I'm not a math person, but I do pay attention to various personal finance ratios in order to stay out of debt and build some modest wealth.
I used to think I had no control over my financial situation. I was just either lucky enough to make a certain amount of money or unfortunate when my debt started to spin out of control.
Then I found out I could control the numbers by either earning more or spending less. I could be rational about every aspect of my money, starting with the money I wanted to keep.
The most important personal finance ratio to me is my savings ratio. Many experts say a person's savings ration should be between 10 and 30 percent. Most people I know save only about 5 percent of their disposable income. Since I got out of debt in my 20s, I've made a commitment to always save at least 10 percent of my income. I save 10 percent toward retirement. I also save financial windfalls and bonuses for emergencies.
Consumer debt ratio
I follow the rule that consumer debt monthly payments should never exceed 20 percent of after-tax income. My only consumer debt at this time is one auto loan payment. In my 20s, my consumer debt ratio was hovering around 50 percent and my life was miserable. In another three years, I intend to have zero consumer debt. I'm saving money now so that I will never need to make another credit card payment, auto loan payment or department store account payment again.
Housing cost ratio
Whether it's paying rent or a mortgage, I try to spend a conservative amount on housing. I've always followed the rule that my housing costs should not exceed 28 percent of my gross income. As a Generation-X female who got her first apartment in the mid-1990's, I didn't have to deal with the insanely high rents. My first apartment in the college town of Vaparaiso, Indiana, was only $260 a month. Rent is so high in the Tampa area where I currently live that I don't think I could afford to rent my own home.
Total debt ratio
Financial experts say a person's total debt ratio should not exceed 36 percent of their gross income. At this time, my husband and I only have the home mortgage and one car loan. Having less debt frees us up to be able to pay off our mortgage in 15 years instead of 30. We also can save money for retirement and other financial goals.
Sometimes it's difficult to be objective about what I can afford. If I stick to my personal finance ratios, I always stay on track.
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More from this contributor:
- personal finance
- consumer debt