HS300: BENCHMARKS AND FORMULAS WITH ALL
CORRECT ANSWERS (UPDATED)
Net Worth to Assets Ratio Correct answer-Represents the portion of assets that are actually owned
by the person. Calculation is Total Net Worth divided by total assets.
Benchmarks are 20% for young clients and 90 - 100% for retirement age clients.
Invested assets to Gross Pay Ratio. Correct answer-Financial Security Ratio Measuring ones
progress towards saving/retirement/ other financial goals.
Calculation is total Invested Assets plus cash and cash equivalents divided by gross pay.
Note that if the client is part of a defined benefit plan, the planner may need to calculate the present
value of all pension benefits.
General Benchmark for Cash & Cash Equivalents as a percentage of total Assets Correct answer-
Regardless of age group, ChFC book says between 5 - 20%
Benchmarks for Investment Assets to Total Assets Correct answer-20s - 30s: (0 - 30 %)
40s - 50s: (30 - 60%)
60s - 70s: (60 - 70%)
Benchmarks for Personal Use Assets to Total Assets Correct answer-20s - 30s: (55 - 90%)
40s - 50s: (25 - 60%)
60s - 70s: (15 - 30%)
Benchmarks for Current Liabilities to Total Liabilities Correct answer-20s - 50s: (10 - 20%)
60s - 70s: (0 - 10%)
Benchmarks for Long Term Liabilities to Total Liabilities Correct answer-20s - 30s: (40 - 72%)
40s - 50s: (16 - 48%)
60s - 70s: (8 - 24%)
Benchmarks for Net Worth to Total Assets Ratio Correct answer-20s - 30s: (8 - 50%)
40s - 50s: (32 - 74%)
60s - 70s: (66 - 88%)
ROI, ROA, RONW Correct answer-Return on Investments, Assets, and/or net worth.
Equal to the beginning balance plus an savings subtracted from the ending balance all divided by the
beginning balance itself.
Benchmarks for:
- ROI = 8 - 10 %
- ROA = 2 - 4 %
- RONW = ['the higher the better, this ratio is likely to decrease as net worth increases']
Describe the goal of Performance Ratios Correct answer-To calculate the adequacy of investment
returns given the risks taken by the clients.
, Describe the goal of Liquidity Ratios Correct answer-measure the client's ability to meet short term
obligations
Describe the goal of Debt Ratios Correct answer-Indicate how well the client manages debt.
Describe the goal of security ratios. Correct answer-indicate the progress that the client is making
toward achieving long term financial security goals.
Emergency Fund Ratio Correct answer-Measures how many months of non discretionary expenses
that the client can pay given their current liquidity
It is calculated by taking cash and cash equivalents and dividing them by monthly non discretionary
cash flows.
The benchmark for this ratio is 3 - 6 months, but it is sensitive to client situations. Specialty workers
may need a larger ratio because it may take them awhile to find a similar position.
NOTE: read carefully any given client profiles. Some clients may consider charitable gifts a non
discretionary expense, and therefore the planner should include it.
Current Ratio Correct answer-Cash & Cash Equivalents Divided by Current Liabilities.
Measures the ability of a client to meet their short term obligations.
Benchmark for this ratio is 1 - 2.
Housing Ratio 1 (front end ratio, basic) Correct answer-Annual Housing costs divided by gross pay.
Annual housing costs include principal, interest, taxes & insurance.
This ratio measures how much of a clients pay is going to property expenses.
The benchmark for this ratio is any percentage less than or equal to 28.
Housing Ratio 2 (broad) Correct answer-Housing Costs + Other Debt Payments divided by gross
pay.
Housing costs include insurance & taxes as they do in HR1.
This ratio measures how much of a client's gross pay is devoted to monthly debt payments.
The benchmark for this ratio is any percentage less than or equal to 36.
Savings Rate Correct answer-Equal to savings + employer match divided by gross pay.
Represents the client's progress towards their long term financial goals through measuring percent
of pay saved.
Benchmarks depend on the goals of the client and how long they will be saving for, but the minimum
is at least 10 - 13 %.
