Financial Ratios: Liquidity, Asset-to-Debt, Debt-to-Income & Investment Ratios

Liquidity Ratio

Measures if there is enough cash on hand for emergencies.

Liquidity Ratio Calculation

Monetary assets ÷ monthly expenses.

Liquidity Ratio Goal

A ratio of 3.0 to 6.0 (three to six months of expenses) is preferred.

Asset-to-Debt Ratio

Determines if total assets can cover total debt obligations.

Asset-to-Debt Ratio Calculation

Total assets ÷ total debt.

Asset-to-Debt Ratio Goal

A high ratio is desirable, indicating high financial liquidity.

Debt-to-Income Ratio

Assesses if the total debt burden is too high relative to income.

Debt-to-Income Ratio Calculation

Annual debt repayments ÷ gross income.

Debt-to-Income Ratio Goal

Should be 36% or less and should decline as one ages.

Debt Payments-to-Disposable Income Ratio

Measures the stress level of non-mortgage debt.

Debt Payments-to-Disposable Income Ratio Calculation

Monthly non-mortgage debt payments ÷ monthly disposable (net) income.

Debt Payments-to-Disposable Income Ratio Goal

14% or less is desirable; 15% or more is considered problematic.

Investment Assets-to-Total Assets Ratio

Tracks progress toward financial goals and wealth growth.

Investment Assets-to-Total Assets Ratio Calculation

Investment assets ÷ total assets.

Investment Assets-to-Total Assets Ratio Goal

This ratio should rise sharply as one approaches retirement.