Financial Ratios Part III: Savings Ratios
Savings Ratios are basically self explanatory. Savings ratios tell what percentages of both gross and net income are being saved each month.
Gross Savings Ratio = Total Savings / Gross Income
This is probably the most common financial ratio people calculate or track even if they don’t know they are doing so. Anytime you’ve got a 401(k) program (or similar profit sharing program) where you designate a percent of your monthly income to be invested, you are setting your gross savings ratio for the month.
For example, if you make $5,000 (gross) a month and make a $500 contribution to your 401(k) your gross savings percentage would be 10%. However, something you may want to keep in mind is that if your company has a matching program your ratio would actually be higher.
Assuming the same facts as above, with the additional assumption that your company offers a 50% match on the first 5% contributed, you would have an additional $125 of contributions ((5,000 * 5%) * 50%). With these additional contributions your gross savings ratio would equal 12.5% (625 / 5,000).
Savings Ratio = Total Savings / Net Income
Another way to look at savings as a percentage of your income is to compare it to your net income rather than your gross income. Although I prefer to track my savings as a percentage of gross income, there are situations where tracking savings versus net income may be more beneficial.
One reason that tracking the net savings ratio may be a better indicator of your overall savings percentage is because with some employers require a number of paycheck withdrawals that are out of the employee’s control. For example, if you are required to carry disability or life insurance through your company you may not look at these funds as truly disposable/discretionary income. When calculating your savings percentage you may not want to include these in the denominator.
A good rule of thumb is to keep these ratios above 10% and preferably above 15%. The higher the ratio the better.
*For an explanation of the other ratios I use, check out my other financial ratio posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios).
(-0.29% Month / +25.92% YTD) June 2009 Networth
June Highlights
- We had some significant decreases in our cash accounts for the month which contributed to the majority of our decrease in networth. The reason for the decreases in our cash accounts is because we had to pay off the credit card for the work on our backyard. Now that the backyard is done, we have finished all of the major renovations at the new house and shouldn’t have to make any more withdrawals from savings.
- This is the last month that we’ll see any increases into our HSA’s. We have switched from a high deductible insurance plan to a low deductible insurance plan with the birth of our 2nd child just a few months away. The premiums on the low deductible plan are more than twice as expensive as the high deductible plan, but the deductible is only $1,500 versus $6,000.
Right now the plan is to wait until after the birth of child #2 and then change back to the low deductible plan. Normally we wouldn’t be allowed that option, but because having a baby is considered a “life event” by the IRS we have a 30 day window to switch plans. Once we get closer to the birth, I’ll run an analysis and see if it’s really worth it to reset our deductibles if we switch.
To see the progress to our current networth, check out the “Networth Page“, and to see the path we are taking towards our future, check out our Goals.
11 Most Expensive Catastrophes in History
I received this in an e-mail today and couldn’t resist posting it myself. I have not verified the accuracy of the information, or who has the rights to the images, but I found it intriguing and thought I’d share.
#11 Titanic – $150 Million
The sinking of the Titanic is possibly the most famous accident in the world. But it barely makes our list of top 10 most expensive. On April 15, 1912, the Titanic sank on its maiden voyage and was considered to be the most luxurious ocean liner ever built. Over 1,500 people lost their lives when the ship ran into an iceberg and sunk in frigid waters. The ship cost $7 million to build ($150 million in today ’s dollars).
#10 Tanker Truck vs Bridge – $358 Million
On August 26, 2004, a car collided with a tanker truck containing 32,000 liters of fuel on the Wiehltal Bridge in Germany. The tanker crashed through the guardrail and fell 90 feet off the A4 Autobahn resulting in a huge explosion and fire which destroyed the load-bearing ability of the bridge. Temporary repairs cost $40 million and the cost to replace the bridge is estimated at $318 Million.
#9 MetroLink Crash – $500 Million
On September 12, 2008, in what was one of the worst train crashes in California history, 25 people were killed when a Metrolink commuter train crashed head-on into a Union Pacific freight train in Los Angeles. It is thought that the Metrolink train may have run through a red signal while the conductor was busy text messaging.. Wrongful death lawsuits are expected to cause $500 million in losses for Metrolink.
