Specific net worth, financial statements, and your monthly budgets are the personal financial ratios or data to describe your household or individual financial conditions. Personal financial ratios are actual tools specifically designed to evaluate the position and strength of your finances. They are the benchmarks that can help you to identify and develop financial habits that are beneficial to you. These may include savings, spending limits, retirement, investing, debt reduction and accumulation.
These personal financial ratios calculations are relatively easy and provide you better insight into your financial progress and health in comparison to your desired goals. You will get a better sense of where you stand and where you want or intend to be.
Budget and Net Worth Are Primary Tools
The creation of your monthly budget, as well as net worth statements and keeping them updated, is the most critical element. These statements hold all the critical information to your current financial existence. Net worth provides a snapshot of your current financial condition, and you can calculate it using your total assets. That is what you owe or what you own less than your total liabilities. Hopefully, what you owe is less than what you own.
A monthly budget depicts your income statement. Your monthly budget is based on total sources of your income minus total expenses (both variable and fixed expenses). If your monthly income exceeds your expenditures and costs of living, then you have to look at ways to save excess money. You will need to add this money to your emergency funds, try paying down your debts and invest money for future financial safety. If your expenses are more than your income, then you will need either earn more, reduce spending, borrow to pay your debts and other costs or a combination of all of these strategies.
Ten Personal Finance Ratios
1. Liquidity Ratio
Liquidity defines your ability of how easily you are able to convert your assets into cash with minimum to no loss of its principal value. When you become financially liquid, you have the ability to take care of or pay any unexpected expenses such as a due to loss of employment, death of a loved one, or if the roof over your head starts leaking.
The most liquid of all assets are your monetary assets. They include cash, money markets or cash-equivalent securities, savings, savings bonds and checking accounts. Liquid assets can also help support your fixed monthly costs for three to six months.
2. Emergency Fund Ratio
Your emergency funds are closely linked to the liquidity ratio. They are essentially known as your cash funds reserves for emergencies due to unforeseen circumstances such as unexpected medical emergency, immediate house repairs, employment loss etc. You can set these funds aside by estimating a targeted period of time that you might believe are enough to support through emergency situations.
However, if you are looking for six months or more than we highly recommend you set aside some funds that can be invested in any high yield savers accounts or investment money market.
3. Net worth Ratio
A net worth ratio is actually a personal balance sheet that measures your net wealth at any point in time. As your assets increases and helpfully outpacing your current liabilities, it will identify that you are getting wealthier.
Your net worth ratio equals your total assets minus total liabilities
4. Targeted Net worth Ratio
The Millionaire Next Door is an excellent personal finance ratios books ever written. It is an oldie but still one of the most favorite books of many. Some of us have actually read it twice, and it is one of the most common referral books by teachers at college to their students on how to control overspending. The book focuses on high savers who are good at building their wealth and maintaining it.
5. Current Ratio
Several personal finance ratios may appear familiar to you. However, the current ratio is a very common ratio when it comes to analyzing the strength of your balance sheet and its capability to meet your short term financial obligations. It works by measuring your household’s ability to repay any short-term debts in case of emergencies or unforeseen circumstances.
Current Ratio is equaled to Short-term assets in cash/ Your Short-Term Liabilities
6. Debt-to-Asset Ratio
It is a very common ratio for industrial firms. Companies are generally more accustomed to the idea of higher debt levels due to being capital intensive in nature. However, individuals must not have high debt levels. The Debt-to-Asset ratio focuses mainly on the borrowing ability of you or your household.
7. Debt-To-Income Ratio
An excellent way to gauge whether your debt burden is getting too high is to run a comparison to the amount you make that is your gross income.
Your Debt-To-Income Ratio is equaled to Your Debt Repayments annually/Your Gross Income) x 100
8. Debt-To-Disposable Income
It is always worth looking at your monthly disposable income relative to your monthly non-mortgage debts. Your monthly disposable income usually means your net of taxes and costs plus what amount is available for you to pay down your debt, your savings and spending of your household.
