A Golden Ratio is a simple formula to get a good idea of where you are right now relative to your financial life in total. It’s comprised of three numbers representing past, present, and future. It can be applied whether you are single, married, age 20 or all the way up to your hoped-for age of retirement.
We’ll use Ben and Nora as an example: their combined gross income is the median household income in the US in 2021: $70,784.
Their current monthly debt payments, including mortgage (you can use rent here if you rent), credit cards with recurring balances, personal loans, car loans, student loans, and any other monthly debt obligations, total $21,235. This total, divided by their combined gross income, equals 30%. This represents their current legal obligations for paying off past purchases.
Their current monthly consumption expenses, including all taxes, utilities, entertainment, food, clothes, gifts, fuel and auto maintenance, totals $42,470. That total, divided by their combined gross income, equals 60%. This represents their current spending for current purchases.
They strive to save 10% of their combined gross income every month which totals $7,078. This money is set aside for their future needs. If untouched, it would be for retirement. It could also be used occasionally as an emergency fund when unanticipated financial needs arise.
Their Golden Ratio is 30/60/10. Financial advisors will differ on what these numbers should be. But note that the first category – Ben and Nora’s debt payments – are the most difficult to manage and can have the most negative impact on the other two categories. Therefore, it is critical that you do not let this category get out of control. Their 30% number, while not great, is not awful either.
The Golden Ratio will give you a perspective of how you are spending your income and how you can tweak that spending to get your financial life under control and meet your financial goals.
If as a result you want to consider the idea of a budget, see Should You Have a Budget?