s much more common for your LTV to decrease as your real estate value grows, which is a beneficial change.
Let’s say you bought our example home when it was valued at $200,000. After five years, you still owe $125,000, but your property value has appreciated to $250,000. That new value is the figure you’ll use for the ratio: $125,000 / $250,000 = 50% instead of $125,000 / $200,000 = 62%. It’s like getting extra equity for free!
Expert tip: Consider money ratios within the context of your life
Okay, you’ve just gone through a lot of math—take a breath! Now is the time to remember these math equations are most insightful when you put them into context. A single ratio isn’t going to provide a comprehensive view of your financial health.
You should never feel bad if some of your ratio results are above or below the ideal numbers. You don’t have to live and die by money ratios! They’re just a guide, and there’s always room for exceptions and flexibility based on your unique situation.
Maybe your desired college degree doesn’t come with an amazing starting salary…but it’s a field you’d love working in, with great future growth opportunities. Don’t rule it out because of a math equation.
Consider them all within the context of your personal core values, needs, and goals to make them work for you.
Why are personal finance ratios important for you?
These ratios are great ways to distill tried-and-true financial wisdom into simple formulas that anyone can use.
If you want to know whether your savings are on track—there’s a ratio for that. Curious if you’re spending too much on housing? There’s a ratio for that.
Knowing your financial numbers can help you improve your life
Furthermore, keeping a record of these numbers lets you reflect on where you came from. As you learn new frugal life hacks, you can pare down your expenses and improve your cash flow ratio.
As your income grows and you pay off debt, those debt ratios shrink in front of your eyes while your net worth swells.
They’re some satisfying little equations that give you another way to track your finances and set new goals.
What are the most important ratios for money?
Finance is a highly individualized journey, so the importance of specific ratios can vary based on individual circumstances and financial goals. But in general, there are a few ratios that everyone should be paying attention to.
The emergency fund ratio is one of my top recommendations for the beginning of your financial journey. Life can throw curveballs at anyone, anytime.
Having at least six months of expenses squirreled away helps give you a runway to figure things out if you get laid off, need to pay for a surprise home or car repair, etc.
I’ll also highlight the savings ratio, which includes traditional savings and investments. Savings are essentially your key to the future. They put all your goals in reach, whether it’s buying a house, paying off your loans, or early retirement.
What is a good debt to net worth ratio?
A good debt to net worth ratio strikes a healthy balance between leveraging debt for wealth-building and avoiding excessive indebtedness.
You might think it’s best to strive for no debt.
However, while that may be a worthy goal for some people, it isn’t always the case. In some situations, debt can be a tool to help you better your financial health.
It ties into the concept of types of debt, like good debt vs. bad debt.
For example, student loan debt or business debt can help you earn more money throughout your lifetime. But credit card debt will eat your income with its high-interest rates.
You can think about it in terms of these ranges:
- Safest range: A ratio below 50% is generally considered healthy—indicating that your net worth is at least twice your total debt.
- Moderate range: Ratios between 50-100% can still be manageable, depending on the situation. Evaluate the types of debt you have, its purpose, and whether it contributes to your overall financial well-being.
- Cautionary levels: Ratios exceeding 100% indicate that your total debt surpasses your net worth. It signals a higher level of financial risk, so proceed carefully and ensure you have a solid debt repayment strategy.
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If you’ve added these ratios to your financial toolkit, you’ll love these reads!
Calculate your personal finance ratios!
Now it’s officially your turn!
In order to start crunching the numbers, you’ll need some key pieces of information in front of you. The main things you’ll need include:
- Total annual income
- Total monthly income
- Total debts/liabilities
- Monthly expenses (broken down by category)
- Total asset value
- Liquid asset value (aka cash or things you can quickly turn into cash)
- Credit limits on your cards
- Real estate value (for property owners)
Once you have these figures in front of you, the rest is just plug-and-play. You can recalculate these personal finance ratios as often as you want—say, once a month, once a quarter, or once a year—to stay on top of your personal financial plan. Over time, if you stay the course, you might even learn how to become wealthy!
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