For personal finance DIY’ers, trusting the long term effects of financial decisions can be difficult. Even when everything makes sense on paper, it isn’t always easy to know if we’re making the right call, financially. Markets can rise and fall. Investments can spoil. Dreams can change. As we progress through the long term unknown, the decisions we make in the meantime will likely shine or dim along with the changing conditions.

Despite the odds, it’s always a good idea to orient your investments and savings towards the goals we have, if at least for now. It’s also wise to check on these goals and the progress made from time to time. So long as the goal remains in place and the progress remains healthy, this can create a remarkably peaceful feeling among the uncertainty.

But what if our goals are less clear? Also, what if we are too young to galvanize long term goals? After all, it’s difficult to know exactly what we’ll want in retirement when we’re still young. Also, for those facing tough transitions in life such as illness, death, divorce, job change, suddenly the goals we had in place maybe aren’t so clear. Or at least put on hold.

The good news is, there is help.

Later in this piece, we’ll look at a very general way to measure your financial progress. Before we get there, let’s talk ratios.

Personal finance ratios can help us when our financial goals are less clear. They help answer the question, “am I saving enough?” or “am I spending too much on a house?” They operate as an answer to common concerns absent any other financial input.

Probably the most useful part of these ratios is the elimination of comparison to others. That is, when trying to decide how much house you can afford, one of the most compelling influences can be the types and values of homes owned by peers. The wonderful thing about ratios is that they can help you disregard unhelpful social comparisons and measure your financial ability and progress independently. Let’s look at a few of the most commonly referenced financial ratios.

Common Ratios

The 50/30/20 budget rule: The broadest popular financial ratio.

This idea attempts to advise, generally, how your spending should be allocated in your budget. First, it recommends that 50% of your spending should go towards needs (housing, groceries, utilities, health care, debt payments, etc). The next 30% should go towards wants (eating out, vacations, discretionary spending, etc) and the final 20% towards savings (emergency fund, retirement, general savings).

Emergency Fund Ratio: Do you have enough to weather the storm?

This ratio helps advise us how much we should have set aside for a rainy day. Unlike the 50/30/20 rule above, this ratio does not have the benchmark built into the title. The benchmark, as typically advised, is 3-6 months worth of total expenses set aside and used only for emergencies such as unemployment, large home/car repairs, or unexpected medical bills. Variations on the 3-6 month benchmark usually stretch the goal to 6-12 months for self-employed or those in volatile industries. Also, some users choose to cover only fixed mandatory expenses with the idea that discretionary spending can be paused if needed.

Savings Ratio (AKA Savings Rate): Are you saving enough every month?

This ratio suggests putting away 20% of your gross income towards savings. This can be retirement savings, general savings, or investing in a liquid brokerage. The nice thing about this goal is that it overlaps nicely with the previously mentioned ratios. Remember the “20” in the 50/30/20? Also, saving 20% of gross income can fill up your emergency fund very quickly.

Debt to Income ratio: Can you handle your debt payments?

This ratio helps you weigh whether or not too much of your income is being put towards debt payments. The calculation is relatively simple. It is your total monthly debt payments divided by your gross monthly income. Once you have your number, compare it with the benchmark of 36%. Any higher than 36% and you may have too much debt relative to your level of income. Anything below the benchmark indicates that you’re on the right path. The lower, the better.

Housing Ratio: Did I buy too much house?

Nested within the debt to income ratio, is the housing ratio. I say that because our mortgage (debt) payment is included in our total debt payments used above. However, if we isolate our mortgage debt payment and divide it by our gross monthly income, we get our housing ratio. The benchmark for this ratio is 28%. Once again, the lower the better.

If you’re meeting every benchmark above, you’re probably in great shape, or you will be before long. However, remember when I said these ratios exist minus any other financial data? That is because they intend to serve as general rules of thumb rather than curated financial advice. How you choose to apply these ratios depends on your individual circumstance and your benchmark may be wildly different.

For instance, for a young couple seeking F.I.R.E. (financially independent retire early), the savings goal of 20% may be way too low. They may push as high as 50% or higher in their pursuit of early freedom.

Likewise, young parents who find a home next door to a perfect elementary school, a few miles from grandparents, and within a desirable community, perhaps won’t be as worried about a 28% housing ratio. If they are both expecting rapid, stable income growth, maybe stretching this ratio in the short term isn’t a concern compared to the invaluable benefits.

And finally, what about those who saved aggressively and find that their dream retirement is already funded, along with a healthy emergency fund? Should they still worry about saving 20% until they eventually retire?

Asset to Liability Ratio

If you find yourself reasonably questioning how one or more of these ratios apply to you, then perhaps taking a step back and viewing the larger picture may help.

This is where your asset to liability ratio comes in. This ratio simply measures how much you own compared to how much you owe. It is calculated by dividing your assets by your liabilities. In layman’s terms, take everything you own and divide by all of your debt. Your assets include your savings, investments, home value, car value, jewelry, and anything else you possess. Yes, even if you have debt taken out against them (mortgage, etc). The debt is simple. The balance of everything you owe.

