Financial ratios are commonly used in the business world. They represent the numerical relationship between various figures from a company’s financial statements and provide a snapshot of the company’s strengths and weaknesses. Financial ratios can be measured, benchmarked, tracked, and analyzed – and are used to make financial decisions.Crane Investment Services Logo

Make it Personal

You can do the same thing on the personal level. You probably have a general idea of how you’re doing financially, but using financial ratios will give you a clearer, more precise picture. Here are just a few examples:

Liquidity ratios measure your ability to meet your financial obligations. The basic liquidity ratio is the total of liquid assets (your checking and savings accounts plus other assets that can quickly and easily be converted to cash) divided by your monthly expenses. The ideal number is between three and six (meaning you have enough liquid assets to cover between three and six months of expenses). You may know this by another name: your emergency fund.

Debt ratios measure how much of your financial resources are allocated to cover outstanding debts. Your debt-to-income ratio is calculated by dividing your annual debt payments by your annual income. In general, you want a number that’s less than 36%. If you’re planning a major purchase, you can run calculations to see how the additional debt will affect your finances.

Net worth ratios express your financial situation in terms of overall net worth (i.e. total assets minus total liabilities) and are a good way to view your general progress. For example, you may want to track your debt-to-net worth ratio over time.

Setting Goals and Tracking Trends

Financial ratios are very useful when it comes to setting measurable goals and monitoring your progress in the short term. And tracking your numbers over time lets you know where your finances are headed.

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