A Comprehensive Guide to Financial Ratios: How to Know If Your Expenses Are in Line with Your Means
A Comprehensive Guide to Financial Ratios: How to Know If Your Expenses Are in Line with Your Means
Why Ratios Matter in Personal Finance
Financial ratios — the percentage of your income allocated to key categories — are powerful because they:
- Give structure to your budget
- Help you assess affordability (e.g., “Can I really afford this car?”)
- Expose hidden risks (too much house, too little savings, too much debt)
- Provide benchmarks for different income levels and financial maturity
Rather than guessing what “feels reasonable,” using ratio-based benchmarks gives you clarity and discipline. This aligns well with Lionhood Financial’s values of ownership, stewardship, and long-term strategy.
Key Ratios to Know (and Why They Are Important)
Here are some of the most widely recommended budget ratios, supported by expert advice and research — and how to apply them in your life.
| Expense Category | Recommended Ratio | Why This Range Makes Sense |
|---|---|---|
| Housing (Mortgage / Rent) | ~ 25% of income | Avoid being “house-poor.” (Dave Ramsey) |
| Food (Groceries + Dining) | 10%–15% | Covers home cooking and moderate dining out. (Frugal Rules) |
| Utilities | 5%–10% | Covers electricity, water, gas, and other basic living costs. |
| Transportation | ~10%–15% | Includes car payments, fuel, and maintenance. Too much here can crowd out essentials. (Flavor 365) |
| Savings / Investing | 10% | Builds emergency funds, retirement, and future growth. (Making Frugal Fun) |
| Giving / Charity | 10% | Charitable giving as part of a healthy budget. (Frugal Rules) |
| Insurance & Health | 5%–10% for health; 10%–25% for insurance | Covers health premiums, life insurance, and other policies. |
| Personal / Discretionary / Recreation | 5%–10% | Money for hobbies, personal spending, and nonessentials. |
| Miscellaneous / Debt Payments | 5%–10% | Debt-to-income ratios matter for larger financial decisions. |
Important Financial Ratios Beyond the Budget Sheet
1. Debt-to-Income (DTI) Ratio
- Definition: Percentage of your gross monthly income that goes toward all debt payments.
- Rule: Keep DTI under 36%; ideally 28% for housing. (Investopedia)
- Why: Prevents overextension and financial stress.
2. Housing Expense Ratio (“28/36 Rule”)
- Definition: Max 28% of gross income toward housing; 36% total debt limit. (Investopedia)
- Application: Helps determine affordability of mortgages or rent.
3. The One-Third Rule
- Definition: Divide income into three equal parts: living expenses, debt repayment, and savings. (Arxiv.org)
- Takeaway: Balanced allocation reduces financial stress and maximizes stability.
How to Use These Ratios to Evaluate a Car Payment (or Any Big Purchase)
- Calculate Your Monthly Take-Home Pay (net income).
- Estimate All Transportation Costs: car payment, insurance, fuel, maintenance.
- Compare to the Recommended Ratio: 10–15% of take-home pay.
- Check Debt-to-Income Ratio: Include the new payment in your total debt. DTI should stay under 36%.
- Consider Opportunity Cost: Could this money be better used paying off debt, investing, or saving for a home?
Tips for Adjusting Ratios as Income Changes
- Income rises: Increase savings, investing, and giving first before lifestyle inflation.
- Income drops: Cut discretionary spending, reduce debt load, or refinance.
- Use tracking tools: Monarch Money helps monitor actual vs. target percentages.
- Reassess periodically: Review every 6–12 months or with life changes.
How Lionhood Financial Coaching Helps You Master Your Ratios
Lionhood Financial provides guidance to:
- Build a personalized budget based on your income, expenses, and goals
- Run ratio-based stress tests for big decisions
- Track progress and maintain accountability
- Adjust allocations as income, goals, or responsibilities evolve
Final Thought
Ratios are not magic rules — they are powerful guides. Understanding your money allocations provides clarity, control, and freedom.
Using researched benchmarks and a coach’s guidance, you can make confident decisions that grow wealth, reduce stress, and protect your future.
👉 Connect with Lionhood Financial Coaching to build your financial ratio roadmap