#8 B-2 Bomber Crash – $1.4 Billion
Here we have our first billion dollar accident (and we’re only #8 on the list). This B-2 stealth bomber crashed shortly after taking off from an air base in Guam on February 23, 2008. Investigators blamed distorted data in the flight control computers caused by moisture in the system. This resulted in the aircraft making a sudden nose-up move which made the B-2 stall and crash. This was 1 of only 21 ever built and was the most expensive aviation accident in history. Both pilots were able to eject to safety.
#7 Exxon Valdez – $2.5 Billion
The Exxon Valdez oil spill was not a large one in relation to the world ‘ s biggest oil spills, but it was a costly one due to the remote location of Prince William Sound (accessible only by helicopter and boat). On March 24, 1989, 10.8 million gallons of oil was spilled when the ship ‘ s master, Joseph Hazelwood, left the controls and the ship crashed into a Reef. The cleanup cost Exxon $2.5 billion.
#6 Piper Alpha Oil Rig – $3.4 Billion
The world’s worst off-shore oil disaster. At one time, it was the world’s single largest oil producer, spewing out 317,000 barrels of oil per day. On July 6, 1988, as part of routine maintenance, technicians removed and checked safety valves which were essential in preventing dangerous build-up of liquid gas. There were 100 identical safety valves which were checked. Unfortunately, the technicians made a mistake and forgot to replace one of them. At 10 PM that same night, a technician pressed a start button for the liquid gas pumps and the world’s most expensive oil rig accident was set in motion. Within 2 hours, the 300 foot platform was engulfed in flames. It eventually collapsed, killing 167 workers and resulting in $3.4 Billion in damages.
#5 Challenger Explosion – $5.5 Billion
The Space Shuttle Challenger was destroyed 73 seconds after takeoff due on January 28, 1986 due to a faulty O-ring. It failed to seal one of the joints, allowing pressurized gas to reach the outside. This in turn caused the external tank to dump its payload of liquid hydrogen causing a massive explosion. The cost of replacing the Space Shuttle was $2 billion in 1986 ($4.5 billion in today’s dollars). The cost of investigation, problem correction, and replacement of lost equipment cost $450 million from 1986-1987 ($1 Billion in today’s dollars).
#4 Prestige Oil Spill – $12 Billion
On November 13, 2002, the Prestige oil tanker was carrying 77,000 tons of heavy fuel oil when one of its twelve tanks burst during a storm off Galicia , Spain .. Fearing that the ship would sink, the captain called for help from Spanish rescue workers, expecting them to take the ship into harbour. However, pressure from local authorities forced the captain to steer the ship away from the coast. The captain tried to get help from the French and Portuguese authorities, but they too ordered the ship away from their shores. The storm eventually took its toll on the ship resulting in the tanker splitting in half and releasing 20 million gallons oil into the sea.
According to a report by the Pontevedra Economist Board, the total cleanup cost $12 billion.
#3 Space Shuttle Columbia - $13 Billion
The Space Shuttle Columbia was the first space worthy shuttle in NASA’s orbital fleet. It was destroyed during re-entry over Texas on February 1, 2003 after a hole was punctured in one of the wings during launch 16 days earlier. The original cost of the shuttle was $2 Billion in 1978. That comes out to $6.3 Billion in today’s dollars.. $500 million was spent on the investigation, making it the costliest aircraft accident investigation in history. The search and recovery of debris cost $300 million. In the end, the total cost of the accident (not including replacement of the shuttle) came out to $13 Billion according to the American Institute of Aeronautics and Astronautics..
#2 Chernobyl - $200 Billion
On April 26, 1986, the world witnessed the costliest accident in history. The Chernobyl disaster has been called the biggest socio-economic catastrophe in peacetime history. 50% of the area ofUkraine is in some way contaminated. Over 200,000 people had to be evacuated and resettled while 1.7 million people were directly affected by the disaster. The death toll attributed to Chernobyl, including people who died from cancer years later, is estimated at 125,000. The total costs including cleanup, resettlement, and compensation to victims has been estimated to be roughly $200 Billion. The cost of a new steel shelter for the Chernobyl nuclear plant will cost $2 billion alone. The accident was officially attributed to power plant operators who violated plant procedures and were ignorant of the safety requirements needed.
