Personal finance

Here’s how to calculate the math of personal finance; your score might shock you

This week we are going to do some calculations.

Personal Finance is all about planning and deploying your cash flow to achieve financial goals while managing risk. Personal Finance covers your income, expenses, assets and liabilities. It seeks to answer money questions such as how much liquidity is right for you? How much should you save there?

This week, we’ll highlight some personal finance metrics and how to calculate them. These are calculations you can do on an excel sheet or a calculator, only the raw data is missing. (no algebra)


Saving is the beginning of any financial journey and the most difficult part of the process. When you earn and don’t spend, you have saved. There can be no investment without savings; thus, the purpose of salvation is to ensure that as income increases, our savings rate also increases. The goal is to save a percentage of income and not a nominal amount, so the goal is to save, for example, 5% of income rather than a nominal figure. The measurable goal is the Savings rate, simply a percentage of savings to total income. if you make N1000 and spend N900, then you have a savings rate of 10, which is calculated as follows

(Total Savings/Income) *100; (100/1000)*100= 10%

You don’t know which savings rate to adopt? In practice, the rule of thumb is to save 10% of income, but don’t do this if your budget will be stretched. Instead, start small and adjust your budget to reduce expenses or earn more and reach your savings goal. A higher savings rate is better because it gives you, the investor, a tool (cash) to invest.

A good activity is keeping a detailed diary of expenses, possibly using an app like Monify; this allows you to go back and see where you can adjust savings to increase your savings rate.

Cash flow:

Cash flow is basically the amount you earn minus the amount you spend. Essentially, are you living within the means of your income? If you have a high savings rate, your cash flow will be increased; if your savings rate is low or negative, your cash flow is negative. Calculating cash flow is super easy, All cash inflows minus all cash outflows. (Note the emphasis on money)

Keep in mind that debt is income for you; so when calculating cash flow, be sure to subtract the cost of any debt incurred to reach that cash. The objective is to have a positive cash flow.

Emergency fund:

As the name suggests, an emergency fund is set up to cover unforeseen events that require funds to resolve a medical emergency. Having emergency funds helps avoid liquidating an investment portfolio to meet this unforeseen need.

An emergency fund is recommended 3-6 months from your non-discretionary expenses, that is, the expenses you need to make such as food and rent. The emergency fund is usually made up of cash or near-cash.

We take liquid assets divided by monthly non-discretionary expenses to calculate an emergency fund. Suppose we calculate non-discretionary spending at 100,000 each month and have accumulated 300,000 in cash. Our emergency fund ratio will be 300,000/100,000 or 3. This means finances can support three months of emergency expenses without further input. The key to this equation is a correct and accurate determination of “non-discretionary” spending. An emergency fund ratio of three is preferred.

Net value :

It’s a simple calculation; Net worth is your total assets minus your total liabilities.

The real job is to plan all your assets and segment them into income-generating and non-incoming assets. So an apartment that you own and rent will be an income-generating good, while a gold watch will be a non-income-generating good. Similarly, a car you own purchased with a bank loan will be an interest-bearing liability. In contrast, a zero rate loan from your employer will be a non-interest bearing liability.

Then arrange these categories from most liquid to least liquid. Thus, cash in bank will come before a corporate bond. Likewise, credit card debt will arrive before the repayment of the principal of a bond you issued for the liability; Then clean. On my net worth sheet, I always compare what I earn from my income-generating assets to what I pay on the liability side, just as an anchor.

Rate of endettement :

Keeping a tab on debt is extremely important. Debt allows the acquisition of assets without the payment of cash. For some assets like a house, the cash cost is so high that it makes sense to leverage to acquire it. Debt is only advisable to buy assets that generate income or reduce an existing expense. One measure to use for debt is the debt-to-equity ratio, which is Total liabilities/Total assets expressed as a percentage.

If your total liabilities are calculated at 25 million while your total assets are valued at 30 million, the debt ratio will be 25/30 or 83%, which means that 83% of your assets are financed by debt. The debt objective is to gradually reduce the level of debt. So, as you approach retirement age, your interest-bearing debt should be significantly reduced or eliminated.

Debt coverage ratio: The debt coverage ratio measures how well your cash income meets debt obligations. For example, you earn 100,000 per month and you have two loans; a car loan of 2500 per month and a mortgage of 2000 per month, then your debt coverage rate will be

100,000/ 2,500+2,000

100,000/4,500 or 22x coverage.

This means that the total income earned can cover twenty-two times the interest payment obligations. Its good. A low or negative coverage ratio will indicate that your current cash income cannot cover or pay off your existing debt.

Another calculation on income-related debt is the long-term debt to gross income. This calculation aims to determine how much of your gross income can be allocated to paying off longer-term debt such as a mortgage. Most mortgage companies will assess your mortgage application based on some variation of this formula. The framework for this measure is to assume that only a certain percentage of your gross income can be allocated to long-term loans.

Suppose a mortgage company has 30% debt to a gross rate of return; this basically means that you can only use 30% of your gross income to pay off the mortgage. In other words, if 30% of your payment cannot pay off your monthly mortgage obligation, you will not qualify for the loan.

Ultimately, Rule 72 it’s a simple trick to know. If you take the rate of return on an investment and divide it by 72, the answer tells you how long before that investment can double your money.

For example, if I invest in a ten-room apartment building and it costs me N10 million to build, I expect an 8% return on the rental property. How long before I double my N10m

Using Rule 72, I divide 72/8 or 9 years.

Remember that the use case for these calculations is to allow you to measure your progress towards a goal. If applied early and properly, these rations can help you adjust your spending or investing behavior. If you want to buy a home, you know you need to reduce your other long-term loans to create enough room to keep your mortgage payments below the minimum rate recommended by lenders.