Some folks feel budgets don’t work. I feel that the process of building and organizing the budget is even more important than having one. Categorizing where your money should and does go is critical.
Apply the same financial discipline we do in business. Remember. You are a business. So do what businesses do!
In business, Financial Ratios are used as milestones to track progress as well as compare your progress to other members of your cohort. In business, you compare yourself against other similar businesses (same industry, products, location, time in business, etc.)
When applying these same tools to personal finance, your cohort become slightly different (Age, Gender, Race, Employment Industry, etc.) However, the concept remains the same. Using numbers to compare yourself to others to see just how well are you doing. How else can you know if you’re running as fast as you can/should? Or more, importantly, are you fat at all? I thought I was fast, until I saw Usain Bolts 100m dash time
In business this is called “ration analysis” and there are generally 5 types of financial ratios we look at.
- profitability ratios
- debt or leverage ratios
- liquidity ratios
- market ratios
- operations ratios
Not all of these ratios are applicable to personal finance. But most are, even if they require a bit of adaptation to fit perfectly. Here are the critical ratios I think anyone serious about their finances should be adapting and using on a regular basis to analyze their progress.
- CIR Capital Income Ratio
- Passive Income Ratio
- Saving Ratio – Major corporations need to run @ 10 to 12% profit margins. Your personal finance business should too!
- Social Security – Know your anticipated income.
- 401K – Max (18K) = 100%, (9K) = 50%j
- Mortgage to Income Ratio
- Education Debt to Average Earnings Ratio
- Investment Ratio
- Disability Ratio
- Life Insurance Ratio
- Long Term Car Insurance Ratio
- Lifetime Earnings to Net Worth
What do you think? Are you looking at financial measure and applying them to your personal finances? If so, how has it worked for you? If not, why not? Aren’t you just another business? Try it – and tell me how it works? I’d love to hear from you.
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