Don at My Dollar Plan wrote a post about 4 ratios to rate your personal finances. I thought I’d see how our family finances fare in this test and maybe learn something new. For each ratio, Don gives a recommended minimum or maximum level. Here goes.
Liquidity Ratio = Liquid Assets / Monthly Expenses
Our family comes in at 6.2 months right now, but this figure varies over time from about 4 to 8 months. I usually let cash sit in trading accounts until it builds up to about $5000, at which point I buy some ETF that’s below its target allocation in our family portfolio. The amounts in each account vary over time, but the total of all these amounts has some stability.
We almost always have less than the 10 months of living expenses that Don recommends. I’m not too concerned because I have a large line of credit available and could also sell off some ETFs in non-RRSP accounts if necessary.
Savings Ratio = Savings / After-Tax Income
Don actually had gross income in the denominator, but I don’t see why your savings ratio should be penalized for paying taxes. Remember to count only the after-tax portion of any RRSP contributions.
My family comes in with a very healthy 61% savings rate. Don recommends saving 20% of your gross income. Let’s call this 25% to 30% of your net income. I’m pleased to be saving double this amount and look forward to full financial independence.
Housing Expense Ratio = Homeowner’s Expenses / After-Tax Income
Don recommends housing expenses of no more than 20% to 25% of net income. My family is at a comfortable 10%.
Non-Mortgage Debt Ratio = Non-Mortgage Debt Payments / After-Tax Income
This is where it gets embarrassing for me. My wife had to replace her car recently and we paid for it on our line of credit. We’ll have this paid off very soon, but a debt is a debt. We plan to pay far more than the minimum 2% each month, but using the minimum payment, our non-mortgage debt ratio is 0.3%, well below Don’s maximum of 15%. Because we have no mortgage, our total debt ratio is also 0.3%.
So that’s it. We’re doing fine everywhere except possibly with our liquidity. How do your finances stack up?