An asset to liability ratio of 1 indicates that you have just as many assets as liabilities. This may sound good, but it is a tipping point in either direction. You can quickly slide below 1 or compound your way higher. The standard benchmark for this ratio is 2 and beyond.

Your Net Worth

Your asset to liability ratio strongly correlates to your net worth. Since your net worth is your assets minus liabilities, an asset to liability ratio of 1 indicates that you have a net worth of $0. See? Not so good. Even worse, an asset to liability ratio of less than one indicates a negative net worth and possible trouble ahead.

Tracking your net worth

The great thing about net worth is that it can be very valuable in a few different ways. Primarily it acts as a snapshot of wealth. It is value of everything you actually own. Or as I put it in “Principles of Prosperity” what you would have left should you sell everything and live under a bridge.

What I like about tracking net worth is that it can be an indicator of financial growth independent of financial ratios. Even if you aren’t meeting the benchmarks above, you can find comfort in consistent net worth growth. In other words, even if you aren’t doing everything right, you’re likely doing something right.

The net worth payment

As we assess the bigger picture far above the ratios, you can measure your progress in a few ways. Of course, monitoring your net worth every month or so is a good start.

However, as we decide from month to month on savings, debt payments, and so on, there is another unique way to perceive how your decisions impact your overall wealth. That is to factor your net worth payment.

In the simplest form, your net worth payment is every dollar saved (doesn’t matter if it’s savings, 401k, IRA, etc) plus the amount of debt payment that is applied towards principal.

Savings + Debt Payments Applied to Principal = Net Worth Payment

Admittedly, “debt payments applied to principal” doesn’t sound like a fun chore. Don’t let it scare you. On your mortgage statement, you can usually find it under the payment breakdown. For other loans, you might have to do a little math. If you divide the interest rate by 12 and multiply it by your outstanding principal, then you have the amount paid to interest. From there, just subtract it from your payment and you’ll have the payment applied to principal! (For mortgages, make sure to exclude any escrow amounts)

Let’s say Joey wants to find his net worth payment. Here are his monthly details

$1,237 paid towards mortgage principal as reported on his mortgage statement.
$400 saved in high yield savings
$100 saved in an HSA account
$550 saved in a 401K
$223.75 ($250 payment made on a 5.25% car loan with a $6,000 principal balance)
$63.92 ($75 payment made on a 13.99% credit card with a $950 principal balance)

Added together, Joey has a net worth payment of $2,574.67. This is the immediate effect of these payments on Joey’s net worth. Absent any change in investments or home value, Joey’s net worth will immediately improve by over $2,500 from these payments.

Notice we didn’t say anything about ratios? He can certainly check ratios, but if some or any don’t apply to his situation, at least knows the power of his net worth payment

Extra Credit

If you want to be even more accurate, feel free to add interest and dividends earned from savings and investments. After all, if reinvested, those are payments that immediately impact net worth as well.

Still want more? If you decide to add payments on top of minimum debt payments, you can calculate the extra interest saved and a present value of all future saved interest payments. Now we’re talking. Reach out to ask how.

By adding these advanced ideas, you can begin to play around with how putting more money towards different savings and debts can affect your overall net worth. Is money best spent towards a low interest rate mortgage or a high yield savings? These advanced steps can help.

Need a Benchmark?

Figuring your net worth payment and tracking your net worth is a great way to capture a comprehensive snapshot and your progress. For those wanting a benchmark regarding net worth growth, there are a few ideas out there.

Keep pace with inflation: This is a baseline goal, ensuring your net worth isn’t shrinking as compared to overall price inflation
Pick your index benchmark: If you’re more investment-minded, picking a stock index and attempting to match annual returns to your personal growth might be a good idea. This idea also provides some grace in down market years. If much of your wealth is invested, watching your net worth decline despite significant net worth payments can be frustrating. Comparing to stock returns can paint a more reasonable picture.
10% annual: If you’re a generalist, 10% annual (or ~ 0.83%/mo) growth may be a reasonable goal. Just remember that this may be too low early in life. Likewise, in later years when your net worth is high, matching this goal may be unreasonable.

Progress is Progress

The ratios I mentioned above are just a glimpse of the financial rules of thumb out there. Using these (and others) to see how you measure up is a great way to spot deficiencies or something you’ve been neglecting. However, don’t forget to step back from time to time and acknowledge the growth you have achieved. After all, enjoying our success from time to time may be the encouragement we need, even if our housing ratio isn’t perfect. The net worth payment is here to help.

Working with a financial planner who understands the unique challenges and benefits of military families can prove invaluable. The financial planners at Military Financial Advisors Association understand your life and can help you develop a personalized financial plan, navigate complex financial decisions, and stay on track toward your family’s goals.

Act Now, Become Debt Free with PSLF!

You could save you thousands of dollars thanks to temporary changes to the Public Service Loan Forgiveness (PSLF) program. The Department of Education announced the Limited Waiver Program last fall. But time is running out! Military service members and federal employees need to act before October 31, 2022 to cash in.

Who is eligible for PSLF?

