There are three debt to asset ratios that are of use to an individual in his personal financial planning experience. Over a person's lifetime, these ratios should decline in value as the individual pays off his debts and accumulates more assets. Assets include houses, cars, savings and investments. Debt is divided into two separate categories: current and long term. Current debt, or current liabilities, are those due within one year. Long-term debt is due any time after that year.
Current Ratio
The current ratio takes a look at the relationship between current assets and current liabilities. It is indicative of the ability of the person to pay off short-term obligations. To calculate a current debt to asset ratio, divide current liabilities by current assets. The target for this ratio is between one and two. It means that a person has more than 100 percent of the assets necessary to cover debts coming due within one year.
Long-Term Debt to Total Assets
Another debt to asset ratio is the long-term debt to total assets ratio. To calculate, a person divides his total long-term debt by his total assets. Long-term debt includes all amounts that are due in greater than one year's time. This ratio should not be greater than one. From year to year, the goal is to decrease the ratio.
Total Debt to Total Assets
The final debt to asset ratio is the total debt to total assets. Dividing total debt by total assets will give the proportion of a person's assets that creditors supplied provisions to purchase. This value should improve by decreasing from year to year as a person works to pay off his debts. Again, it is a good idea to keep this number below one.
The Roll of Age
When a person is just beginning his career following high school or college, the ratios will increase as he makes large purchases. This is known as the asset accumulation phase of his life cycle. Generally, from the early 20s until nearly 40 years old, a person will accumulate debt as he buys a house, car and other assets. Once he begins to pay off the debts, significantly save and plan for retirement, the ratios typically decrease and should continue to do so.
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