Measure Your Financial Security By Calculating Your Debt-To-Cash Ratio

The best way to measure your financial security is by calculating your debt-to-cash ratio. Having a lot of debt lowers your financial security. Whereas having a lot of cash increases your financial security.

The lower your debt-to-cash ratio, the strong your financial security and vice versa. Using debt to buy a house that is appreciating in value is great. But using debt to buy a house when it is depreciating could cause problems if you don't have enough cash on hand.

Your Debt-To-Cash Ratio

One of the reasons why I want to rebuild my cash reserves back over $100,000 is because of financial risk. With two rental mortgages to pay and no steady job, having less than $100,000 feels irresponsible. Further, I've got two young kids to take care of.

Theoretically, I could lose all my tenants and therefore have to shoulder both mortgage payments on my own. In such a scenario, because of property taxes, an HOA fee, maintenance, and mortgage payments, $100,000 would be exhausted in 12 months.

Going off a gut feeling to determine how much cash to have is OK. But it would be nice to formalize a debt-to-cash ratio to see at what level debt is too much.

Because of excessive debt, way too many people got their heads blown off during the last financial crisis

Today, we once again see plenty of people borrowing from their home equity to buy things they don't need. It's so funny how quickly we forget about the risk of having too much debt!

With uncertain times here again and interest rates up a lot since the 2021, increasing your financial security by reducing debt is wise.

Debt As A Necessary Evil To Build Wealth

The only reason why I take on debt is to leverage up on potentially appreciating assets like San Francisco real estate. So far, so good as the labor market is robust in the Bay Area, and the bubble in tech hasn't popped, yet. Big tech is winning big during the pandemic. Remember, despite the dotcom meltdown and financial crisis, rents still went up.

I will never knowingly take on debt to buy a depreciating asset. Neither should you. Because of the interest you must pay, to do so is like giving yourself a double uppercut.

In event of a bad investment or downturn in the economy, too much debt can crush your finances. This post will discuss what levels I think are simply too much.

Cash is used as the denominator so we can measure financial risk. It's all fine and dandy to have equity as the denominator, but when shit hits the fan, your equity could disappear in a nanosecond. Having cash is the true safety net. Do not count on equity!

Sa Francisco median sales price - Measure Your Financial Security By Calculating Your Debt-To-Cash Ratio

Measuring Financial Risk And Security

Here are various ways to measure your financial security. We'll go through each one to the come up with an appropriate debt-to-cash ratio.

No Debt Or Net Cash Position

You're living as financially risk-free as possible. If you can cover your basic living expenses, you will likely never face financial calamity. Depending on your assets, it's important to have health, auto, property, and excess liability insurance.

Having no debt or having cash that exceeds your debt is an excellent position to be in by the time you are retired or no longer earning active income. No debt is better than a net cash position. You have tremendous financial security and can weather and recession.

100% Debt / Cash Ratio

Every dollar of debt is matched by a dollar of savings e.g. $100,000 mortgage and $100,000 in a money market account. You will also likely never experience financial distress because you will probably never have to fire sale an asset due to a liquidity crunch.

A 100% Debt / Equity ratio is risk-neutral. Shore up your financial security by developing as many income streams as possible.

200% – 500% Debt / Cash Ratio

An example is a $500,000 mortgage + $50,000 in student loans and $150,000 in cash. Such levels should be supported by secure income that has a high probability of growing over time.

You should also have a plan to continue working for at least 10 years. The higher the debt level, the longer you should plan to work and the more income streams you should have.

600% – 1,000% Debt / Cash Ratio

You may have just purchased a home and exhausted all your funds e.g. a $140,000 downpayment has left you with just $50,000 in the bank and a $500,000 mortgage (1,000% Debt / Cash).

This is generally a short term situation as you rapidly rebuild your cash hoard, and more slowly grow your income. You might want to pick up a side gig like driving for Uber. Be good to your parents! It's important to do everything possible to grow your balance sheet.

1,000%+ Debt / Cash Ratio

With more than 10 times more debt than cash, you are at real risk of financial insolvency if anything should happen to your income. If you used debt to buy a depreciating asset, like going on margin to buy tech stocks, NFTs, and crypto, you are probably wiped out now.

