Mastering Wealth with 10 Financial Ratios: a Guide for Your 20s and 30s

Don't guess your way to wealth, use data to guide you there.

What’s the best way to become a millionaire in 5-10 years?

1. Set clear financial goals

2. Turn your habits into systems

3. Measure your progress along the way

This week’s guide is about number 3: Helping you measure the progress of your financial goals using 10 simple ratios.

Step up your personal finance game in your 20s and 30s by harnessing the power of these financial ratios.

Here's your free guide.

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Laying the Groundwork: Five Foundational Financial Ratios

1. Savings Rate

• Measure: Percentage of monthly income saved.

• Formula: (Amount saved / Monthly gross income) x 100

• Example: Earning $5,000 a month and saving $1,000? Your rate is 20%.

• Rule of Thumb: Aim for at least 20%.

• Analogy: Fuel efficiency of a car – the higher, the better.

2. Debt to Income Ratio (DTI)

• Measure: Proportion of income consumed by debt.

• Formula: (Total monthly debt payments / Monthly gross income) x 100

• Example: Owe $500 on credit cards with a $5,000 monthly income? That's a 10% DTI.

• Rule of Thumb: Keep it under 36%.

• Analogy: A backpack's weight – lighter is better for the journey.

3. Emergency Fund Ratio

• Measure: Duration your savings cover unexpected costs.

• Formula: Total emergency fund / Monthly expenses

• Example: $6,000 saved with $2,000 monthly expenses? You're covered for 3 months.

• Rule of Thumb: Strive for 3-6 months of expenses.

• Analogy: Lifeboat's capacity in stormy seas.

4. Investment Asset to Debt Ratio

• Measure: Your investment assets compared to your debt.

• Formula: Total investment assets / Total debt

• Example: $100,000 in assets with $50,000 debt? Your ratio is 2:1.

• Rule of Thumb: Aim for a ratio >1.

• Analogy: Balancing golden eggs and rocks on a scale.

5. Net Worth Growth Rate

• Measure: Annual increase in net worth.

• Formula: [(Current net worth - Last year's net worth) / Last year's net worth] x 100

• Example: $110,000 this year from $100,000 last year? A 10% growth.

• Rule of Thumb: Positive growth is good; consistently above 5% is great.

• Analogy: Monitoring tree's growth rings.

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Layering in Five More Advanced Financial Ratios

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6. Expense Ratio

• Measure: Portion spent on non-essentials.

• Formula: Discretionary spending / Total monthly income x 100

• Example: $500 monthly on hobbies with a $5,000 income? 10% on leisure.

• Rule of Thumb: Keep non-essential spending <30%.

• Analogy: Percentage of junk food in your diet.

7. Income Diversity Ratio

• Measure: Breadth of income sources.

• Formula: (Side income or passive income / Total monthly income) x 100

• Example: Property rent yields $1,000 on a $5,000 monthly income? 20% is passive.

• Rule of Thumb: A diverse income (20%+ from other sources) builds resilience.

• Analogy: Multiple pillars supporting a structure.

8. Liquid Assets to Monthly Expenses Ratio

• Measure: Time frame your liquid assets can cover expenses.

• Formula: Total liquid assets / Monthly expenses

• Example: $10,000 in savings vs. $2,500 monthly costs? Four months of financial safety.

• Rule of Thumb: Aim for 3-6 months for peace of mind.

• Analogy: Water reserves in arid terrain.

9. Return on Life (ROL) Index

• Measure: Life quality improvements from financial moves.

• Example: A property near work diminishes commute, gifting 2 daily hours for pastimes.

• Rule of Thumb: The higher the ROL, the better the financial decision.

• Analogy: Flourishing flora in a well-tended garden.

10. Future Financial Independence (FFI) Ratio

• Measure: Current assets vs. projected retirement needs.

• Example: $500,000 in investments and $40,000 annual retirement costs? You're set for over 12 years.

• Rule of Thumb: Aim for a number covering 25+ years for comfort in retirement.

• Analogy: A fuel gauge approaching 'Full' for a long journey.

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