Financial Planning Ratios: Common Questions

financial planning ratios

A common question related to personal finance is “how much house can I afford?”. The answer to that question, like so many others, varies from person to person, but there are some basic, broader questions that you can follow to get a sense of what you need to do when it comes to personal financial planning, so we will look at those in this post.

How Much Money Should I Be Saving Each Year?

In general terms, 10% of your yearly income is a good personal finance ratio. So if you make $90,000 per year, then $9000 of that needs to go into pre- and post-tax accounts. The percentages can change depending on age, but it’s still a good number to start with.

What Should I Spend On Essentials?

Another financial ratio to think about is essentials like household needs, which can include food and transportation. In general, you don’t want to spend more than 25% of your gross income. If you base it on net income, that number can go up to 33%, but more than 40% can put you into trouble.

For food, 8% is a good number to aim for with gross, and 10% for the net. For transportation, you want to aim for 6%.

How Much Should I Spend On Housing?

In high-interest rate environments, you want to go for two times your annual income and three times your income in low-interest rate environments. Following that guideline will make your mortgage payments manageable, and you won’t end up with more than you can afford.

What Should I Spend On Life Insurance?

For life insurance, ten times your income is the ideal ratio. If you have dependents, then you may want that number to be higher. By following this rule, you won’t be underinsured and, in some cases, your employer may offer a life insurance benefit to your spouse as well.

You want your life insurance to be enough to cover your family’s needs when it comes to your children and housing expenses, so keep those things in mind.

How Much Should I Have In My Emergency Fund?

When saving for an emergency, you want to have enough to cover expenses for anywhere from three to twelve months. This will be able to take care of your essential costs for you and your family in the event that you are out of work, or become injured.

What Should My Retirement Savings Be?

This financial ratio is something you need to keep in mind for the long term, and it should be twenty times the amount you spend annually. It’s a good foundation number but will be different if you have a job that provides a pension to retirees. By planning to put away enough to satisfy this ratio, you will be able to continue enjoying the lifestyle you have built over the years.

These general tips will help you build a strong financial future and planning for retirement, but you want to avoid the temptation of spending more and saving less. You can do this by focusing on your relationships with your family over focusing on spending money.