Top 5 Financial Ratios Every College Student Should Know

In the United States, financial literacy is one of the most important skills for young adults. The majority of college students have classes and probably a social life to worry about, and rarely consider their finances until the time when it is a problem.

However, understanding the basic financial ratios can empower students to make better decisions about budgeting, spending, saving, and long-term planning. It is not only big corporations, banks, and people with money under management who can make use of such ratios, but they can also be used in ordinary personal finances.

The purpose of this article is to present the most important financial ratios every college student should know, along with simple explanations and real-life examples.

Table of Contents

What Are Financial Ratios?

Financial ratios are practical formulas used to evaluate specific aspects of financial performance. They are not merely abstract ideas, but educational tools applicable to personal finance to help someone understand the health of their financial situation, whether it be paying off bills, saving money, investing, or paying off a debt. These financial ratios are quite beneficial to students studying in colleges within the U.S., as they offer a rational and clear way of handling finances.

Financial ratios are used by banks, credit card companies, and employers when evaluating a person’s creditworthiness or financial responsibility. By teaching the students about them when they are young, students will be better equipped to develop useful habits and enjoy improved financial outcomes in the future. Early tracking of these ratios could put students on a long-term course of financial prosperity and stability.

Key Financial Ratios

Current Ratio

The current ratio indicates that an individual will have the capability to fund short-term liabilities through available funds. It will help a student understand whether they are living within means or are spending more than they are earning.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example: Where a student has $800 in their checking account, $200 in cash (all current assets are $1,000), and their monthly bills to be paid, such as rent, groceries, and utilities, are $700 (current liabilities), then:

Current Ratio = (1,000/700) = 1.42

This means that the student is able to draw 1.42 dollars per dollar he owes on a short-term basis. A current ratio of above 1 is healthy.

Debt-to-Income Ratio (DTI)

The value of the debt-to-income ratio would provide a percentage of the monthly student income used in paying off the debts. Lenders in the U.S. (credit card companies and loan providers) use this ratio to rate an individual on their capacity to make a monthly payment.

Formula:

Debt-to-income Ratio = (Total monthly debt / gross monthly income)

Example: A student earns 1,000 dollars a month with part-time employment. They pay 150 of their student loans and 50 of their credit cards. The monthly amount of debt is 200 dollars altogether.

DTI = 200/ 1000= 0.20 or 20

The American lenders prefer a DTI below 35 percent, so 20 percent is a sound figure.

Net Profit Margin

It is a net profit margin that will tell a student how much money s/he gets out of the total money s/he receives after paying all the expenditures. This comes especially in handy with the students who may have freelance or small part-time jobs to make money.

Formula:

Net Profit Margin = (Net Income / Total Revenue)

One related scenario is that a student who designs graphics has to receive the given total revenue, which is worth $600 per month. They spend $50 on design software and $30 on the internet bills (total expenses: $80). They enjoy a net income of 520 dollars.

Net Profit Margin = 520/600 = 0.87 or 87 percent

What this means is that they keep 87 cents out of every dollar they make. Such a high net profit margin means that the expenses are under control.

Return On Investment (ROI)

Return on investment estimates the proportion of which a student gains from committing an investment in a particular resource. Education expenditure, certification, or investment in equipment that will lead to additional profits are mostly computed as ROI.

Formula:

ROI = (Gain -Cost) / Cost

Example: A student buys a $200 Internet marketing course. After they complete the course, they start to offer social media services and will earn 600 within three months. The profit = $400 ($600 200).

ROI = 400/200 = 2.0 (or 200 percent)

A 200 percent ROI means that they had secured twice the return of what they had invested. When ROI is high, the financial decision is good.

Savings Ratio

The savings ratio describes the part of an individual’s income that a person is saved in a given month. In the U.S., financial experts tend to recommend the saving of not less than 10-20 percent of all income earned, especially during a plan towards emergencies and early retirement plans.

Formula:

Ratio of Savings = (Savings each month / Income each month)

Example: A student earns $1,200 a month and can save $180.

The ratio of savings = 180/1200= 0.15 or 15 percent

The ratio of 15 percent on savings means that the student is currently saving the correct percentage of their income. The higher the ratio, the better the financial position in the long term.

Using These Ratios in the Real World

These financial ratios should be grasped first. Then the thing is to put them to use college students can utilize such financial ratios during financial reviews that can be conducted weekly or monthly. These ratios are very easy to follow using simple means like Google Sheets, Excel, or free budgeting software.

To illustrate, a student can enter their monthly income and expenses in a spreadsheet, and a formula will instantly find their current ratio, DTI, and savings ratio. This, on a long-term basis, will enable one to establish the trends and make the announcement about the time the adjustments should be made.

Significance of Establishing Financial Goals

Setting financial goals has the potential to keep you focused and motivated. To illustrate, you may have a high DTI, in which case you target to improve it by a percentage rate within a limited amount of time. By regularly tracking your financial ratios, you can monitor your progress and adjust your strategies as needed.

Key Takeaways

Financial ratios provide a clear and simple way to evaluate financial health.
The application of the debt-to-income ratio in the U.S. is prevalent in that lenders use the parameters to decide whether they can extend loans and credit cards.
Net profit margin/ ROI is a good tool for students with a side activity or freelance work.
The value in excess of 1 in the current ratio indicates a student who has a surplus of assets over liabilities and is in a better placed to confront in the event of emergency.
The saving ratio is good and will enable the students to build an emergency fund and hoard to invest in new projects, such as grad school or business.
Popular Money Mistakes to Refrain from making the opposite mistakes of going into debt or spending too much time, not saving enough. Understanding and applying these financial ratios can help you avoid these common pitfalls and make better financial decisions.
Tracking financial ratios may feel like extra work, but it quickly becomes a useful habit. Start by documenting your monthly expenses and income. Once you have your numbers, begin by calculating all of your various financial ratios. Be realistic in terms of what you set for yourself and check your financial ratios every month to remark that you improve.
Take up one ratio at a time. To illustrate, assuming that you have a low saving ratio, you may reduce your wasteful expenses on unnecessary trips to restaurants or the cinema. Provided you have a high DTI, it is ideal to pay some of the debt you are carrying before taking up another obligation.
These financial ratios are not necessarily purely academic, but in fact, a practical tool that can help you build financial discipline. ROI or profit margin questions are more fundamental questions that are likely to be asked in most entry-level interviews in the financial and marketing professions. You have the advantage of mastering them earlier than in your future profession.

Conclusion

Financial ratios are powerful tools that help college students understand their financial health and make smarter decisions. Regardless of what you are trying to achieve, improved budgeting, saving, management of debts, etc., the ratios, current ratio, debt-to-income ratio, net profit margin, ROI, and savings ratio will give you some sudden guidance.

Through this monitoring and improving of your financial ratios, you will have a good financial discipline that will follow you even when you have finished your studies. What to do? Start immediately, calculate your financial ratios, and use this knowledge to take your financial future into your hands.

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Top 5 Financial Ratios Every College Student Should Know (With Examples)

What Are Financial Ratios?