Debt-To-Disposable Income ratio is equal to your monthly payments of non-mortgage debt / your monthly disposable income
This debt-to-disposable percentage must be 14 percent or lower. Anything more than that even 15 percent is a problematic indicator, and it may reflect as your household to be carrying way too much debt.
9. Personal Cost of Debt
If you carry too much debt in comparison to your income, it is problematic. The Personal Cost of debt ratio focuses on the cost of your debt, which is influenced by your FICO score and credit mix. For example, if you have a high credit card balance every month, then you may have high debt costs. Remember that credit card companies charge a notoriously extortionate amount of high-interest rates. Plus, your credit rating and scores do matter, so if you have a FICO score lower than 650, lenders will consider you as a risky borrower and more likely charge a higher interest rate.
10-Pay down High-Cost Debt
There are two types of plans when it comes to debt reduction. First is snowball methods that tackle your smallest debts, whereas, avalanche method targets to rid you of your highest costs firsts. Most prefer the avalanche method so that you can cut the cord from all your highest debt costs as soon as possible. You can try doing so by eliminating all the credit card remaining balances by paying them in full.
The main goal you must keep in mind is to reduce the higher debt costs. For example, if you have a $25,000 outstanding loan along with some smaller debts and costs. You would first target the $25,000 and try and reduce it or ideally eliminate it altogether as soon as you can.
Whether you are a business or an individual, the above method is effective for both. You can do so by investing in well-thought and evaluated opportunities and projects to guarantee a quick generation of revenues so they can pay off their debts quickly to avoid higher interest rates over many years. Think of your household as a business, and you would want to ensure higher returns on your investments to reduce your debts.
Every now and then, we give up on managing our finance and wonder if we need a personal finance coach. However, what is the defining parameters to evaluate what is a perfect fit or definition of a personal finance coach or a personal financial independence coach? Personally, we believe it should be someone who has made a substantial amount of money through various ventures and also helped others make money or improve their personal financial situations.
Attributes Of a Personal Finance Coach
Although there are no set standards that personal finance coaches must follow, here is a quick review that can help you spot a decent one by knowing who they are and what they do.
What is a Personal Finance Coach?
The answer boils down to one simple factor; a financial independence coach is a person who can help you identify your goals and set milestones in your life. They can help you develop a well-thought plan to achieve these goals and milestones and also help by motivating you to execute the plan. Think of it as hiring a trainer or a coach at your gym; it is no different than actually getting a personal fitness trainer. The only difference is that here the coach is training you for your financial fitness, not physical.
Personal Finance coach vs. a Financial Advisor
A financial advisor is a person generally responsible for your investments and has greater insight into the regulatory matters of each investment sector; whereas, a personal finance coach almost does not have to be directly involved in your finances. Their job is to focus on your personal life, analyze it and look at the day-to-day decisions and choices you make and then make suggestions for how to improve or make better decisions.
Although there are training programs and certifications for personal finance coaching, they are not a pre-requisite to becoming a personal finance coach. Anyone can become a personal finance coach, so you have to weed out the right ones from the wrong.
What a Personal Coach Actually Provides?
A personal finance coach helps you perform to your best capabilities when it comes to the financial aspects of your life. Generally, the most important aspect of getting aid from these coaches comes in the form of motivation. They will use their methods of persuasion to help you spend less and be smart with your money and spending.
Really, it is similar to having a personal trainer because to cut down on your current ways of spending is a painful process that we all struggle with. Hence, they help motivate us to go the extra mile and push through that threshold of pain for a rewarding and financially secure future.
What a Coach Does Not Provide
When looking for a decent personal coach, you must know what to really expect from an actual coach. There are chances you may come across some making false claims and promises that a true personal finance coach has nothing to do with. This will help you identify if the coach you are considering is out of line and will help you move on to the next option.
A coach will never handle your finances himself, not even to show you how it is done. Instead, they are purely there to guide you, and will listen to your story, your situation, and help you the appropriate moves that are needed for you to make. They will draw out that self-motivation and focus from within you to achieve the goals set by your coach.
