We’ve talked about setting up your taxes and running your stream like a business, but how do you measure the health of your household and business finances? Clearly, each of us is different in our responsibilities and things we have to or want to pay for but my goal is to give you some good rules of thumb. It’s important to remember that since these ratios are rules of thumb there might be things in your life that make it so you need to track it slightly differently! Remember, you want to focus on increasing your income and protecting yourself from downsides- this article is a protect your ass article.
Liquidity Ratios
What’s liquidity you ask? It’s a measure of how available your money is for you to use, if you’d need to. Liquidity is surprisingly important. You wouldn’t want to be in the scenario where you poured all of your money in to your business and then lost it all because of a personal expense that you couldn’t cover!
These ratios should give you insight on your ability to cover your short term needs. In either case it makes sense to bump up your safety threshold if you’re worried about your income stream or it’s unstable. If you have a steady job on top of your streaming then you’re probably safe near the 3 month mark. If you’re streaming full time you probably want to be on the higher end. That way, if some big expense comes up or you’re unable to stream you can still manage your finances.
Emergency Fund Ratio (Personal)
Cash and Cash Equivalents / Monthly Non Discretionary Cash Flows= 3 to 6 Months
Let’s define some terms. Cash and cash equivalents means the sum of your cash (savings, checking account) and anything that can be converted in to cash in less than 3 months (short term bonds, CD’s, money market fund). Monthly non-discretionary cash flows is a fancy way of saying everything you need to pay in a month that you can’t do without. A basic list includes your mortgage or rent, loan payments, credit card payments, insurance payments, taxes, basic food budget, and utilities. There are more for certain, but one important thing to remember is that it covers the bills you need to consistently pay month to month.
This formula is where you get the generic advice that you need to have 3-6 months’ expenses in cash. Also, if you’re looking for a target number because you’re below where you want to be then all you need to do is multiple your denominator by the number of months you need coverage. This ratio helps you have a sense of how long you could go without working and without dipping in to investments if necessary.
Current Ratio (Personal and Business)
Cash and Cash Equivalents / Current Liabilities ≥ 1
Cash and cash equivalents is the same as before and current liabilities means everything you need to pay within a year. In this case, you’d count 12 months’ rent or mortgage payments instead of the entire amount. This is another way to measure how well you can cover your debts and other necessary payments but extended to a year. In this formula you can also include expected income as you’re probably paying bills out of new income instead of savings. In general, having a ratio above 1 means you’re in good territory and below 1 means you may need to make some changes.
This is a ratio that is important to track both personally and for your business. Yes, you probably don’t have a ton of expenses with your stream. All that it means then is you need to have less cash on hand than someone running a manufacturing business. However, if you build up your stream over time and need to start hiring contractors your liabilities will grow. If you keep a handle on it early you’re much more likely to avoid blowing your business out of the water with expenses.
Debt, Income, and Expenses Ratios
These ratios can give you an idea of how well you manage debt and if there are areas that you need to watch more carefully. If you’re running a little short here it might make sense to stream ore, take on some more sponsors, or do some fundraising drives with your audience.
Net Income (Business)
Gross Income – Expenses = Net Income or Net Revenue
This is one of, if not the, major things to track for your business. How much are you making after accounting for your expenses? You need to be tracking this, even if you’re just starting out. If you’re looking to transition to full time streaming this will be one of the key pieces of data that lets you know whether or not you’re crazy to give it a try.
The cool thing about being a business owner is that you only pay taxes on your net revenue. Most of us regular taxpayers have to pay taxes on everything coming in the door. Imagine how much nicer it would be if we only paid taxes after we took out our living expenses! Take advantage of that fact and play the tax game when you can. However, to play the game effectively you need to know where you stand which means tracking your numbers. Ignoring pure SMOrc, how would you know if it made sense to go face or trade in Hearthstone if you didn’t know what health each character was at?
Variable Cost Percentage (Business)
Variable Costs / Total Costs
Some expenses are dependable. Rent costs the same each month, you should be paying yourself a fixed salary, and any loan payments are likely fixed. There’s not a lot of uncertainty around those numbers. The more difficult ones are your numbers that change. Utilities can vary if not included in the rent, food bills are certainly different month to month, and your entertainment costs are likely variable unless you’re 100% entertained by Netflix and Twitch. You should track those kinds of costs for yourself and your business to get a sense of how much of your monthly spending is uncertain. If it’s a large percentage, you might want to revisit your emergency fund ratio!
You also want to know your variable costs per unit. In this case you want to look at subs/bits/donations to get a sense of what you get from each one of those. Since you’re getting paid a fixed percentage of each of those items your variable cost per unit is the cost that you incur on each unit. So that’d be that $2.50 or whatever your agreement states that goes to Twitch for each sub. Even though you technically don’t receive the money in your pocket and then pay Twitch when you get a sub you should still consider that as a cost. That way, if there’s another opportunity in the future for a streaming platform or other income source you can do an apples to apples comparison of the cost.
