Aim For These Ratios To Get In Good Financial Shape

Wealth and prosperity aren’t really about how much you make, but about how well you use what you have. If you offset a high-income job with wild spending habits, you’ll be in worse financial shape than someone who makes half as much as you but saves and lives within their means.

The Frugal Toad pinpoints financial ratios to shoot for:

* Savings ratio. It’s the relationship between your after-tax income and your cash surplus after expenses. If you’re able to sock away between 10 and 20 percent of your disposable income, you’re doing far better than the American average of 4.5 percent.

* Housing cost ratio. Take your total monthly mortgage payment, including all taxes and fees, and divide the number by your pre-tax monthly income. If you’re spending more than 28 percent of your money to keep a roof over your head, you can consider yourself “house poor.”

* Consumer debt ratio. Compare the amount you spend each month paying off debt to your monthly after-tax income. If you’re spending more than 20 percent of your take-home pay on debt, you are likely struggling.

Check out the source link for some other key ratios, as well as advice about how to shape up your finances.

Personal Financial Ratios Everyone Should Know [The Frugal Toad]


Edit Your Comment

  1. Emerson says:

    I wonder how bad the federal government would fair in these tests…..

    • Missing in Vlissingen says:

      The federal government is not a household. These are personal financial ratios, not relevant to a government.

      • Patriot says:

        The relevance is that the government continually spends more than they take in. He wasn’t asking for your smartalec comment.

        • NeverLetMeDown says:

          He was asking a rhetorical question. The rhetorical question he asked displayed a lack of understanding of basic economics. Missing called him on it. Totally fair, and not at all a “smartalec [sic] comment.”

  2. TuxthePenguin says:

    These are great guidelines, but you need to account for individual scenarios when really evaluating your own situation. If you have no consumer debt and you’ve got your lifestyle set where you say 15% of your take-home pay, going over that 30% housing cost ratio isn’t going to be a big deal.

  3. buddyedgewood says:

    I don’t mean to brag, but I’m going to…

    SR= 25%
    HR= 24%


    • Vox Republica says:

      I shake my fist at you thusly!

    • exit322 says:

      SR – Not so great…about 9.2% right this moment, but it’s going to improve with time.
      HCR – 16.77%
      CDR – We took advantage of a 0% interest offer ($8,400 with a $79 fee) to clean some other stuff up, so with our $600 a month on that plus student loans (not really consumer debt, but it works), it’s 22.37%…explains the savings rate a little.

    • katarzyna says:

      SR: 30%
      HCR: 3%
      CDR: 0%

  4. kcrobinson says:

    28% of your pre-tax monthly income towards housing payment, but only 20% of your after-tax monthly income towards debt? Those two rules conflict with each other considering that your housing payment is a debt payment and that 28% of your pre-tax income is greater than 40% of your after-tax income.

    • Missing in Vlissingen says:

      Consumer debt category excludes housing debt.

    • LoadStar says:

      That sort of debt would be anything above and beyond your housing debt. It would include things like car loan, student loan, credit card payments, and the like.

  5. Cat says:

    A Ratio? I was readin’ here just the other day where there’s somewhere like four-hundred needy boys in this county alone, or, or, or one-and-a-half boys per square mile.
    Opie: There is?
    Andy: There sure is.
    Opie: I never seen one, paw.
    Andy: Never seen one what?
    Opie: A half-boy.
    Andy: Well it’s not really a half a boy, i – it’s a ratio.
    Opie: Horatio who?
    Andy: Not Horatio – a ratio. It’s mathematics, ‘rithmatic. Look, now Opie, just forget that part of it. Forget the part about the half-a-boy.
    Opie: It’s pretty hard to forget a thing like that, paw.
    Andy: Well, try!
    Opie: Poor Horatio.

  6. Straspey says:

    It also does not calculate for renters, as opposed to owners.

    Here, in NY City, the prevailing wisdom is that your monthly rental payment should be equivalent to one week’s worth of take-home pay.

    Your rent is $1,700 per month = Your weekly paycheck is $1,700 per month.

    Unfortunately, due to skyrocketing rents here – generated by the increasing levels of developments and gentrifications into “trendy” neighborhoods – many times people end up paying as much as 50% of their monthly income solely on their rent.

    • mramos says:

      Typically they say 25%-30% of your gross pay. 1 week of take home is really unrealistic. You’re suggesting that you need to make over $60,000 to afford a $1700 a month apartment.

      • bee8boo8bop8 says:

        A lot of landlords require you to make 40 times the monthly rent to get an apartment, which would mean making $68,000/yr to afford the $1,700/month apartment.

        • mramos says:

          And you are correct. I meant to say $120000+. 1700/w *52 weeks = $88,400 pre tax. I for some reason multiplied it by 26. Suggesting that someone has to make ~$120,000 before taxes to afford a $1,700 a month apartment is crazy.

    • who? says:

      I think you’re mixing up gross pay and net pay. Using the 28% ratio, a $1,700 apartment would require $72k in income. Before taxes, $72k would be $1,400/week. However, after taxes are figured in, someone making $72k would spend about 50% of their take home pay on the apartment.

  7. meltingcube says:

    I agree with the housing cost ratio in theory, but doesn’t work in practice. I’m currently at 39% for my apartment. The only places that offer apartments in the 28% range are low-income complexes, which I don’t qualify for due to having too high of an income.

  8. c_c says:

    I wonder if for the savings ratio they mean that to include any retirement contributions, or additional liquid savings on top of that…

    • Derigiberble says:

      I wonder about that too. If you include 401(k) and Roth contributions then I am sitting very comfortably according to those ratios, but if you don’t them I’m only hitting around 10-12%.

      I always find it interesting that the housing cost ratio is computed with pre-tax income but savings is post tax.