A coach will never make any financial moves on your behalf, even if you want them to. That is a job for a financial advisor to do so. If a financial coach offers to do so, stay away! With a true personal finance coach, you just have to lay everything about your finances and life on the table in all honesty (which most people are unwilling to do and probably should not do it unless you really trust the coach you are working with). However, it is important, because a coach can only help around the information you provide them.
Be ready to share your bank and credit card statements, your mortgage contracts and statements and other financial details that are confidential in nature. It is like, you are going to a gym trainer and not telling him you have a knee injury or a pre-existing coronary condition. Give them half the information, and they will design something heavyweight for you that will be harmful to you, worsening your conditions. So you have to be mentally ready and willing to share your confidential information with your personal trainer, or else the blame is on you if things go south.
Do Your Part
Always remember, in the end, any financial decisions and changes you make and their implications are going to be up to you, and so will be any perks or consequences will be yours to handle. Therefore, you must do your part. You will be needed to make some tough choices, control your spending and pay off any debts. Remember again; a personal coach can only show you the door; it is you who has to go through it.
That said, you need to familiarize yourself with the basics of finance on your own, so you have an idea about things when talking or evaluating a finance coach. Plus, it will help you when your coach is not around.
Remember, there are no “secrets” of success to personal finance. If a coach tells you that they know some secret formula is simply feeding you stories and nothing more to get you to hire them. Do not get the wrong idea, they may still be able to give you some really good financial coaching, but that is all you are going to get. There is no magic formula to help you improve your finances whatsoever.
There is a multitude of online services that offer free personal finance coaching for free. All you need is to put in a bit of research and do some homework to find a good one. You can even get some amazing personal finance coaching material from various financial bloggers and their blogs and websites. There are some wonderful best selling finance self-help books written and readily available online and at the bookstores.
But that does not mean in any way that there is no use of hiring a personal finance coach. They come with their own perks, and nothing can beat a customized and useful service. Plus, some of us do need someone to nudge and push us constantly to make better choices and follow the set path. When finding a personal coach, as for how they plan to help you and if they are readily available throughout the process or are it just a one-time plan and service, they offer to design a financial strategy for you and then you are on your own to deal with it. An excellent personal finance coach will provide on-going support until you feel you are self-sustainable and have mastered your finances.
What is a credit score? What is good debt? What is an IRA? What type of debt is OK? These are some personal finance questions that come to have crossed our minds at some point in our life. Some are basic terms that remain unchanged. However, others depend on the market and its changing trends and norms.
We bring you answers to ten of the most basic personal finance questions.
Answers to Ten Personal finance Questions
Finance is a complicated landscape for most of us, especially youngsters who have just started taking care of their own finances and budgets. They have to learn new ropes on how to start good and lay a solid financial foundation for their future. So we must all familiarize ourselves with these basic FAQs of the finance industry.
WHAT IS A CREDIT SCORE?
A credit score is a rating system that creditors can use to assess any borrower’s risk while making a decision to lend them any money. The credit scores used mostly in the market by creditors is from FICO. Your credit rating is defined via various parameters such as the amount of debt you already have, whether your utility bills are paid on time, the number of credits cards you already have, and if you have any outstanding or unpaid bills etc.
The credit score affects almost all financial decisions made by creditors or lenders, and its range falls within the range of 300 to 850. Whether you want to buy a car or rent a house, opening a new line of credit and getting a loan or mortgage will require a review of your credit score by all lending companies, banks and private investors.
WHAT IS A 401K?
A 401K is a retirement plan that is offered to all employees by their employer. It allows the employees to take advantage of their paychecks and put aside an amount for their retirement. However, it is up to the employee to decide how much money he wants to put aside every month. The company will usually invest this money on your behalf into various bonds and stocks so that your saved and invested money can help create more money.
You get to choose your investments, which can be direct investment, or you may get a chance to pick a mix of different investment opportunities. However, it is dependent on how much risk you are willing to take and feel comfortable with. The investment money that is contributed or deducted for your 401K gets taken from your monthly paycheck before taxes; it means it helps reduce your taxable income.