Your income must either be extremely high (new medical doctor making $200,000+ with lots of student loans who decides to buy a house), or something is wrong with the management of your finances, e.g. took out a HELOC to spend on depreciating assets, massive credit card debt, etc.

Your number one financial goal is to pay down debt as quickly as possible while guarding against running out of cash should something unfortunate happen. Spending must go on lock down mode. Find ways to sell things you don't use.

You might even want to start a website to keep your debt payoff motivation high. There are hundreds of debt bloggers out there who've achieved fantastic results thanks to their community's encourage.

Variables To Reduce Insolvency Risk And Boost Financial Security

My debt-to-cash ratio is about 500%. In other words, I'm nowhere near a safe level for someone who no longer has a job. Entrepreneurship is risky business and Google could banish Financial Samurai and my other websites from their search rankings tomorrow!

A high debt-to-cash ratio is why I've been hustling to earn more money through corporate consulting clients so I can pay off one of a rental property mortgage early. With the volatility in the stock market, I'm even more motivated to raise cash in order to have buying ammunition.

My plan is to bring my Debt / Cash ratio down to 200% in 10 years, and down to 100% in 20 years before the age of 60. With the purchase of my fourth property in 2014, at 38, I'm no longer in the hyper asset accumulation phase unless I can win an attractive low ball deal. Making money selling a product online is more enjoyable than managing property at this stage of my life.

I would feel very comfortable having one dollar in savings match one dollar in debt. Even in true retirement, when due to arthritis, my fingers can no longer type.

So long as I can make a combined $300,000 AGI a year through business income and passive income, having a ~$750,000 primary mortgage balance is ideal at today's interest rates. A 2.625% interest rate is a relatively low hurdle for my investments to overcome. Further, the $300K income:$750K mortgage ratio is relatively conservative.

Besides the level of income that may help lessen the risk of a high Debt / Cash ratio, the absolute level of cash is also an important variable as well. You may have $2 million in debt that costs $53,000 a year in interest to service. But if you have $1 million in cash, you'll be solvent for the next 20 months, assuming no other income is received.

The Ideal Maximum Debt-To-Cash Ratio By Age

There's no one size fits all Debt-to-Cash ratio because everybody's risk tolerance and income generating abilities are different. But if I am to think logically about the necessities of debt to gain a college education and buy a home, here are the recommended Debt / Cash ratios by age.

The ratios are all about gaining more financial security as you age.

Measuring Financial Security Chart - Maximum Recommend Debt To Cash Ratio By Age and Work Experience

The idea behind these ratios is to provide guidance for a typical person who goes through a typical arc of accumulating debt in the first half of his/her career. Then paying down debt in the second half of his/her career.

With the goal of being debt free by retirement. Cash should not include stocks, bonds, real estate, or any investments that do not guarantee 100% principal.

During boom times, you want to be leveraged with as much debt as you can comfortably handle invested in appreciating assets. During downturns, the reverse is true.

The goal is to not have to ever sell anything during a downturn due to a liquidity crunch. Many people who held onto their stocks and real estate between 2008-2011 are doing just fine now. It's those who had to liquidate out of fear, a margin call, or a job loss who ultimately got hurt.

Before we die, it would be nice to have zero debt. This way, there's one less organization to deal with when dispersing our wealth to family members and organizations we care about. But if you can't get to zero debt before death, then try your best to get to a 100% debt-to-cash ratio by retirement.

What is your debt-to-cash ratio? (All Debt / Cash. Cash can include CDs, money market accounts, physical cash, checking accounts)

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Related Post: Pay Down Debt Or Invest? Implement FS-DAIR

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Related: Manage Your Asset-To-Liability Ratio For Financial Freedom

67 thoughts on “Measure Your Financial Security By Calculating Your Debt-To-Cash Ratio”

  1. Hi, is having already paid properties that i can sell more or less at or slightly above market value that i could use to payoff debt counts as equity or some form of cash?