Housing Ratio (Personal)
Housing Costs / Gross Pay ≤ 28%
Your housing costs are either your annual rent or 12 months of your mortgage PITI (principle, interest, taxes, insurance). Your gross pay is your pre-tax income so whatever you pay yourself plus your owner’s draw. If you’re in the US and set up as a sole proprietorship than it’s just your net revenue. This is the ratio that lenders use to help determine if you’re going to get a loan and if so if you’re going to get their lowest rates. Generally housing is one of your biggest expenses so it makes sense that you’d want some way to know if you’re at an acceptable amount. This is also highly location dependent, I spent $600/month to share a room in Berkeley and $800/month for a 2 bedroom place to myself in Madison.
If you’re in one of those high costs areas you may need to bite the bullet on this one or get some more roommates than you’d normally want. The 28% is a maximum, not a target. The lower you can be below it the better for your finances. Keeping your housing expenses low is in line with running lean like we discussed in tips for managing uncertain income.
Consumer debt ratio (Personal)
Consumer Debt / Gross Pay ≤ 10-15%
Your consumer debt means all of your debt payments except for housing. This includes credit cards, student loans, auto loans, bribe payments, etc. For this one, you again want to add everything up for a year’s worth of costs. You don’t need to count the entire balance of a student loan, for instance. This ratio is one that will certainly be worse when you’re younger as you’re more likely to have student loans and less likely to be earning a lot. As with the housing ratio, this is a max and not a target.
Total debt ratio (Personal and Business)
(Housing Costs + Consumer Debt) / Gross Pay ≤ 36-38%
Here you’re adding the previous two ratios together and getting a whole debt picture. It may be that you’re living in middle of nowhere Iowa but have a ton of student loans. In that case your housing ratio might look great but when added to your consumer debt ratio the whole picture is a little rougher. Think of this and the previous two ratios as golf, the winner has the lowest score!
You can and should apply this ratio to your business. If you had to take out a loan for equipment or to cover your expenses during your transition time it’s still important to know what you’re on the hook for in terms of debt payments. In this case you’d use net revenue instead of gross pay.
Total Assets to Total Debt and Net Worth to Total Assets (Personal and Business)
Total Assets / Total Debts ≥ 1
Your assets are everything you own with a positive cash value. This includes your cash, investments, equity in your home, vehicles, real estate, and others. Your total debts are the current value of any loans you have. In general, you want your assets to be larger than your debts. However, if this is an unfriendly ratio to you hopefully you can come up with ideas to attack both parts of the equation and build assets while paying off debts.
Net Worth / Total Assets ≥ 20-100% (highly age based)
Your net worth is your assets minus your debts. In this case, you want to compare your net worth to your total assets because this can give you a sense of how many of your assets are financed by debt. A 20% ratio is good if you’re under 30 because you likely have student loans and not many assets but as you’re approaching retirement you really want the number to be 100% as you’re unlikely to be doing much to increase your assets afterwards. Because net worth equals assets minus debt this ratio can never be higher than 100% as your assets and net worth would increase in line without any debts.
Saving and Investing Ratios
Savings Rate (Personal)
(Savings + Employer Match) / Gross Pay = 10-13%
This is simply shows how much of your pay you’re saving. It’s important not to forget the employer match if you get one as that’s free money! Generally, you want to be saving as much as you can but a solid rule of thumb puts anything above 10% as a solid rate. This is football and not golf, you want that high score here.
Investment assets to gross pay (Personal)
(Investment Assets + Cash and Cash Equivalents) / Gross Pay = See table below
This asks how many times over you could replace your current pay with your assets. The below chart gives a decent idea of benchmarks to use. This is roughly what you can use for a target number for retirement if you assume that you want to replace your current income by drawing down your retirement savings over 20 years. That formula is a bit dated as it assumes you won’t live past 85 and assumes relatively static investment returns over that time.
| Age | Ratio |
| 25 | 20% |
| 30 | 60-80% |
| 35 | 160-200% |
| 45 | 300-400% |
| 55 | 800-1000% |
| 65 | 1600-2000% |
Conclusion
You will get a strong impression of your financial picture if you put together these ratios for yourself. While they mean something in isolation but they’re even more important as a tool to compare yourself over time. You should be able to track your personal progress or identify areas where you might need to intervene. It’s also important to take in to account your age. Are you under 30? All of your ratios will probably look worse because you have more debt and fewer assets. Your earnings are almost all ahead of you; use these tools to track your progress. Over 50? You should be outperforming the standard benchmarks. If you’re not it’s a good start for where you should start digging more deeply in to your finances and might be a sign that you need a financial checkup.
I give you these tools but it’s up to you to use them. I challenge you to not only fill them out for yourself but let us know how you stack up. It will be enlightening. Leave any questions or comments you may have and we’ll get back to you!