CORRECT ANSWERS (UPDATED)
Net Worth to Assets Ratio Correct answer-Represents the portion of assets that are actually owned
by the person. Calculation is Total Net Worth divided by total assets.
Benchmarks are 20% for young clients and 90 - 100% for retirement age clients.
Invested assets to Gross Pay Ratio. Correct answer-Financial Security Ratio Measuring ones
progress towards saving/retirement/ other financial goals.
Calculation is total Invested Assets plus cash and cash equivalents divided by gross pay.
Note that if the client is part of a defined benefit plan, the planner may need to calculate the present
value of all pension benefits.
General Benchmark for Cash & Cash Equivalents as a percentage of total Assets Correct answer-
Regardless of age group, ChFC book says between 5 - 20%
Benchmarks for Investment Assets to Total Assets Correct answer-20s - 30s: (0 - 30 %)
40s - 50s: (30 - 60%)
60s - 70s: (60 - 70%)
Benchmarks for Personal Use Assets to Total Assets Correct answer-20s - 30s: (55 - 90%)
40s - 50s: (25 - 60%)
60s - 70s: (15 - 30%)
Benchmarks for Current Liabilities to Total Liabilities Correct answer-20s - 50s: (10 - 20%)
60s - 70s: (0 - 10%)
Benchmarks for Long Term Liabilities to Total Liabilities Correct answer-20s - 30s: (40 - 72%)
40s - 50s: (16 - 48%)
60s - 70s: (8 - 24%)
Benchmarks for Net Worth to Total Assets Ratio Correct answer-20s - 30s: (8 - 50%)
40s - 50s: (32 - 74%)
60s - 70s: (66 - 88%)
ROI, ROA, RONW Correct answer-Return on Investments, Assets, and/or net worth.
Equal to the beginning balance plus an savings subtracted from the ending balance all divided by the
beginning balance itself.
Benchmarks for:
- ROI = 8 - 10 %
- ROA = 2 - 4 %
- RONW = ['the higher the better, this ratio is likely to decrease as net worth increases']
Describe the goal of Performance Ratios Correct answer-To calculate the adequacy of investment
returns given the risks taken by the clients.
, Describe the goal of Liquidity Ratios Correct answer-measure the client's ability to meet short term
obligations
Describe the goal of Debt Ratios Correct answer-Indicate how well the client manages debt.
Describe the goal of security ratios. Correct answer-indicate the progress that the client is making
toward achieving long term financial security goals.
Emergency Fund Ratio Correct answer-Measures how many months of non discretionary expenses
that the client can pay given their current liquidity
It is calculated by taking cash and cash equivalents and dividing them by monthly non discretionary
cash flows.
The benchmark for this ratio is 3 - 6 months, but it is sensitive to client situations. Specialty workers
may need a larger ratio because it may take them awhile to find a similar position.
NOTE: read carefully any given client profiles. Some clients may consider charitable gifts a non
discretionary expense, and therefore the planner should include it.
Current Ratio Correct answer-Cash & Cash Equivalents Divided by Current Liabilities.
Measures the ability of a client to meet their short term obligations.
Benchmark for this ratio is 1 - 2.
Housing Ratio 1 (front end ratio, basic) Correct answer-Annual Housing costs divided by gross pay.
Annual housing costs include principal, interest, taxes & insurance.
This ratio measures how much of a clients pay is going to property expenses.
The benchmark for this ratio is any percentage less than or equal to 28.
Housing Ratio 2 (broad) Correct answer-Housing Costs + Other Debt Payments divided by gross
pay.
Housing costs include insurance & taxes as they do in HR1.
This ratio measures how much of a client's gross pay is devoted to monthly debt payments.
The benchmark for this ratio is any percentage less than or equal to 36.
Savings Rate Correct answer-Equal to savings + employer match divided by gross pay.
Represents the client's progress towards their long term financial goals through measuring percent
of pay saved.
Benchmarks depend on the goals of the client and how long they will be saving for, but the minimum
is at least 10 - 13 %.
