But these statements were just a list of items and figures.

Amy needed to dig deeper and do some maths to understand the implications and inform fully her decisions about her money and life.

So Amy, under my guidance, used the figures to calculate eight critical financial ratios. At the same time, we discussed which way the financial wind was blowing for Amy and what ratios she felt would be acceptable in light of her life’s goals.

Goal ratios

These ratios tell you how close you are to achieving key goals and reflect the degree to which you are financially independent.

Savings Ratio
Monthly savings / gross monthly income
A high percentage may mean you emphasise long-term security at the expense of living life to the full today. Do you want to live for today, tomorrow, or somewhere between? Plan to bring this ratio into line with your goals.

Savings to Income
Total savings and investments / annual gross income
You would expect this to grow during your working lifetime, especially if you run a good to high savings ratio. You must ask yourself how much is enough to meet your long-term goals.

Asset mix
Readily realisable assets / illiquid assets
Readily realisable assets can quickly be turned into cash in the bank without significant tax. Illiquid assets include unconventional investments and property. This ratio will tell you if you are asset-rich and cash-poor, which can be uncomfortable.

Security ratios

These ratios tell you about your short-, medium- and longer-term security. They will flag areas where you might be vulnerable to shocks and changing circumstances. Debt and liquidity feature strongly here.

Liquidity
Cash / monthly core expenditure
Do you have a security fund that you can draw on within 24 hours? How many months of core expenditure does it cover? Is this sufficient?

Debt to income
Total debts / gross annual income
What is the size of your debt relative to your income? This figure should fall throughout your life.

Debt to assets
Total liabilities / total assets
What are your liabilities relative to your total assets? In other words, how much equity is available? Are you comfortable with this, or should you fix another figure to aim for?

Debt servicing costs
Gross monthly income / total monthly debt servicing costs
What is the cost of servicing your debt relative to your income? How much of your income is allocated to debt payments, and how much do your debt repayments leave for you to live?

Debt servicing reserve
Cash or liquid assets / total monthly debt servicing costs
How many months’ debt servicing costs are covered by cash and liquid assets?

The magic is in the story

Notice how the key ratios exercise is helping Amy relate her money to her life. The math here is essential, but you will see that we are also asking questions about Amy’s relationship with money and the emotions around money, such as, “Are you happy with this figure?” or “Is this enough or too much/too little?” It is only a short step to looking at the story the figures tell, and this is where the magic of money happens.

Photo attribution

Photo by Jordan Ladikos on Unsplash

Audio link

https://audio.com/jeremy_deedes/***/

Other attributions and references

Farrell, Charles. Personal Financial Ratios: An Elegant Roadmap to Financial Health and Retirement. Journal of Financial Planning, January 2006.

Taking it further

Use these templates to help you make a start. It will take a bit of work, but the outcome will be a sense of peace and calm from knowing where you stand. Even if it is bad, you can make informed decisions and draw up a plan to deal with the situation.

Family financial statements template: https://shrtm.nu/wAm

Family key ratios template: https://shrtm.nu/wAl

Related posts

How to find financial calm in four revealing steps
https://wordsnotdeeds.co.uk/financial-calm/
Find financial calm in these four revealing statements and make informed decisions about what to do with your life and money.

ABOUT

I work with ambitious, family-oriented professionals transitioning to independent consultants to create a 3 to 5-year holistic plan so that they grow wealthy, make a difference and find meaning.

My clients are aged 35-50. They are in a long-term relationship with family and parents who are supportive but ageing. They wrestle with personal and financial responsibilities and dream of more control, wealth, time and purpose.

If this excites you, you are coachable, willing to change, and want to stop going around in circles, then find out more at jeremydeedes.com

Then, take your next step and explore your way forward with a Mapmaker, a one-off online coaching gig to help you decide your options, assess our compatibility, and determine whether we are the right fit. Mapmaker is excellent value, held in confidence and without further commitment.

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Your views are important, and your fellow readers would love to hear your opinion, so share your thoughts in the comments box below, and thank you for your time and generosity.