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The most important personal financial ratios for building wealth

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For investors, understanding financial ratios is important to evaluate the current state of a company. There are various ratios such as P/E ratio, Debt/Equity ratio, EV/EBITDA ratio, Interest Coverage Ratio, etc. Then, compare each ratio with the financial ratios of other companies to make a more informed investment decision.

As someone who has worked in the investment field for 13 years and has an MBA, I can’t help but think about everything in relative terms, which is why since starting Financial Samurai in 2009, I’ve developed a number of personal finance ratios to help my readers and listeners build wealth.

These ratios are designed to help people spend, invest and save more responsibly, with the ultimate goal of achieving financial freedom sooner. In a vacuum, it’s hard to know where you stand. By comparing one thing to another, you can better understand how to optimize your financial decisions.

The most important personal financial ratios for most people

After reviewing all the personal financial ratios I have developed, the most important personal financial ratio is House to car ratioSince everyone needs a place to live and over 90% of Americans own a car, my housing to car ratio applies to virtually everyone.

Yes, savings rates are crucial to financial freedom. We all know that the more we save and invest, the greater our chances of building above-average wealth. But my home-to-car ratio goes a step further, because we save and invest to ultimately buy things. And the things we most often buy are homes and cars.

So, even if I don’t think my home-to-car ratio is the most important, I would say it’s at least the most relevant.

Personal Financial Ratios Help You Grow Wealth

Building wealth requires allocating capital wisely. The more capital you allocate to assets that will appreciate and the less you allocate to assets that will depreciate, the better.

History has shown that investing in real estate is one of the best ways to build wealth over the long term. Favourite asset class It’s a small investment for the average person, but unless you’re buying a rare collector’s item, the car is sure to depreciate in value over time.

But my problem is that a lot of people are spending too much on their cars. The 1/10 rule for buying a car For over 15 years, I’ve helped millions of people save money on their cars. Today, I’m sharing my car buying guide and 30/30/3 Home Buying Guide Create the ultimate personal finance ratios.

Aim for a home-to-car ratio of 30 or more

If you accept this goal, your goal would be to achieve a home-to-car ratio of 30 or more. The higher the ratio, the better. The key to achieving this ratio is to buy an inexpensive car and own it for as long as possible while owning an affordable primary residence. Use your car’s depreciation to your advantage!

Yes, you can achieve a ratio above 30 by purchasing a more expensive home. But Dream Home It has to be done within the bounds of my 30/30/3-5 home buying guide, which means I’m not talking about maxing out leverage to irresponsibly buy a home.

This is an episode about the most important new personal finance ratios. Share this concept and discuss the ratios with your loved ones and friends, and one day you might give them the greatest gift of all: more money means more freedom. apple or Spotify Too much.

Other Personal Finance Ratios and Financial Concepts

Here are some helpful personal finance ratios and financial concepts to know: They were created to help you deal with life’s biggest financial dilemmas.

My goal since 2009 has been to find practical solutions to life’s biggest financial dilemmas. For new readers, I worked in GS and CS for 13 years, studied Economics at the College of William & Mary, and earned my MBA from Berkeley.

Ratios for investment, retirement and education

Debt Investment Ratio (DAIR) – This ratio helps people determine how much to save and invest in response to changes in interest rates.

Decent safe withdrawal rates – As the economy is constantly changing, it is better to follow a dynamic safe withdrawal rate instead of a fixed safe withdrawal rate. The result is FS Safe Withdrawal Rate = 80% x 10-Year Treasury Yield.

Your guide to saving for financial freedom – As one of the pioneers of the FIRE movement in 2009, I encourage everyone to make the most of their tax-advantaged retirement accounts and save an additional 20% in taxable brokerage accounts and other assets. The ideal savings rate to achieve FIRE is 50% or higher.

Deciding whether to attend public or private elementary school and university – Education is an important investment, but some families are spending too much on it. Previously, families would have had to earn at least five times the cost of school tuition per child to afford it. But the rise of AI and the availability of free online education has raised that multiple to seven times.

Responsible Spending Ratio

Spending too much money on things like cars, houses, vacations, weddings, engagement rings, etc. gets most of us in trouble.

Holiday Guide – I don’t know if most people calculate the true cost of a vacation. Just like it’s easy to spend money irresponsibly on a car, it’s easy to spend money irresponsibly on a vacation. If you follow my guide, you won’t find yourself in a situation where you’re out of money and have to work for years to pay for future vacations.

The new rules for buying an engagement ring – This personal finance ratio will help you curb the partner who wants the most expensive engagement ring, and it will also help the partner who has to pay for it.

Wedding spending rules to follow – Spending a lot of money on a wedding is also a big deal in the US. You want to start your married life on the most stable financial footing possible. My wedding spending rules are based on your level of wealth and your ambitions for building wealth.

Net Worth Guide for Buying a Home – In addition to the 30/30/3 Home Buying Guide, there is also a Home Buying Guide based on a Percentage of Net Worth, which is for older, wealthy people with reduced or no income.

Typical Personal Financial Ratios

Emergency Fund Ratio = Cash / Monthly Non-Discretionary Expenses

Savings rate = annual savings + employer contribution / annual gross pay

Debt to Total Assets Ratio = Total Liabilities / Total Assets

Net Asset Ratio = Total Assets / Net Assets

Return on Investment = (Final Investment – Initial Investment) + Savings / Initial Investment

Invested assets to total pay ratio = Invested assets + Cash / Annual total pay

Other Personal Finance Recommendations

Be sure to negotiate your severance package – Don’t quit your job. You’ll end up with nothing if you quit. Instead, negotiate a severance package that gives you full severance, deferred pay, medical assistance, and 100% unemployment benefits. If you were going to quit anyway, there’s no downside.

Think in probabilities, not absolutes – Be flexible. If you always wait until you are 100% sure, you will miss an opportunity that you will regret. Instead, adopt a 70/30 philosophy. That is, if you are sure that something has a 70% or higher probability of succeeding, then go for it.

Think logically about finances

It’s important not to get haphazard when it comes to your personal finances, or you’ll likely not know where your money went 10 years from now.

These personal finance ratios will help you become a better critical thinker in making better financial decisions. Your decisions won’t always be right, but if you learn from your mistakes, you can build more wealth over time.

I wish you every success on your journey to financial independence!

Thank you.


Suggestions for building more wealth

Track your net worth Empoweris a free wealth management tool that I’ve been using since 2012. Empower also allows you to inspect your portfolio for excessive fees, identify areas of too much risk, model your retirement cash flow, and more. You can link all your financial accounts to track everything in one place.

Join over 70,000 others to accelerate your journey to financial freedom. Free Financial Samurai NewsletterThe Most Important Personal Financial Ratios is an original post from FS.

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