Financial Ratios

Measures of Current Financial Status:

1. Consumption-to-Income Ratio: amount of spending from one's budget divided by disposable income

(Rec.: approx. 70-90% if using 10/20/70 Budget)

2. Basic Liquidity Ratio: amount of time, in months, a family can meet its expenses with its monetary assets (liquid assets in savings and checking)

To find, add up all liquid assets and divide by monthly expenses.

(Rec.: 3 to 6 months)

Measures of Debt Burden:

3. Consumer Debt- Service Ratio: credit card and auto debt repayments by your disposable income, expressed in a Monthly figure

(Rec.: < 11%)

4. Annual Debt-Service Ratio: same as above plus one's mortgage payment, expressed Yearly.

(Rec.: < 40% for Homeowners; < 15% if Renting)

Measures of Progress toward Goals:

5. Long-Term Savings-to-Income Ratio: take the amount one is saving for long-term goals such as college and retirement and divide by disposable income (monthly or annually)

(Rec.: 10% if using 10/20/70 Budget)

background

John Jones is currently 28 years old and married to wife, Kate who is also 28. They twin two-year old daughters and do not plan to have more children. They live in Huntington Beach, CA in a 2-bedroom condo that they purchased just this month at the price of $550,000, with a 20% down-payment. They are planning to rent out this condo when they can afford to buy a home. Their current mortgage for the condo is $1,800 per month with an Association fee of $200 per month. Their home is nicely furnished with furnishings they financed from Pottery Barn, worth about $10,000.

When they purchased the condo, it was supplied with new appliances. The complex has a pool, playground and BBQ Area so there is not too much more they need. Their property taxes are paid with their mortgage to their bank. They are saving to buy a home in 5 years and anticipate needing about $25,000 as a down payment. John and Kate know buying a home will bring many expenses such as new appliances (maybe down the road) and moving expenses. They plan to start a savings plan to be able to have more than the $25,000 down payment for extra expenses for their new home.

They have two cars; one is a 2013 Ford truck that is paid off and probably worth $10,000.

Kate drives an Audi, probably worth $18,000 that they make $300 per month payment on for one more year.

John is the finance officer of a nearby hospital where Kate is a Physical Therapist. Their combined income is close to $128,000 a year. (They make close to the same amount). They have good health insurance through their jobs and only pay $250 per month pre-tax to cover both the dependent children for medical and dental. They have minimal life insurance, so they bought an additional 20-year term life plan that only costs $20 per month. They both still owe about $20,000 each in student loans and each are paying $200 per month, each, (pre-tax - government aid student loans) and once those are paid off, they will be in a better situation to really start saving for retirement.

The utilities run them about $150 per month (gas, power and water are $100, and cable is $150). They have a modest cell phone package costing about $80 per month. Currently John and Kate each put $100/month into their company pension 401k plans. Their pension plan balances are roughly at $12,000 each. They would like to put more into their plans once they get their home and their student loans paid off. Their credit union savings account has a current balance of $5500. They are not sure if this is an adequate emergency fund. They are hoping to figure out where they should be putting extra funds in order to reach their financial goals.

They live comfortably and are not materialistic people. They enjoy the outdoors, beach, camping, hiking, skiing and do not really take extravagant vacations. They hope to take their children on a Disney Cruise in two years. They anticipate that vacation would cost about $5,000 and are saving for it with a special flex CD savings account through the credit union. They enjoy going to Disneyland, so they have annual passes that cost them $55 monthly. They own a two-seater kayak and two paddleboards and use them locally most of the time. They estimate their personal belongings to be worth about $10,000. They enjoy sporting events and do save up about $100 per month to go to a professional game.

Kate's mom watches the kids, so they save quite a bit on childcare, although they do pay her about $400 a month just for things she needs while taking care of them. They also budget an additional $100 for other babysitting needed for date nights! College planning is already a long-term goal of theirs, so they do put $100 per month away in one account for their twins, with the current balance of $1,200. They have one major credit card, with a balance of $900, and try to keep it paid off each month and only use for vacations and emergencies. The Pottery Barn card still has a balance of $1,200 from when they purchased their furniture.

They are trying to learn how to avoid debt and to save for what they need. They currently do not have any pets.