  2. My husband and I have around 1200% debt/cash ratio, but honestly I don’t think this metric is very useful; considering total income to total debt is much more telling. Besides, there are lots of other assets besides cash that can be useful in a crisis (cash is king of course, but brokerage shouldn’t be disregarded entirely IMO – not to mention other safety nets like family money, pensions, etc.).

    We have around $1.3M in mortgages (10 rental units plus our home) and “only” $106K in cash. That makes us crazy by your gauge, but I just don’t feel like we need more than 12 months of expenses on hand, especially given that we live on less than 50% of our (very stable) salaries. Also, all our properties have 30% equity or more and are on very cheap fixed rate mortgages.

    Instead of building cash we are maxing out retirement and making nearly triple mortgage payments on our home. Yes, Great Depression II could strike and we could both lose our jobs and all our tenants. But trying to prepare for that would require selling all the rentals and avoiding the stock market entirely – and we are too young for that kind of conservativism!

  3. If you borrow you should borrow beyond max! and push the risk to the lender, after all it is the lender’s business.

    “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” J. Paul Getty

  4. Do you consider holdings in gold the same as cash? Especially physical gold held in ones own possession.

  5. I am confused about your numbers specifically your 200-1000% as it pertains to debt to cash. I thought i understood it, but now I am not so sure. I like how you explained your rule for buying a car, as a 1/10th rule–that was a cleaner and more understandable ratio to me than percentages over 100.

    Wouldn’t it just be easier to total up your debt, let’s say $300K and then multiply that by 10%, 20%, 30%, etc. and aim to increase your percentage year after year. You could focus on increasing your savings from 30K (year 1) or 10% and 60K (year 2) or 20%. This seems more understandable to me, but I don’t have a background in finance like you do.

  6. Delivery boy. Congrats for being at the $2.5M networth category. You are among top 4% of the wealthiest households in the u.s. Your passive income at $35k seems a bit low with that level of networth. Your passive income at $2.5M net worth should be between $120 – $125k/year.

  7. I am 38 years old and i prefer to be at 100% cash to debt ratio today. If you look at the dow since its inception of 1897, the stock market shifts from a bull market to a bear market every 18 years like clock work. 1982 – 2000 was a bull market cycle and 2000 – 2018 is what i believe to be a bear market cycle. Had you invested $250k in 1982 and closed your eyes for 18 years, you investment would have grown to $3.5M by holding the s&p until 2000. What i see short term is a massive deleveraging taking place, a very similair environment to that of 1937. You want to hold as much cash as possible in a deflationary environment and leverage as much as possible in an inflationary environment. In a deflationary environment cash is king. By next year i see euro and dollar trading at parity and dollar breaking the 100 index.

  8. Hi Sam,
    You could write a post abt ratio of passive income to ratio of active / job / business income. That would give interesting targets to shoot for. For e.g. A person earning $200,000 in job income could have a passive income of $50,000 for a ratio of 25%. Something similar. I believe it would be an insightful read.

  9. Great point about not taking on debt to buy depreciable assets. An education is a good reason (though value for the $ varies wildly) and a home can be as well. Other things, such as vehicles….not so much. I still recall getting my haircut a few years ago and the lady was talking about the brand new vehicle she bought while taking out a 6 year loan. I felt bad for her, due to her lack of financial education.

  10. I basically never had any debt and wasn’t realizing it was such a common thing until I started looking into my own finances seriously. This happened roughly at the same time I bought a condo, and had to take a loan for the first time in my life (I was 31).

    I guess I was shielded by the fact that I never owned a credit card. I’m still amazed that I basically avoided debt by simply never accepting the concept of using money that is not mine.

  11. I like this view, I’m a “safety” margin nut – but never considered the ratio in this view. The only question I have is I typically keep a 5% cash amount; let’s use round numbers:

    500k = 25k in cash
    175k in debt puts my ratio to an uncomfortable point – yet, at the same time, I feel I have too much cash on hand and wish it was working in the market… as the nest egg grows to 800k, 1M, etc… i would actually lower my available cash to a 3-4%…

    So, what this ratio tells me is to focus more on lowering debt, since I don’t like to have too much cash laying around…

    I guess at some point, the nest egg would be large enough that it could justify the cash laying around…

    Anyway – thanks for the view, gives me another angle to consider.