WHAT IS AN IRA?
IRS stands for “Individual Retirement Account” or “Individual Retirement Arrangement.” It is a place to put or save your money away for retirement, which will be invested on your behalf. Your IRA can be utilized along with 401K in a combination, or it can be used as an alternative to 401K if your company does not offer the option of 401K. Somewhat similar to 401k, your money is invested across a variety of bonds and stock packages. Of course, you get to choose the bonds and stocks, but the primary purpose is to grow your money over time.
However, IRAs come with contribution limits. For example, in 2019, you could put a total of $6,000 annually into your IRA with an exception to put an additional $1,000 if you are over the age of 50.
In traditional IRAs, the money usually put into people’s traditional IRA account is tax-deferred. It means you only pay taxes on your IRA amount when you withdraw it. It is nothing like a Roth IRA, meaning no matter the amount of money you make, a Traditional IRA will allow you to make contributions to a maximum applicable limit.
WHAT DOES INVESTING MEAN?
Investing actually means pouring your money into a project or a venture – that can be a form of commodities, companies or real estate. The idea is to make more money from your existing money. The easiest way to get into investing is, to begin with, one’s retirement account. However, remember that there are various ways to invest, and contrary to the common misconception or opinion held by the masses, you do not need tons of money to start investing.
WHAT IS ‘GOOD DEBT’?
The answer to what is good debt depends on your circumstances. You can ask some personal or general questions to yourself in order to assess what kind of debt is worth it. However, it is totally up to you to determine whether any specific debt is good or bad for you.
HOW MUCH SHOULD I PUT IN AN EMERGENCY FUND?
It all depends on how much you think about the cost of your life. There is neither a hard-and-fast rule nor a specific number that can define one formula that applies to all. The best and safest way is to have at least three to six months of your total living expenses such as food, rent, monthly bills and transportation saved aside for emergencies.
This way, if you come across a situation where you have lost a job or fall on hard times for any reason, you can continue to meet your minimum financial commitments and maintain a lifestyle without stacking on any additional or substantial debt.
WHAT IS A BUDGET? DO I NEED ONE?
A budget is just a basic plan or understanding of how much you make vs. how much money you spend. And Yes – it is absolutely important to budget; however, it comments in various forms. While you can be rigid about what your expenses are and fix strict allowance, you can also be relaxed in some aspects. Either way, it helps you keep control over your money and expenditure.
HOW MUCH DO I NEED FOR RETIREMENT?
The answer to this question depends on multiple variables, such as how old you are, how much you have already saved in your retirement account (if you have saved any). What are your annual income and the level of comfort you want when you retire? However, there are tons of retirement calculation tools out there to help you determine the approximate amount you need to consider retirement.
HOW MANY CREDIT CARDS SHOULD I HAVE?
Well, it is totally up to you and what your credit scores and ratings are. It will also depend on how responsible you have been with your existing credit cards? Where having an assortment of credit cards can help you strengthen your credit scores, it can also be asking for trouble.
If you find yourself neck-deep into debt from multiple credit cards, then do not think about opening another one. However, if you are a great money organizer and knows how to handle your credit and finances and have been great with your cards so far and looking for a better deal, then go for the one with better rewards.
WHAT IS APR? HOW DO INTEREST RATES WORK?
APR stands for “Annual Percentage Rate.” It usually comes into play if you are unable to pay off your monthly credit card bills. APR is generally an interest rate a lender charges on any owed amount that you did not pay clear in full.
There is no better message than one that’s serious in nature but given in a fun way. Memes have been a part of the internet for many years now. As fresh ones keep coming, you come to a realization that there are no finite limits to the creativity of human beings. However, there is something you have to admire even more about personal finance memes. They are funny, but they still manage to convey a very serious message. If you are looking for advice on personal finance in a fun way, you should definitely consider some of these personal finance memes.
