Posts Tagged ‘financial benchmarks; credit usage ratio; personal finance ratio; emergency fund’

Personal Finance Benchmarks: Do You Know Your Numbers?

Financial ratios and comparing to general benchmarks are a tool to analyze your financial situation. They can be a good way to determine strengths and weaknesses and can help
develop a realistic financial plan.

Below are some common ratios and benchmarks.  These benchmarks are just a starting place. Your specific situation, goals, budget priorities and stage in the life-cycle need to be considered. Think of these benchmarks as a general guide, not the key to precise happiness.

Emergency Fund: The recommendation is to have enough money in a safe, liquid account so you can cover 3-6 months of non-discretionary expenses. Just how much depends on whether or not you have sick leave, disability  insurance, and income stability. In addition, even 3 months can seem like an overwhelming goal. Start slowly. Saving  $1.50 a day for 2 years will give you a nest egg of $1,095.

Savings to Income Ratio: If a person starts when they are 25-35 and saves & invests 10 – 13% of their income throughout their working years, they have a good chance at a comfortable retirement. A person who starts later in life or who has additional goals such as saving for children’s education will likely need to save and invest more than 10%.

Credit Card Usage Ratio: This is the amount of money charged on credit cards compared to the limits of those cards. This ratio will impact your credit score.
Example: Charge $1,000 a month and total credit card limits are $5,000. Usage ratio = 20%.

Recommended benchmark is to keep usage below 30%. This is true even if you pay the balance in full each month.

Housing Mortgage Ratio: Generally the recommendation is  that no more than 30% of gross income should go for the mortgage. This includes principal, interest, taxes, and insurance (PITI).

Example: Gross income =  $4,000 a month. A monthly payment = $1,200 could be considered affordable. Lenders may allow for 33% ratio. In this example that would  allow for a monthly mortgage payment = $1,320.

Overall Debt: Overall debt includes mortgage debt, student loans, credit cards, and auto loans. The benchmark is 36% or less of gross income.

Example: Gross income  = $4,000. Overall debt goal < $1,440. So with a $1,200 mortgage there is $240 left for other consumer debt payments.

Some lenders will stretch the ratio limit to 42%. In this example that would allow  debt levels  = $1,680.

Assets to Debts: The benchmark for the asset to debt ratio depends on our stage in the lifecycle. Ideally, closer to retirement assets- such as investments and savings- are considerably greater than debts.