Good Morning 😃
In last Wednesday’s newsletter, we shared tips on bouncing back if your 2023 didn’t go as planned. In case you missed it, please take a moment to review our earlier emails or newsletters.
Today, let’s dive into the discussion about five essential money ratios. Think of these ratios as mini financial health check-ups that offer insights into your financial standing and provide actionable steps to level up your money game.
According to a popular quote by Robert Kiyosaki, “It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”
This is why these ratios are critical in your financial journey. They will help you focus more on your financial well-being, empower you to make informed decisions and enhance your overall financial health. Let’s get straight into it.
- Debt-to-income ratio. This one’s pretty straightforward. It’s the amount of debt you have compared to your income. You want this ratio to be as low as possible because a high ratio can mean you’re carrying too much debt. To calculate your debt-to-income ratio, divide your total debts in 2023 by your total income earned.
Ideally, this ratio should be below 36% to ensure you are not drowning in debt.
- Savings ratio. This one tells you how much of your income you’re saving. It’s a good indicator that shows if you’re living within your means and preparing for the future. It can also help you judge if you have enough money to fund sudden or large expenses. To calculate your savings ratio, divide your total savings by your total income.
A healthy savings ratio should be around 20% or more, so you can be prepared for any unexpected expenses. If it is lower, aim at doing more in 2024.
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- Housing/rent ratio. This tells us how much of our income went towards housing expenses. It can help you see if you’re spending too much on housing and if you need to make some adjustments. Divide your total housing expenses by your total income. Ensuring this ratio is not more than 30% will help you judge if you are not overspending on housing and have enough left over for other expenses.
- Investment ratio. This ratio shows how much of your income went into investing for the future. Simply divide your total investment by your total income.
A good rule of thumb is to aim for at least 15% of our income going towards investments.
- Net worth ratio. This ratio gives you a snapshot of your overall financial health by comparing your assets to your liabilities. It tells you how much your assets outweigh your liabilities. It’s a good way to see if you’re building wealth over time.Â
A positive net worth ratio means you are in good shape, while a negative ratio may indicate you need to focus on paying down debts and building up savings.
So, there you have it—5 money ratios that can give you a snapshot of your financial health in 2023. Take a look at these ratios and see where you stand. If you’re not where you want to be—don’t worry—there’s always room for improvement. Use these ratios as a starting point to make positive changes and improve your financial well-being. Happy money management!
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