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Rocking Financial Planning … Old School Advice!

By Dr. David E. Marcinko MBBS MBA MEd CMP®

The economic platitude of the past, such as don’t spend more than 15-20 percent of your net salary on food, or 5-10 percent on medical care, among others, have given rise to the more individualized personal financial ratio concept. Personal ratios, like business ratios, represent benchmarks to compare such parameters as debt, income growth and net worth.

According to Edward McCarthy MIB CFP® – a personal financial expert from Warwick, Rhode Island whom I interviewed about a decade ago – the following represented useful ratios for the lay as well as medical professional [personal communication].

The Ratios: 

• Basic Liquidity Ratio = liquid assets / average monthly expenses. Should be 4-6 months, or even longer, in the case of a medical professional employed by a financially insecure HMO. In a low interest rate environment, iMBA Inc offers 12-24 months for consideration.
• Debt to Assets Ratio = total debt / total assets. A percentage which is high initially, and should decrease with age as the medical professional approaches a debt free existence
• Debt to Gross Income Ratio = annual debt repayments / annual gross income. A percentage representing the adequacy of current income for existing debt repayments. Medial professionals should try to keep this below 25-30%.
• Debt Service Ratio = annual debt re-payment / annual take-home pay. Medical professionals should try to keep this ratio below about 40%, or have difficulty paying down debt.
• Investment Assets to Net Worth-Ratio = investment assets / net worth. This ratio should increase over time, as retirement for the medical professional approaches.
• Savings to Income Ratio = savings / annual income. This ratio should also increase over time, especially as major obligations are retired.
• Real Growth Ratio = (income this year – income last year) / (income last year – inflation rate). It is desirable for the medical professional to keep this ratio growing faster than the core rate f inflation.
• Growth of Net-Worth Ratio = (net worth this year – net worth last year) / net worth last year – inflation rate. Again, this ratio should stay ahead of inflation.By calculating these ratios, perhaps on an annual basis, the medical professional can spot problems, correct them, and continue progressing toward stated financial goals.

Assessment

Now, after ten years, are these traditional ratios and advice still valid today: why or why not?

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Conclusion

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security
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