When it comes to managing your money, it’s not just about how much you earn—it’s about how you manage and protect what you have. Just like doctors use vital signs to assess health, there are financial “vital signs” that tell you how secure and prepared you are. These vital signs come in the form of financial ratios.

Below, we’ll break down 5 powerful ratios you can use to measure your financial health, what the ideal indicators are, and examples to help you apply them.

1. Debt-to-Income Ratio (DTI)

What it measures: How much of your monthly income goes toward debt payments.

• Formula: Debt Payments ÷ Gross Monthly Income

• Good Indicator: Less than 36% is considered healthy. Under 28% is excellent.

• Example: If your monthly income is $6,000 and you pay $1,500 in mortgage, car, and credit card payments:

  DTI=1500÷6000=25%

  ✅ Healthy—below 28%.

Why it matters: A lower DTI means you have more flexibility for savings, investments, and emergencies.

2. Emergency Fund Ratio

What it measures: How many months of living expenses you can cover with your liquid savings.

• Formula: Emergency Savings ÷ Monthly Living Expenses

• Good Indicator: 3–6 months of expenses in savings.

• Example:

  Monthly expenses = $4,000

  Emergency savings = $16,000

  Emergency Fund Ratio=16,000÷4,000=4 months

  
  

  ✅ Good—enough to cover 4 months of expenses.

  
  

Why it matters: An emergency fund protects you against job loss, medical bills, or unexpected expenses without going into debt.

3. Liquid Net Worth Ratio

What it measures: How much of your net worth is liquid (cash or investments that can be easily accessed).

• Formula: Liquid Assets ÷ Total Net Worth

• Good Indicator: At least 20–30% of your net worth should be liquid.

• Example: Total net worth = $250,000 (home, 401k, savings, etc.)Liquid assets = $70,000 (savings + brokerage)

  Liquid Net Worth Ratio=70,000÷250,000=28%

  
  

  ✅ Healthy—above 20%.

  
  

Why it matters: Liquidity ensures you can handle short-term needs without selling long-term assets at the wrong time.

4. Life Insurance Coverage Ratio

What it measures: Whether your life insurance coverage is enough to replace your income and support your family.

• Formula: Life Insurance Coverage ÷ Annual Income

• Good Indicator: 7–10× annual income.

• Example: Annual income = $100,000

  Life insurance coverage = $800,000

  Life Insurance Coverage Ratio=800,000÷100,000=8

  ✅ On target—provides 8 years of income replacement.

Why it matters: Adequate life insurance ensures your loved ones can pay off debts, fund college, and maintain their lifestyle if something happens to you.

5. Investment Ratio

What it measures: How much of your income you’re investing toward long-term goals (retirement, wealth building).

• Formula: Annual Investments ÷ Annual Income

• Good Indicator: At least 15–20% of your income invested.

• Example:

  Annual income = $120,000

  Annual investments = $18,000 (401k + brokerage)

  
  

  Investment Ratio=18,000÷120,000=15%

  ✅ Good—building long-term wealth.

Why it matters: Consistent investing helps grow your wealth over time and ensures financial independence.

Final Thoughts

Strong financial health isn’t about perfection—it’s about balance. By monitoring these 5 key financial ratios, you can:

• Control debt

• Build an emergency cushion

• Keep your net worth flexible

• Protect your family with life insurance

• Invest consistently for the future