My first encounter with a money-related ratio was religious.
Mom taught me to give one-tenth of my income to church. Christians call this “tithe,” and it was the beginning of my fascination with ratios.
In university, I came across ratios again — this time textbook financial ratios you use to evaluate a company. So for example, Company A with a higher Return on Assets is likely better than Company B with a lower score. Company A is more efficient with their money.
Which ratios are important in life? I can think of a few, starting with some personal finance favorites:
How Do You Spend Your Money?
I share the 50-30-20 rule whenever someone asks me about budgeting. Because it’s so easy to remember.
50% for needs (rent, food, transportation), 30% for wants (entertainment, hobbies, travel), 20% for savings and investing.
Of course, like any personal finance geek, I have more granular ratios for my budget. Not important.
What’s important: budgeting — splitting your income into buckets so you can plan your spending — is powerful. It’s one of the most important things I’ve practiced in my life.
Aren’t budgets restrictive? In some ways — to teach you discipline.
But they can also be liberating. For example, interesting things happen when your earnings start going up. $250 for a weekly night out ($1k a month) might seem extravagant, but if you’re earning $10k a month, that’s a very acceptable 10% for entertainment.
Maybe you can afford that trip you’ve been dreaming of.
How Much Money Do You Owe?
Many ways to consider how much money you owe, but I like the traditional repayments / gross income view:
- Home payments should be <33% of income
- Total debt payments should be <40% of income
Charlie Munger once said smart people go broke for one main reason: leverage.
He was talking about borrowing money to invest, but it’s a good reminder for other kinds of debt.
I like to think of debt as a barrel of wine. One glass makes your life better. Too much will kill you.
How much is too much? Financial advisor ratios give you the standard answer.
But also consider the emotional angle: The gap between how much money you can owe and what you do owe affects how well you’ll sleep at night.
What Percentage of Work Do You Hate?
“Find a job you love, and you’ll never work a day in your life.”
Thank you early-2000s motivational quotes for crushing the dreams of many young people.
In reality, work will always be a mix of stuff you hate, stuff you find meh, and stuff that gets you into “flow.”
A good job is where you spend more of your time on work you love, with less time on stuff you hate.
My mom used to be a hospital therapist, but retired at 50. When I asked her why she chose early retirement, she explained: “What I truly enjoyed was spending time with patients. But as a Head of Department, most of my tasks became administrative.”
What’s a good ratio for (work you love / work you hate)?
Jeff Bezos has an interesting benchmark:
“If you can get your work life to where you enjoy half of it, that is amazing. Very few people ever achieve that.”
Where Are You Spending Most of Your Time?
If a good job is where you prioritize work you enjoy, a good life is where you prioritize meaningful things.
For most people, “meaningful things” will be family and friends. Strong relationships. Love.
How much time do you spend on these vs other life admin and distractions?
A decade ago, I came across a powerful time journaling exercise from Mark Manson. If you’ve ever questioned the meaning of life, I recommend you start time journaling to see how you’re spending yours. I do mine at the start of every year:
First, I write down all my major weekly activities — and how much time I spend on each one. Then, the critical part: I rate how much value each activity brings to my life, and an action step for the year.
For example,
Reading on Internet | 14 hours/week | 6/10 value | Action: Read more physical books
A good life — or at least a life that’s heading in the direction of good — is where you’re happy with your ratio of (meaningful time / meaningless time).
How Much Do You Expect?
Allow me to propose my favorite ratio of all:
Satisfaction = What you have (reality) / what you want (expectations).
Two ways to solve for higher satisfaction.
The first is what most of us naturally do — push harder for a better reality. Do more. Get more. Dissatisfaction is good for progress. It’s what makes people build rockets, explore the oceans, and develop treatments for cancer.
But left unchecked, it’s bad for happiness. I’ve seen too many miserable high achievers to know this is true.
The other solution — manage your expectations. It’s easier to be grateful for a Toyota than pushing yourself to get a Ferrari.
Ending with a wonderful quote from Charlie Munger, which I’ve rearranged slightly:
“If you have unrealistic expectations you’re going to be miserable your whole life.
You want to have reasonable expectations and take life’s results, good and bad, as they happen with a certain amount of stoicism.
The first rule of a happy life is low expectations.”
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Pic from Pexels: Tony Litvyak
