5 ratios to measure your financial health

Feeling that "the money never stretches" doesn't tell you where the problem is. Five simple divisions do. You need four figures: what you own, what you owe, what you earn and what you spend each month.

We'll use the same example throughout: €50,000 of assets (including €3,000 in accounts), €15,000 of debt (€750 due in the coming months), €2,000 gross and €1,500 take-home pay, €1,500 of monthly expenses, €180 of loan payments (not counting the mortgage) and €150 saved each month.

1. Debt ratio

Debts divided by assets. In the example, 15,000 / 50,000 = 0.30: for every euro you own, you owe 30 cents. Lower is better. A figure that rises year after year is a warning sign.

2. Current ratio

Available cash divided by short-term debts. In the example, 3,000 / 750 = 4: you have €4 available for every euro falling due soon. Below 1, you can't pay what is due without selling something or borrowing.

3. Months of reserves

Available cash divided by monthly expenses. In the example, 3,000 / 1,500 = 2 months. That is how long you could last without income. The usual guideline is three to six months, so this example still has some way to go.

4. Debt payments ratio

Loan payments (not counting the mortgage) divided by take-home pay. In the example, 180 / 1,500 = 12%. A common guideline is to stay below 20%. For mortgages, banks apply their own affordability criteria, which include all repayments.

5. Savings rate

Monthly savings divided by gross income. In the example, 150 / 2,000 = 7.5%. Saving 5% to 10% is a good start, and more is better. If this figure is zero, this is where to begin.

How to use these numbers

• Work them out twice a year and compare with last time: the direction matters more than the value.
• Pick one ratio to improve at a time. In the example, it would be building reserves to three months.
• Remember they are guidelines, not rules. Your situation, job stability and family all matter.

The hardest part is knowing what you spend each month. In FinanceFlow, the free plan already shows the month's expenses by category. Paid plans add advanced statistics with totals by period, and let you export your transactions to CSV to do these calculations in a spreadsheet.