The PS in PSLF stands for public service. Full time (active duty) service members are all eligible. So are those of you working full time for state governments and most non-profits. This includes hospitals, schools, libraries, emergency services, and public interest law. Public Service depends on the organization you work for, not the actual job you do.

What is PSLF?

The LF in PSLF stands for Loan Forgiveness. That means as long as you make 120 qualifying student loan payments (that’s 10 year’s worth) you won’t have to repay the rest of your student loan balance. “Poof” your student loan payments disappear! No more debt. And you won’t owe tax on the loan forgiveness benefit you receive either. This can be a massive value depending on your circumstances.

How to Participate?

You work for a qualifying employer full-time (see above). You have federal Direct Loans. Once you make 120 on-time monthly loan payments to a qualifying loan, you apply for forgiveness.

Federal Family Education Loans, Federal Perkins Loans, and Graduate Plus Loans are NOT federal Direct Loans. Loan payments under those programs didn’t count toward forgiveness. To qualify now, you must consolidate those loans into a federal Direct Loan.

If you were late to the consolidation party, you may have made months or years of federal loan payments that didn’t count toward forgiveness. Don’t dismay. Read on to the Temporary changes.

Why the changes?

It turned out in practice, PSLF was an unfulfilled promise. The goal was to provide debt relief to public servants by cancelling student loans after 10 years. But many borrows didn’t understand the requirements, were misled by loan servicing providers, or never even qualified in the first place. The Department of Education denied loan forgiveness to almost all initial PSLF applicants. Recent changes are supposed to correct some of this and fulfill the PSLF promise.

What has changed with PSLF?

Temporary Change #1 (Almost) All Past Loan Types Can Count

Good news. If you consolidate your federal student loans now, any payments you made in the past in will count toward your 120 payments. BUT only if you consolidate to a federal Direct Loan by October 31, 2022. This do over is a limited time opportunity!

Don’t know what kind of federal loans you have? Log into your account on StudentAid.gov https://studentaid.gov/fsa-id/sign-in/landing . Go to the My Aid page StudentAid.gov/aid-summary/. Scroll down to the Loan Breakdown section. There, you’ll see a list of each student loan you have borrowed, even if you have paid the loan off or consolidated it into a new loan. Direct Loans begin with the word “Direct.” This is what you want.

If you have Federal Family Education Loans (start with “FFEL”) or Perkins Loans (include the word “Perkins”) consolidate–DON’T refinance. Consolidate into a federal Direct Loan by October 31, 2022. Get all the details for consolidation at https://studentaid.gov/app/launchConsolidation.action.

Once you consolidate your loans into a Direct Loan, your previous payments will count toward PSLF retroactively. You could have your loan balance forgiven months or even years sooner.

Note, Parent Plus loans did not qualify before, can’t be consolidated into a Direct Loan, and still won’t qualify now.

Temporary change #2 Any Past Payment Plan Qualifies for PSLF

Past payments under any repayment plan now count toward loan forgiveness. You have to enroll in an Income Driven Repayment (IDR) plan like ICR, IBR, PAYE, and REPAYE payment plans to benefit from PSLF.

Now PAST payments made under any repayment plan count toward your 120 payments. These payments are supposed to be automatically recounted, but you’ll want to keep an eye on it.

If you’re not in an Income Driven Repayment now, change to one so future payments will also count.

Temporary Change #3 All Past Payments Can Count towards PSLF

Many previous loan payments did not count toward PSLF due to technical requirements. This includes wrong payment plan, timing, or amount of a payment. Some borrowers missed out because their payments were off by one or two pennies or late by a few days.

As a fix, the Department of Education will automatically adjust the count for payments made on or before October 31, 2021 if you have certified some employment. This look back is a temporary benefit. If you have not applied for PSLF forgiveness or certified employment, do it by October 31, 2022 to get all those payments counted.

Service members on active duty can qualify for student loan deferments and forbearances. This is to help you through periods where service inhibits your ability to make payments. But often in the past, those same deferments or forbearances did not count toward PSLF. Federal Student Aid is supposed to implement a process to address this and update affected borrowers. Watch out for this too.

And one last improvement coming down the pike. The Department of Education announced it will begin automatically giving service members and federal employees credit for PSLF by matching Department of Education data with information held by other federal agencies. So be on the look out for that! In the meantime keep rectifying your employment history.

More Help on PSLF

Where can you go for more information? You can read the entire Department of Education announcement: https://www.ed.gov/news/press-releases/fact-sheet-public-service-loan-forgiveness-pslf-program-overhaul

For help with all things PSLF, tons of helpful information, and the PSLF application, go to the official website at https://studentaid.gov/pslf/

Act Now to Qualify!

#1 You must work for a qualifying employer such as the military, state and federal governments and most non-profit organizations.

#2 You must work full-time.

#3 You must have federal direct loans. If you have other federal student loans, consolidate into a direct loan before October 31, 2022.

#4 You must be in an Income Driven Repayment (IDR) plan. If you aren’t in IDR yet, switch by October 31, 2022.

#4 Make 120 on-time monthly payments. Under the temporary waiver all virtually all past payments will count. This one time boost may help push you over the line sooner than you think!