Debt to Equity Ratio as a Personal Financial Indicator
Debt to Equity ratio, also known as Debt to Asset Ratio, is a valuable indicator to both analyzing business financial statements as well as your personal financial health. A debt to equity ratio is simply total debt divided by total assets or equity. For example, if your total assets equal $200,000.00, and the total of all your liabilities is $140,000.00, your debt to equity ratio would be 0.7 or 70%.
As a general rule, debt to equity above 80% is considered very risky and financially unhealthy. Usually young singles or couples purchasing their first home with little money down will fall into the 80% or higher debt to equity ratio category. As you build income capability over the years and grow your savings account, a more ideal debt to equity ratio would be in the range of 25% – 50%. Typically older couples will have %50 or less debt to equity ratios.
To use debt to equity ratios as a financial health indicator for personal finance, it is best to track this ratio every year. To calculate the ratio from your personal finances, first add up all your liabilities. Liabilities include home loans, auto loans, and any personal outstanding loans in addition to credit cards and bills owed. Next, add up all your assets which should include your home appraised value, car appraised value, and all amounts in your savings, checking, 401K, IRA and investment accounts. Simply divide your debts or liabilities by your assets and this is your current debt to equity ratio. Start tracking this ratio on a yearly basis. To make it easy to remember, pick a time you usually review all your financial accounts such as at the end of the year, or during tax time in April. You should strive to decline your debt to equity ratio each year over time until you are in the healthy range of 50% or less.