#1 Electing Obama President - $800 Billion in the first month….. (and counting)
I’m not trying to make a political statement here, but I am disgusted by the financial irresponsibility of our federal government and corporate America.
With all our forefathers did to give us the freedoms we enjoy today, I am extremely proud to call myself an American. I pray the leaders of this country, whether black, white, liberal or conservative, will not let their egos or greed get in the way of leading us out of our current economic recession.
Financial Ratios Part II: Debt Ratios
Debt Ratios can help determine what percent of assets are offset by debt and whether or not you can meet your current and long-term debt obligations.
Debt Ratio = Total Liabilities / Total Assets
The debt ratio tells you what percentage of your assets is financed with borrowed money. For example, if the only asset you owned was your home and you purchased it for $100,000 by borrowing $95,000 and putting $5,000 down, your debt ratio would be 95% ($95,000 (total liabilities) / $100,000 (total assets)). In essence, 95% of your assets have been financed through debt. The remaining 5% would be the “equity” you own in the home. If the ratio is ever above 1, it means you have negative networth. Having a negative networth means that if you were to sell all of your assets for what they are worth, you would not have enough to cover your debt.
As you track this ratio, you should see a downward trend. The closer the ratio is to zero, the better. When the ratio hits zero, you are debt free. Many investors may argue that you don’t want this ratio at zero because that means you’re not using the power of leverage. I agree there is a time and place for debt and the use of leverage, however, I also know there is nothing that can substitute freedom from debt.
Long-term Debt Coverage Ratio = Monthly Living Expenses / Monthly Debt Payments
The long-term debt coverage ratio tells you how many times over you could pay debt obligations based your monthly living expenses. I think a more useful way of looking at this ratio is to reverse the positions of the two expenses in the equation (Monthly Debt Payments / Monthly Living Expenses). This calculation actual gives you a percentage of your current monthly expenses that are made up of long-term debt.
For example, if your total monthly expenses equal $4,500 and your monthly payments on long-term debt obligations equals $1,950, your Long-Term Debt Coverage Ratio would equal (4,500/1,950) 2.31. Perhaps better said, 43.33% (1,950/4,500) of your monthly expenses are made up of long-term debt obligations.
Referring to the original equation, the higher the ratio the better. A higher ratio indicates that you could cover debt payments for a longer period of time if you had a loss of income. As you track this ratio you should see an upward trend. If you look at the ratio by the 2nd method you’ll want to see it as low as possible.
*For an explanation of the other ratios I use, check out my other financial ratio posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios).
June 2009 Spending Report
Another month past and a pretty ordinary month at that. Here are a few of the highlights.
Taxes – Because of the bonuses I relieved during the first couple months of the year and the requirement to tax them at the highest individual rate possible (35%) I thought I may have paid-in enough taxes. I ran a projected income to tax calculation and figured I didn’t need any more payroll tax withholding for the rest of the year. I made the adjustment to my W4 in May claiming “exempt” so my employer would stop withholding.
However, when I took a look at this month’s spending report and saw my taxes still at 6% it made me think. Although they are no longer withholding for Federal and State income tax purposes, I am still required to have taxes withheld for FICA purposes (Normally just above 7% for employee portion). I can’t believe that I am still paying 6% of my paycheck towards a program that I will never be able to participate in (that’s a discussion for another post). There are a lot of people that think if their effective tax rate is zero, they aren’t paying any taxes. As you can see, this isn’t the case.
Charity – We have been able to keep our giving at just above 10% which has been great considering the current economic conditions. We’d love to increase this in the future, but with our current situation this is what fits in the budget 
Freedom Week 2009
If you’ve missed it in the past, now’s your chance to get any of Dave Ramsey’s collection of just $10. It seems like this may be an annual event, as last year he had a very similar promotion. He is basically offering his entire collection for just $10 and under. They are also offering free shipping for orders over $65. If your order is less than $65, shipping is based on your State and zip code.
This is usually when I stock up on his New York Times Bestselling “The Total Money Makeover”. It may be lame, but I’ve found it to be a perfect wedding and graduation gift. Most people have very little knowledge as to how to manage their money and financially prepare for the future. In “The Total Money Makeover” Dave lays out a very simply to follow, 7 step plan, to eliminate debt and become financially independent. It’s not a get rich quick system, but if followed, it will lead you to financial freedom. I don’t necessarily agree with every concept in the book, but he does have some good points and lays out a plan anyone could follow.
