As an investor, understanding financial ratios is important to help assess the current state of a company. For example, we have P/E ratios, debt/equity ratios, EV/EBITDA ratios, interest coverage ratios, and so many more. We then compare each ratio to another company’s financial ratio to make a more informed investment decision.
As someone who worked in the investing field for 13 years and got my MBA, I can’t help but think of everything relative to another. Therefore, since starting Financial Samurai in 2009, I’ve come up with a whole host of personal finance ratios to help readers and listeners build wealth.
These ratios are designed to help people spend, invest, and save more responsibly, with the ultimate goal of achieving financial freedom sooner. It’s harder to see where you stand in a vacuum. By comparing one thing to another, you get a better idea of how to optimize your financial decisions.
The Most Important Personal Finance Ratio For Most People
As I reviewed all the personal finance ratios I’ve developed, I believe the most important personal finance ratio is the House-To-Car Ratio. Since everyone needs a place to live and over 90% of the American population owns a car, my House-To-Car Ratio is relevant for practically everyone.
Yes, your saving rate is crucial for financial freedom. Everyone knows that the more you save and invest, the greater your chances of building above-average wealth. However, my House-To-Car Ratio goes a step further because we ultimately save and invest to buy things. And two of the most common things we buy are houses and cars.
Hence, if you don’t think my House-To-Car Ratio is the most important, it is at least the most relevant.
Personal Finance Ratios Help You Build More Wealth
To build wealth, we must allocate our capital wisely. The more
