Would you like to super-charge your money management skills in just a few minutes with minimal effort? All it takes is knowing a few of the secret ratios that professional financial planners use every day to help their clients. What are ratios, and why are they such a secret? A ratio is a simple mathematical percentage that tells you what amount of your earnings should go toward a specific purpose, like a car payment, a mortgage, or groceries.
They’re based on national averages, so yours might be higher or lower. However, the percentages in each category can give anyone a good idea of where they stand, higher or lower, in relation to what others are doing. Plus, they’re only referred to as secret because so few people outside the financial industry know about them. In truth, there are hundreds of such percentages that cover every aspect of personal and business planning, but the three most helpful ones for individuals are the following.
Debt to Income
Lenders use this piece of important data to evaluate your ability to purchase a home, car, or any other major consumer good. It’s sort of a snapshot of how much of your earned pay goes toward debt. The lower it is, the better. If this metric were 100 percent, it would mean you spend every dollar of your earnings on paying off debt, not a good situation. If it’s zero percent, you are one of the very few individuals who has no debt at all, a wonderful but rare position to be in. Aim for 40 percent or lower.
Expenses to Income
This shows how much you pay toward monthly bills from your income. It includes debt along with non-debt items like groceries, fuel costs, rent, utility bills, spending money, house payments, student loans, and so forth. A typical EI for a working adult is around two-thirds, with the lower the better. A low metric in this category means you’re spending less of what you take in on bills, and thus have more left over for savings and other wealth-building activities.
One way to lower it is to refinance student loans through a private lender. Consolidating and refinancing several payments into one can get you a more favorable interest rate and better terms. The main thing it does is lower your monthly expenses, which automatically improves your E-to-I figure. A refi of education debt works whether you have multiple loans or not, so it’s always an advantage to seek out a private lender who can help you.
Assets to Income
Your A-to-I shows how much you’ve been able to save over the years. For example, if you earn $50,000 per year and your only assets are a $7,000 vehicle and $10,000 of home equity, then your A-to-I is 17000/50000, or 34 percent. However, if you earn the same amount but have assets to the tune of $30,000 of home equity, a debt-free $10,000 vehicle, and $5,000 in savings, then yours is 90 percent. Note that it’s possible to have a figure of greater than one if you’ve managed to build up net worth that is more substantial than your annual income.