Know Your Numbers: The Most Important Financial Ratios/Formulas to Know
In episode 40, we talked about whether we were winning the fight for financial literacy and I made a comment about understanding certain financial ratios when it comes to your personal finance. Today, I’ll cover some of the most important financial ratios and formulas to know that are crucial to your financial picture. After this episode you should be able to take these financial ratios and formulas to get an indication of where you are when it comes to spending, saving or investing.
Questions/Issues We’ll Address on this Episode:
- Understanding Your Debt to Income Ratio (4:50) – Very popular ratio when it comes to receiving a loan. A lot of underwriters and financial institutions use this to determine credit worthiness.
- Understanding Your Emergency Fund Ratio (7:40) – Very popular ratio when it comes to determining your liquidity. The saying “living from paycheck to paycheck” stems from a lower than needed emergency fund ratio.
- How much House Can you Afford (14:45)–This is a formula that should be calculated when you buy a house or attempt to refinance your current home loan.
- Personal Savings Rate and a Quick Lesson on how to calculate your retirement number (17:15) – This is the mother of them all–personal savings. This will directly determine how much will be in your nest egg at retirement. I break down how to get to this number.
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