The Payday That Never Comes
As funny as it looks, this particular meme tells you a lot about the world around you. If you think you are the only one who struggles to pass the month without being empty pocketed in the later dates, you might want to look at this meme. It shows you that you are not alone in this struggle. There are millions of people living all around the world who feel the same way by the time the end of the month arrives. No matter how much you try to save money, it seems to disappear by the end of the month. And then you have to be the most frugal person on earth to make it through the last days of the month.
This particular meme also tells you a great lesson. Since you are not alone in this struggle, you do not have to feel uncomfortable when you don’t have money at the end of the month. You don’t have to borrow loans from online lenders so you can show your friends, colleagues, and loved ones that you are making it through the month with ease. It is okay to be struggling a little. That’s what makes you tough and strong enough to face the reality of the world. So, next time you see this meme and smile, be sure to tell yourself that millions of other people are smiling with you in different parts of the world.
A Life without Bills
So, there was a time in your life when you did not have to pay any bills. And of course, no time in life could be better than that. A time lived without worries is time spent well. However, it is not possible to live without worries. Even when you were a child, you were worried about that incomplete homework before going to school. Sometimes, you just did not feel like going to school and your mom wouldn’t listen. Those were worries too but nothing is more stressful than paying bills every month. Again, the meme is extremely funny because of the facial expressions of the celebrity the picture, but it does tell you a great lesson.
If you are paying your bills without any issues, you should be proud of yourself, and if possible, you should step ahead and help others who are having troubles in paying their bills. If you are struggling with your bills, you should know that you are not alone. And most importantly, the meme helps you realize the efforts that your parents have put in bringing you up and making you reach where you are today. If it were not for their hard work and effort, you wouldn’t have achieved what you have achieved in life.
Because It’s on Sale
This is perhaps the most amazing personal finance themes. There are too many people in the world who buy things they don’t need and then run short on money when it comes to buying things they need the most. You wouldn’t want to go to the doctor because the fees are too high, but you will watch all the new smartphone reviews to see if they are worth a shot. Is a smartphone really more important than your health? You don’t want to make mistakes that others have made. It is not cool to fall in the same pit that you have seen others people falling in.
You have to learn the important lessons in life and remember them forever. So, do you ever see yourself searching products in the store or online for no reason? You just see them, look at their prices, and all of a sudden you want to buy them because you like them. That’s not how things should be in your life. Set your priorities and preferences in order. If you are still trying to make both ends meet, you should only buy what you need. Do not buy things you don’t need. Do not spend your money on things that are on sale and look good for the price. Most importantly, never buy something from a loan.
This is yet another meme that teaches you an important lesson. You can say that the lesson in this meme is pretty much similar to the one in the previous one. However, it needs to be pointed out here that the problem mentioned in the picture is more common in young people than it is in old people. When you start a new job and get your first salary, you feel like spending it. Every month you get the salary in your hand, you feel rich. For some reason, as soon as people start getting compensated on their first jobs, they think they have to change their lifestyles.
They start partying more. They start eating fast food more and spend money on things that they had never thought of buying before. This particular behavior is very common in people who have just started their jobs and making money. If you see yourself in the same boat, stop right now. You cannot afford to live like this because you will end up spending all the money you make. In other words, you are burning the candle on both ends. You have to find a way to save your money. And that’s what this meme is teaching you.
When you spend your money, you should know every small calculation about it. How much do you make every hour? How much money do you make every month? How many hours do you work in a day? What could you do if you saved only one hour’s wage every day? If you think about these things, you will reach some surprising conclusions. You will find out that you can do a lot more with your money than buy delicious food from restaurants. If you are such a fan of eating great food, you should learn to cook yourself. This way, you will save money, eat delicious and safe food every day. S
Fun and entertainment have become addictions for today’s people. However, if you are mature, you should find a way to learn from funny and entertaining content as well. Humor is an art and when it is done the right way, it can do wonders. So, when you look at personal finance memes on the internet, you should make sure that you learn something from them. At the same time, you should smile at them rather than taking them seriously. You must know that they are created by people who face the same financial challenges in life as you do. So, they are not making fun of you. Instead, they are making fun of the situation and trying to keep you happy.