Credit Karma Review
If you’ve ever done a google search for the term “Free Credit Report”, you’ll find dozens (if not hundreds) of sites offering a free credit report or free credit score. The only catch is, to get your free score, the sites require you to sign up for their credit report monitoring service. This monitoring services on the other hand, is not free. It usually carries a monthly service fee of anywhere between $5 – $20.
Credit Karma has decided to pull a 180 degree turn and truly offer a free credit score as well as a credit monitoring service. The approach they have taken to make this possible is similar to that of Mint.com and MoneyStrands.com. Rather than a monthly service fee there are affiliate offers presented based on your demographics/credit situation.
Because I’m a credit score nut and love to have a pulse on my own credit score I decided to give it a try and see what the buzz is about. It turns out the sign-up process was was a 3 Step process that was extremely simple and straight forward. Start by clicking the “Get Your Free Credit Score” button.
Step 1: Create Your Account – Enter your name, e-mail, a screen name and password.
Step 2: Confirm Your Email Address – After completing step 1 you will receive an email with a verification link to activate your account. Simply click the link to finish your account setup.
Step 3: Create Your Account – By clicking on the verification link you will be taken to step 3 of the account setup process. Here you will be required to enter somewhat personal information that allows them to pull your credit report from one of the 3 credit bureaus. They require a current address, phone number, birthday and social security number. I think the best part of the whole thing is that the don’t require a credit card.
In less than 5 mintues you’ll have an account setup and access to your current credit score.
After browsing through the site and the different tools available with an open account I saw a number of tools that may be useful. I think it could be a great tool for someone looking for a way to immediately improve their credit score.
However, one of the biggest disadvantages was that you can’t see your actual credit report. They break it down and show you what they think is most important, but I couldn’t find a way to download it myself. Also, I am not sure which credit bureau they requested my report from since I am only allowed one report per bureau per year..(I have already requested one from annualcreditreport.com myself this year).
Call me old fashion, but I think I am going to stick to pulling my credit score myself 3 times a year and doing my own monitoring. I will however, compile a few posts over the next week or so explaining some of the tools available within Credit Karma.
$50 Cash for Opening a Checking Account
1st Bank is currently running a promotion offering $50 for opening their free checking account. After seeing the offer I was expecting to see the regular stipulations when an offer like this is being promoted (i.e. direct deposit requirements, minimum balance requirements or a required number of debit card purchases each month).
However, after reading the fine print there aren’t any major stipulations. They require that you open the account with at least $50 and keep the account opened for a minimum of 6 months. The $50 bonus will be credited immediately upon opening the account. The account has no monthly balance requirements and no monthly services fees. One downfall may be that the free checking account is a non-interest bearing account so this won’t be a place to store much money. But for me it will work great, I will “invest” $50 for six months and get a 100% return on my money….not bad.
Here is a link to application
May 2009 Spending Report
It was another pretty standard month when it came to the budget and spending. After looking at the spending breakdown I realized that we are only living off of 18% of our monthly gross income. I guess with all things considered that is pretty good. I have never really looked or thought about it that way.
We have been doing good at keeping our savings over our goal of 15% of our monthly gross income. The bulk of the savings are actually going into our HSA account in preparation of our baby coming this fall. We also have my 401(k) contributions with my career.
May 2009 Financial Ratios
Another month past with no complaints here…
Month’s Living Expenses Covered Ratio: On goal that we would like to focus on over the next 3-6 months is getting our MLECR over 12 months. Although I’ve only got our goal (recommended) at 3-6 months we have decided that since we’ll be buying a bigger car in the future it’d be best if we could get this over 12 months since we’ll be taking a big chunk out to get a car. Starting in July we are switching health plans at my work so we will no longer have contributions to our HSA, but rather regular savings.
YTD% Growth: We are right on pace to hit our goal of 50% networth growth for the year. With 7 months to go we are more than halfway there. However, we are going to have to find a way to get another nice increase since we won’t have a tax refund during the second half of the year 
*For an explanation of my ratios and how they are calculated check out my 3 Financial Ratios posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios).