  12. delivery Boy

    I am a little confused with these ratios of “debt to cash.” I am married and 49 years old. We have a net worth well over $2.5 million. I am ok leaving retirement accounts, other assets, etc. out of the discussion. A good chunk of our worth, over $600,000, is in taxable accounts. Our only debt is our mortgage of about $300,000 on a $750,000 home. Of the $600,000 in taxable accounts, we have about $100,000 in cash and I feel pretty comfortable investing my remaining taxable $500,000 in equities. So am I currently 3/1 (debt/cash) ratio or better Sam? Should I pay my 3.25% fixed 30 year mortgage down further? Damn, you have a great site by the way and your observations and thoughts keep me coming back . . . just confused on why I should reduce my debt v investments. Our household W2 income is $200,000 per year. My passive income is about $35,000 per year putting us in your sweet spot (which I agree with!).

    1. Hola,

      At 49, it depends on how much longer you want to work, and whether you ascribe to my recommendation to get to a 100% D / C ratio by the time you no longer want to work. Everybody is different. Where is the remaining $2.5M in net worth as I’m only counting around $1.85M?

      I’d happily be lobbing an extra $1,000 – $5,000 a month to pay down a 3.25% mortgage. That’s a good return this year with the S&P 500 down 4% so far!

      I wouldn’t have just $300,000 in cash lying around. Instead, I would build a CD ladder with $100,000 of a $200,000 cash hoard and get that mortgage to $200,000.


  13. Sam, thought provoking post as always!

    I’ve got $98k in cash and currently sitting at an 800% DC ratio.

    All debt is mortgage based. 63% is against income properties, and the remaining 37% for my home.

    I definitely need to reduce my DC ratio as I get into my mid forties… am 38 now.

    1. I like how you split up the debt mortgage regarding your rental properties and your home. I’d shoot to get down to a 500% D / C level per my chart. It will be a fruitful initiative that will make you motivated to save more and may down your highest interest rate mortgages.

  14. Currently in my mid twenty’s I have a debt to cash ratio of 0%. I have absolutely no debt. Paid off student loans, have no mortgage or car payments. I guess I should start looking for some investments that I can use debt to accelerate my growth. At this age I would rather take advantage of this low interest rate environment and use my income from my job to pay a monthly payment while building my net worth and passive income faster.

  15. Bryan @ Just One More Year

    This is an interesting way to analyze safe cash margins, to keep from becoming over leveraged with debt. History has shown that many people are caught in a cash crisis when the bubble bursts and they don’t have the funds to service their debt obligations.

    We are at a 45% ratio today based on the last bit of debt we have remaining and our liquid investments. In less than 5 months, we will be at zero debt, a growing balance in our liquid investments, and a passive income stream to cover out expenses indefinitely. That will put us in that elusive “No Debt Or Net Cash Position” we have worked to achieve for the last decade.

  16. Hi,
    We fall into the no debt/no mortgage category but we’re analyzing what our cash allocation should be since we’re 3 years away from early retirement. Without a future active income, we’re calculating how many years of living expenses to have in cash. Great article!

  17. I finally become 100% debt free last year after paying off my grad school loans. Right now, I’m just focusing on saving at least half my income so I can build my FU fund and saving for retirement as well. It makes me feel secure knowing that I have a good stash of cash in the bank and I love watching that balance grow.

  18. As one of my favorite analysts once said; “Leverage gives the illusion of wealth. Savings is wealth.”
    Being highly leveraged in real estate is a dangerous way to build wealth. I don’t care what it is or where it is. Everyone thinks it’s different where they live.
    I’m was kind of surprised at debt situation you’re in.

    1. “Being highly leveraged in real estate is a dangerous way to build wealth.”

      I have to disagree with this. Although using leverage with real estate is much more risky than simply using cash, being highly leveraged in real estate is much less dangerous than most other types of leverage due to the non-callable nature of mortgages and the low interest rates. Assuming that you have the income to cover mortgage and are confident in your ability to keep your job (or find an similarly compensated position), then I don’t believe that using high amounts of leverage to build wealth with real estate is all that dangerous. To be fair, you may be referring to higher levels of leverage than I am referring to though.