  9. dulcinea47 says:

    Do you mean 10 to 20% of your *take home pay* should go to savings, rather than 10-20% of your disposable income? B/c, 10% of my disposable income, money that I don’t actually need for bills or housing or whatnot, is like $8/month.

    • crispyduck13 says:

      Yeah same here. I do believe they meant 10-20% of your net take home pay:

      “It’s the relationship between your after-tax income and your cash surplus after expenses…”

      It’s a good goal, and I am certainly trying.

    • babyruthless says:

      disposable income
      the part of a person’s income remaining after deducting personal income taxes.

    • Patriot says:

      Though they weren’t referring to the $80 you have left over each month, if that is truly all you have, it’s time to dump your cellphone, cabletv, change your thermostat settings, stop eating out, etc.

  10. crispyduck13 says:

    I’m going to need an explanation on that cat ratio. Mr. Tubbs is starting to live up to his name.

  11. nishioka says:

    Love the pic.

    “For maximum lolz, kittah must be 1.53:1”

  12. Cosmo_Kramer says:

    Thanks for the reminder that I’m awesome.

  13. Reading Rainbow says:

    For the SR, how do you consider things like Flex spending or retirement contributions? Both of these technically are “after tax income” but kinda are a bit removed for a while.

  14. areaman says:

    Wonder if 401k contributions count towards the Savings Ratio.

    I contribution around 6% of my gross income to 401k every paycheck which is around 4% of my after tax/disposable income.

  15. MaytagRepairman says:

    Another couple of ratios I read about in a book year ago suggested something like….

    Don’t buy a car worth more than 1/3 your annual income.

    When buying a house, don’t borrow more than 2x your household income though lenders will easily let you borrow more than that.

    I’ve failed at both of these guidelines.

    • j2.718ff says:

      Wow, I doubt I could find a shoebox for sale around here at 2x my annual income. I guess that’s why I’m not a homeowner.

      • bee8boo8bop8 says:

        The advice I’ve heard was “Don’t borrow more than twice your annual income,” which can be a significant difference.

        • MaytagRepairman says:

          Yeah. I probably don’t remember it correctly. It was a book that was popular in the 90’s. Maybe it was “Your Money or Your Life” which I see was updated around 2008 and is still selling.

    • BrianneG says:

      I can’t imagine spending more than 1/3 my annual income on a car, but we definitely borrowed a little more than twice our combined incomes to buy a house in Southern California.

  16. j2.718ff says:

    Apples to Oranges? Why is the “savings ratio” based on your after-tax income, and the “housing cost ratio” based on before-tax?

    I’m not sure “consumer debt ratio” even belongs in the an article entitled “aim for these ratios”, as there is no ideal ratio here (unless you have no debt to pay off)

  17. Major Tom Coming Home says:

    I’m house poor because companies such as countryside were giving out gimmick home loans to people they knew would end up defaulting on them, but since they were bundling and selling them them off to speculators they did not care. This artificially inflated home prices.

    Responsible home owners effected by this should receive restitution. The CEOs and their minions that encouraged this should be in federal prison for committing fraud. Of course, this won’t happen and my “restitution” might be a $200 visa check card from Bank of America with an $8.99 activation fee…if I am lucky.

    • DrPizza says:

      You chose a house and decided that the value of that house to you was what you were willing to pay.

      You wouldn’t go to an auction where they had 10 of an item and whine that you paid more than the item was worth because people kept bidding you up, would you?

  18. LabGnome says:

    Man, I’m so poor.

  19. HogwartsProfessor says:

    I just figured out the amount of unemployment I’m getting is barely–and I mean BARELY–going to make ends meet. If anything happens I am SCREWED. And I still have medical debt to pay off. *sighs* On the bright side, I finished paying off my shitty old car. But if it breaks, I am royally screwed. Public transit here is awful.

    I guess I’ll have to start going to the food pantry. :(

  20. mrvw says:

    i’m just glad even after both the wife and I took a pay cut, our housing ratio is 20%.
    that’s some good info, but it will be applied differently to everyone.

  21. who? says:

    An article like this that doesn’t mention retirement savings isn’t useful.

    The article also needs to take a stand on whether or not the cost of home maintenance is part of the housing cost ratio. It says that HOA fees are part of the housing cost ratio, but doesn’t say anything about the cost of fixing the roof if you own a freestanding house. Condo dues generally pay for most of the same maintenance items that you’d pay for yourself if you owned a house, so those items need to be budgeted in if you don’t have a condo association paying for the maintenance.

    • smo0 says:

      Anyone under 50 who thinks they are going to retire is actually living a pipe dream.
      You can put away for retirement but it won’t be enough to live on, I guarantee it.

      I had a financial adviser break it down and say you need at least 3 million in the bank to retire comfortably at 65.
      I hold those words to heart.
      I will not happen for the 98-99% of us who probably won’t even see a million dollars in our entire lives.

      • Coelacanth says:

        Are you talking about future dollars, or $3 million in today’s? I assume you mean the former. If one’s life expectancy is only 10-15 years after retirement, you’re talking about a burn of $200-300k each year, provided no capital appreciation, dividend, or interest income is received after retirement.

        At today’s currency valuation, that’s an absolutely absurd figure to be the minimum figure for “comfortable”.

  22. UncleAl says:

    Sorry, but I’ve got to disagree with the housing cost ratio as being too high. While that number is the conventional espoused by the mortgage industry for years, it’s part of what lead to too many families ending up with more home than they could afford or needed — and it’s why the housing market is still due for more correction downwards, IMHO. A more realistic ratio suggestion by a number of personal finance authors over the last few decades (Dave Ramsey is just the most recent) is 25% of *net* pay.