Financial Ratios

I started this blog because I couldn’t find any good information on using financial ratios for personal finance. As an accountant I use them all the time in my work for the companies I consult to, but there was a distinct lack of information on such ratios in personal finance – so I started making a few up.

Ratios are a great tool for understanding your financial position. They help you see through the raw data to get a better understanding of how and why things are moving. They allow you to track trends more easily over time – for example are you saving enough, how much are you spending in a certain area etc. To say that you saved $500 in a month might be fantastic if your income is $1000, but terrible if its $100,000.

Here are a few of my favourate ratios:

• Savings Ratio - how much do you save?
• Paws and Uaws and Paws and Uaws redone - a saving ratio from ‘The millionaire next door’
• Time to repayment - how long till you repay your loan
• Debt to income ratio – can you support your debt repayments?
• Gearing ratio – a million dollar debt might seema  lot, unless you have a couple of million in assets

Planting Dollars also has a great post on a couple of alternative ratios. Check it out.