Savings And Debt Ratios

Wondering how much to save or how much debt is “normal”?

The truth is there is no one size fits all. Only you know your financial situation.

But when I was studying to become a CFP® professional studying, I learned recommended “savings and debt ratios”.

That’s what’s listed below. These are the figures experts general give as guidelines.

I’m focused on getting out of student loan debt, so these numbers don’t apply to my situation. This is a perfect example of taking the information and making it work for you.

So, take a look and use what makes sense but don’t take it as Gospel.

Here’s a look at!


Debt Ratios

In general, there are three debt-to-income ratios: consumer debt, housing debt, and total debt.

These ratios are used to determine, in part, how you’re doing financially. As part of taking financial inventory and budgeting, you’ll want to know your debt ratios. Note that some ratios compare monthly payments to gross income (before taxes) whereas others compare to net income (take-home pay).


Consumer Debt Ratio

Definition: Your consumer debt ratio is your debt other than housing and student loans, i.e. your credit cards, auto loans, and medical debt.

Percentage: Generally, your consumer debt ratio should not exceed 20% of net income. An “excellent” consumer debt ratio is 10% or less.

Calculation: To determine your consumer debt ratio, divide your monthly debt payments by your monthly take home pay.


Housing Debt Ratio

Definition: Your housing ratio is your housing debt, including principle, interest, taxes, and insurance (PITI). For renters, housing includes rent and insurance.

Percentage: Your housing ratio should be under 28% of gross income.

Calculation: To figure out your housing ratio, divide your PITI by your monthly gross income.


Total Debt Ratio

Definition: Your total debt ratio combines your consumer debt and housing debt, along with any other debts, including personal loans, student loans, etc.

Percentage: The recommended total debt ratio is under 36% of gross income.

Calculation: To determine your total debt ratio, divide your total debt payments by your gross monthly income.


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Savings Ratios

Now, let’s take a look at the emergency fund savings and total savings recommendations. (Because what you save for retirement is based on a number of personal factors, there is no general retirement savings percentage, so you won’t find that here.)


Emergency Fund

Definition: Your emergency fund is a savings account that you can easily access in case of an emergency (e.g., job loss, car accident, injury, etc.). It’s your financial “cushion”.

Percentage: The recommendation here is to have between 3 and 6 months of expenses saved in an emergency fund. Whether you’re on the 3 month end of things or the 6 month end depends on your specific situation. One factor is whether you have one or two incomes in your household. The more incomes, the more fewer months you’ll need saved.

Calculation: To determine what “3 to 6 months” of expenses looks like, figure out what it costs to live for 1 month and multiply that by 3 and 6. Somewhere in between those numbers is the suggested emergency fund amount. Note, that you don’t include any of your taxes, retirement, or other automatic withdraws from your paycheck in your monthly expenses here. Only add up what you’d have to pay if you lost your job (housing costs, utilities, loans, groceries, gas, etc.).


Total Monthly Savings

Definition: Your total savings is what you put into savings, investments, and retirement every month.

Percentage: Generally, for a young professional who starts saving before age 32, saving between 10-12% of your gross income is recommended. For people who start saving when they’re older, this percentage jumps to the 15-20% range. But this is just based purely on a general recommendation. Determining what you should contribute to retirement varies greatly based on your income, tax bracket, investments, and a number of other things.

Calculation: To calculate your monthly savings, multiply your gross monthly income (i.e. before tax income) by .12 to see what you should be saving monthly at 12%. For example, someone earning $5,000 pre-tax, would want to save $600 / month, split between her savings and retirement (5,000 x .12 = 600) using this guideline.


Looking for more to read on saving money? Check these out… 


A Final Note!

Okay, let’s recap! Here are the 5 savings and debt ratios to keep in mind:

  1. Consumer debt: < 20% of net income
  2. Housing debt: < 28% of gross income
  3. Total debt: < 36% of gross income
  4. Emergency fund: 3-6 months of non-discretionary expenses
  5. Total savings: 10-12% gross income if you started saving before age 32.

Only you know your financial situation, so you may not fall into all of these categories. But keep them in mind!