Your Financial Report Card - Debt, Reserves, and Wealth

2006-08-23

Return to Part 1 of Your Financial Report Card

Debt
Debt is debt. There is really no way around it. Do everything you can to payoff your debt as soon as possible. Give it the attention it needs and keep it under control. If your current ratio is greater than 1.0, your current assets are deemed sufficient to cover your current debts. The higher your current ratio the better financial situation you are in. To calculate your current ratio, use this simple formula:

current assets divided by current liabilities = current ratio

Current assets are defined as non retirement assets in the form of cash or can easily be converted to cash without penalties.

Current liabilities are short-term obligations due from 30 days to 5 years and include personal loans, car loans, etc. Many times these liabilities are tied to personal property.

Adequate Reserves
Being in good financial standing should allow you enough funds on hand to meet emergencies, honor your financial obligations on a monthly basis, prepare for your children’s college tuition costs, and prepare for retirement. If you are lacking in one of these categories, adjustments to your financial plan needs to be made.

Your Emergency Fund Ratio (EFR) is the amount of time you could pay your financial obligations if you lost all your income, without touching your retirement funds. To find your EFR, use the following:

Current Liquid Assets divided by your monthly nondiscretionary expenses = EFR

Many financial experts say 6 months is a good EFR to have. This would mean your family could survive for six months with no income at all.

Wealth Accumulation Rate
Examine you’re the rate at which you are accumulating wealth. If there is little to no inflow into your wealth accumulation, then adjustments may need to be made. For example if you earn $50,000 per year and manage to save $10,000 per year in retirement accounts and non-retirement accounts, your WAR is 20%. Most financial planners recommend a minimum WAR of 10%.

Continue to Part 3 of Your Financial Report Card

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