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).

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.

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 2^nd 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).

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

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.

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).

May  Highlights

- We had about a $2,000 decrease in our savings account this month because we needed a little more cash to finish the backyard.  This should be the last time that we’ll need to dip into savings for a while.  We have finally finished all of the major fix-ups at the house and it’s finally starting to feel like home.  I think the next major withdrawal from savings will be for the purchase of our new car….well, not new, but our new-used car.

- It was a decent month for the stock market so we saw some decent growth in our IRA accounts.  I don’t really think this is going to last, but I’ll take it while it’s there.  The bulk of my IRA is still cash and I am still trying to debate how to re-allocate and invest the funds so if you’ve got any ideas please feel free to suggest.

– The giant increase in our credit card debt this month was due to the fact that we were finishing up the backyard.  Like always we will be paying it off in full at the end of the payment cycle, so it is a little deceiving.

To see the path to our current networth position check out the “Networth Page“

Another great month.  The ratios are exactly where we like to see them

YTD% Growth: We are now more than half way of hitting our goal of 50% networth growth for the year and we are only 4 months into the year.  Granted a big portion of that is because of the enormous tax return we got, but it is still nice to see such high growth so early in the year.  Also, we saw a second straight month of gains in our IRA and brokerage acconts which has been a good change from months past.

Emergency Fund Ratio: A.K.A. Month’s Living Expense Covered Ratio, is still growing steadily.  Although we are well above our goal of 6 months we are now shooting for a emergency fund of 12 months.  This means we will probably need to increase our emergency fund to about $30,000, but it will be a good security blanket if we are ever faced with a layoff or family emergency.  I’ve always felt like the more you’ve got set aside, the less likely something is to happen.  Or maybe it just seems that way because what would have been considered an “emergency” is now just a minor setback.

*For an explanation of my ratios and how they are calculated check out my 3 Financial Ratios posts (Liquidity Ratios, Debt Ratios, Saving Ratios).

April Highlights

- Finally the financial markets have decided to give back a little of the massive losses we have been suffering over the past year.  It was nice to have a second month in a row of increases in our equity accounts.  I may be a pessimist, but I don’t think we are quite out of the woods yet.  We may have bottomed out when the Dow hit around 6,500, but I think it’ll be a quite a few years before we are back above 10,000 levels.

- I have been keeping our house value constant since our purchase last December, but I think I may start to change the value every quarter or so.  This is one of those assets that is extremely hard to value until you actually sale it.  Right now I have simply valued it at what it appraised for which was about $20,000 more than the purchase price.  This may be a little aggressive so I’ve been looking at some different value models and may start using one of those in future months.  However, in the end it will still be just a guess, but I would assume it will be much more conservative than my current valuation.

– We did see a significant decrease in our cash account this month, but that was because we had a pretty decent size credit card balance that we had to pay off.  We are still trying to finish up the last few fix-ups around the house, so hopefully in the next couple of months we’ll have a lower outstanding balance at the end of each month.  Our last major project is the backyard and if all goes according to plan I’ll have that done, by the end of May.  We’ve decided on a budget of around $2,500 to finish the backyard.  This seems reasonable considering I’ve got to pretty much do everything from sprinklers and drain pipes to laying edging and sod.

- We hit the halfway mark of our goal to increase our Networth 50% for the year and we are only 1/3 through the year.  With a little help from the markets and continuing to follow our plan, we should be able to hit our goal.

To see the path to our current networth position as well as our other monthly statements check out the “Networth Page“

Another month past and our ratios are right in line with where we’d like them.

MTD% Networth Growth – FINALLY!!!  It’s been quite a while since we’ve seen an increase in our retirement/equity accounts.  Although the growth isn’t near what we’ve lost, we did see some increases this month.  Who knows if we have hit bottom or if this is just a lull in the recession, but whatever it is I’ll take it.  I know this is long-term investing money and I shouldn’t worry about it, but it’s hard to see investments drop by nearly 50% in a very short time period.  I guess only time will tell if this is going to be a sustained recovery or just a pause in the downfall.

Month’s Living Expenses Covered Ratio – We saw a pretty significant drop in our emergency fund coverage ratio from last month to this month.  The reason is because we had to take out about $3,000 for home repair projects.  We have been planning on doing these projects since we purchased our new home and now that the weather is getting nicer the time finally came to make the withdrawal.   We are hoping that by the end of the year we’ll have it back over 12 months.

*For an explanation of my ratios and how they are calculated check out my Financial Ratios posts (Liquidity Ratios, Debt Ratios, Saving Ratios, & Networth Ratios).