Financial Ratios

As a college student, managing your finances can be challenging. You're juggling a full course load, various jobs, social activities, and trying to make the most of your time on campus. It's easy to get caught up in the excitement of college life and forget about your finances, but that can lead to problems down the road. That's why it's essential to know some useful financial ratios to help you manage your money effectively. 

Here are some financial ratios every college student should know:

1. Debt-to-Income Ratio

The debt-to-income ratio is a measure of your ability to pay back debts. It's calculated by dividing your total monthly debt payments by your gross monthly income. A good rule of thumb is to keep your debt-to-income ratio below 36%. If your ratio is higher than that, it may be a sign that you're taking on too much debt.  

2. Savings Ratio

The savings ratio measures the amount of money you save each month as a percentage of your income. It's calculated by dividing your monthly savings by your gross monthly income. A good target for your savings ratio is 20%. If you're not currently saving 20% of your income, try to work towards that goal over time. 

3. Net Worth

Your net worth is a measure of your financial health. It's calculated by subtracting your total liabilities (debts) from your total assets. Your assets include things like cash, investments, and property, while your liabilities include things like student loans and credit card debt. Ideally, you want your net worth to be positive, which means you have more assets than liabilities. 

4. Credit Utilization Ratio

Your credit utilization ratio is a measure of how much of your available credit you're using. It's calculated by dividing your total credit card balances by your total credit card limits. A good rule of thumb is to keep your credit utilization ratio below 30%. If your ratio is higher than that, it can negatively impact your credit score. 

5. Return on Investment

Return on investment (ROI) is a measure of how much money you're earning on your investments. It's calculated by dividing your investment's gain or loss by the initial investment. A positive ROI means you're earning money on your investment, while a negative ROI means you're losing money. Understanding ROI can help you make more informed investment decisions. The biggest Investment a college student has is their investment in higher education. Investing in a degree sets students apart from those who don’t go to college with the potential for higher earnings and broad employment options. 

6. Emergency Fund Ratio

Building an emergency fund while in college is crucial in creating a safety net for when you need it most. It is calculated by dividing your total cash on hand by your monthly nondiscretionary expenses. Experts suggest having 3 to 6 months’ worth of non-discretionary expenses in an emergency fund that you can use in the event of a job loss or large, unexpected expense.

In conclusion, managing your finances as a college student is crucial for your future financial well-being. Understanding these financial ratios can help you make informed decisions about your money and avoid common financial pitfalls. By keeping these ratios in mind, you can set yourself up for financial success both during and after college. 

---

The Financial Wellness Center offers financial counseling to all students, staff and alumni. We are happy to assist those who need help with their financial needs, goals, and wellness. Visiting the Financial Wellness Center bears no extra costs to you and everything within our office is confidential.  

 

Blog Search