Gauging Clients’ Financial Health with Financial Coaching Ratios
When a qualified financial counselor begins counseling a client, it’s important for him or her to realize that each client will have a distinctive personal finance situation, emotional relationship with money, and array of pre-existing money behaviors. The coach must dive deeply into a client’s status to learn all he or she can across the broad spectrum of financial indicators.
Toward that end, there are financial coaching ratios that help the coach unpack a person’s level of financial wellness and prescribe actions for improvement.
Financial Coaching Ratios Related to Income
A client needs to be saving money and have the ability to purchase assets in order to achieve financial security. Therefore, the coach needs to analyze a client’s income sources and whether the client is capable to set money aside for future asset acquisition. This analysis should be stated upfront in the financial coaching agreement terms. The number and diversity of a client’s income sources, how the person’s income compares with the market, and the relative security of each income source are a few of the ratios the coach can calculate in this area.
Savings-related Ratios
Another set of financial coaching ratios a trained and Certified Financial Counselor might compute are ones related to the client’s saving behavior, as savings form the foundation of a client’s financial security. The savings rate ratio assesses how much the client is saving in relation to his or her income. The liquid savings ratio tells the coach how much money clients have that they can readily access should they need it quickly.
Asset-related Financial Coaching Ratios
A primary reason for clients to save money is to purchase assets, defined as anything of value. Assets may be account-based, like money in savings or retirement accounts. They also can be tangible, like real estate property; or intangible, like invention patents or copyrights. Part of the financial coaching ratios should involve detailing the assets a client owns and their value.
Ratios Describing Expenses and Budget Preparedness
Another key piece of figuring financial coaching ratios should include the client’s expenses, liabilities, and budget preparedness. The housing expense ratio calculates the individual’s percentage of monthly income that’s spent on housing costs (e.g. mortgage or rent). A qualified housing counselor is likely to have software that figures this ratio. Similarly, the debt service ratio determines the percentage of a person’s income spent to pay for debts and other obligations (e.g. credit cards, personal loans). And the budget preparedness ratio is designed to estimate how much money a client needs for planned future expenses and when the client anticipates needing those funds.
Other Financial Coaching Ratios
Some other financial coaching ratios that a coach might think about calculating include risk management ratio (e.g. levels of insurance coverage), tax withholding ratio, and investment contribution ratio (how much client is investing compared to his or her income). This blog post from 2019 discusses the 7 most important personal finance ratios to figure.
