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4 Key Financial Indicators You Should Pay Attention To

As millennials and Gen X step into their prime earning years, financial planning becomes a crucial aspect of securing financial freedom. Being that we’ve just started a new year, Fyooz Financial Planning thought it would be fitting to equip you with the key financial ratios everyone should pay attention to. In this blog, we’ll cover what each ratio is, why it's important, and where you want to be (approximately!). 

Debt-to-Income Ratio (DTI)

  • Definition: DTI is a measure of the percentage of your monthly income that goes towards paying debts.

  • Importance: A lower DTI indicates a healthier financial situation, allowing you more flexibility for spending, savings, investments, and unexpected expenses.

  • Calculation: Divide your total monthly debt payments by your gross monthly income to obtain the percentage.

  • Target: Textbooks tell us that your debt payments, including your housing expenses [i.e. rent or mortgage] should be less than 36% of your gross monthly income. 28% towards your housing and 8% towards your other debts. To be honest, in today’s world with travel, childcare, and other expenses eating away at our money, we find this figure to be high.

We find our clients who are the most “cash-flow” comfortable don’t have a mortgage or rent payment of more than ~20% of their gross monthly income and all other debts reflecting less than ~10% of their gross monthly income.

Savings Ratio

  • Definition: The savings ratio represents the portion of your income that you save each month.

  • Importance: A higher savings ratio ensures that you are building a financial cushion for emergencies, future goals, and retirement.

  • Calculation: Divide your monthly savings by your gross monthly income to obtain the percentage.

  • Target: We encourage clients to set a minimum savings goal of 10% of their gross income. Those who can sustain a savings rate higher than 15% tend to create more options and flexibility for future financial goals.

Emergency Fund

  • Definition: This figure measures the adequacy of your emergency fund in relation to your monthly expenses.

  • Importance: A well-funded emergency fund protects you from unexpected financial setbacks without resorting to debt.

  • Calculation: Multiply your monthly living expenses by three and six to determine your range.

  • Target: We advise dual-income households to have a minimum of 3 months worth of expenses held in their emergency fund. Single-earner households and business owners are those who should consider having a larger six-month emergency fund. 

Net Worth Calculation

  • Definition: Net worth is the difference between your assets and liabilities.

  • Importance: A positive net worth indicates financial stability and the ability to cover debts with assets.

  • Calculation: Add up your assets (bank accounts, investment accounts, business valuation, and real estate value, etc.) and subtract your liabilities (credit card debt, mortgages, auto loans, student loans, etc.)

  • Target: We believe a millennial should have or be very close to having a positive net worth. The exact amount depends on your situation. For example, if you borrowed money to fund 8 years of education, your net worth may be lower than someone who obtained a full-ride scholarship for their bachelor's degree. Regardless, most of our clients experience net worth growth year over year in their 30s and 40s.

    Another aspect of your net worth calculation to zone in on is simply the amount you have saved for retirement.  Fidelity Investments conducted a study to find that by the age of 30, you should have 1x your salary saved in retirement accounts.  That number turns to 3x your salary by 40, and 6x by 50. This is aspirational and not a target everyone can hit. That’s why it’s important to consider your specific situation to best determine how on track you are.

Understanding and actively managing these financial figures can empower you to make informed decisions about your money. By prioritizing savings, investments, and debt management you pave the way for a secure financial future. It can be handy to have ratios and percentages to get a quick read on how you are doing. However, your situation is very unique compared to anyone else. If you’re sick of feeling scared and alone in this major part of your life, consider meeting with us! We take clients from feeling insecure about their finances to confidently radiant! Schedule your free consultation to learn more.

Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Fyooz Financial Planning
Founders, Fyooz Financial

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