  19. If you include our retirement accounts, my Debt to Cash ratio is good–around 100 percent. But if you do not include retirement accounts, my ratio is more in the 600 to 1000 percent category.

    So my question is, do you include all assets or just assets that you can easily access? Should a retirement account be included in this calculation?

    Thanks Sam!

    1. I would say absolutely- net worth is net worth- including retirement accounts! Good job saving while you’re young!

    2. Hi Kate…. Hmmmm, it sounds like your saying your retirement accounts (IRA?, 401K?) have significant cash positions. I don’t think that’s the intent of the ratio (nor do I think that’s a good use of tax sheltered accounts), or do you mean something else.

      1. Hi Kate, sorry, I retract my comment (if only I could truly retract/delete it). I replied too quickly and for some reason thought you were referring to a high cash position in retirement accounts, which you were not. Apologies.

    3. Hi Kate,

      My D / C calculations DO NOT include retirement savings accounts (pre or post tax) as part of the cash denominator. Only physical cash, money market, checking, CDs really.

      The idea is that the value of cash doesn’t go down if you get into a liquidity crunch and need to sell. But investments in stocks and bonds do. And if you have to pay a 10% early withdrawal penalty, that’s no good either!


  20. fun in the sun

    Cash to debt ratio really just shows how conservative an investor is. 2 other important ratios are;
    1) Income Debt Produces to Debt Ratio. Ie if you invest in real estate, and you have $100k in profits coming in on $1 million of debt, that is a good investment, even if you only have $50k sitting in cash. Compare this to the person who has $1 million debt on their own home. They would want at least $200k in cash to fee similar level of comfort.
    2) Day Job income to debt ratio. New graduates can have a lot of student debt, but can also have high salaries to service it comfortably.

    I am currently working hard to improve my Income Debt Produces to Debt Ratio on each investment. My personal floor on new investments is 10%. The net income produced must be at least 10% of the debt taken on.

    1. Sure, those are good ratios and I may write a more elaborate post about them.

      May I ask how old you are and what is your current income profile? I used to think more about income in my 20s and early 30s, now it’s much less so because the income produced is more than enough to live.

      1. fun in the sun

        I am 35 with $220k day job income, and $50k investment income. I am working hard within a years to migrate some capital growth property to be income properties, with aim to move net investment income up to the $100k mark.

        I hate the risk of my capital growth type real estate. Another crash and all that equity can be wiped out. Moving these assets to being higher income producing (keeping the Income Debt Produces to Debt Ratio high on priority list), feels lower risk.

        I only keep $50k to $100k in cash, and hold a million in debt, all linked to income producing assets. I have zero personal debt (no car loan, mortgage, etc). As long as you have enough cash to weather a 6 month unemployment stint, that feels more than enough (and when I am unemployed, I significantly cut expenses)

        I agree, that once I hit the retirement mark / financial independence, the risk profile changes. But if you spend your growth mode at 100% cash to debt, you are probably adding decades to your working life with current low interest rates. Not all debt is equal, home mortgages and credit cards are not the same as leveraging income producing assets.

        1. Got it! $50k is a good investment income number with $100K as a great goal.

          I definitely don’t count on any of my real estate equity to be there, but I do count on the cash flow.

        2. I’m in a very similar situation to Fun in the Sun and have been more focused on creating investment income than holding on to cash, so much so that I have a really hard time letting it sit in a bank account for too long. I am hoping to always have at least $50k in cash on a go forward basis, but if there is another dip in real estate values, I’d have a hard time not spending everything on a good deal or two! To Fun in the Sun’s point and yours, I think your perspective shifts once you feel like you already have enough to live comfortably for the rest of your life – that’s when you want more cash and less risk.

  21. My wife and I are 25. We have about $160,000 in mortgage debt (2.875%) and another $20,000 in undergrad student loan debt (~4.9% in deferment), own both our 10 year old cars outright and only use credit cards to pay monthly expenses and pay off our statement each month. We contribute what we can to 401ks and IRAs and are cash-flowing her graduate school expenses (~$16K tuition/year, nurse practitioner to be) We recently paid a large chunk of $ to refinance and eliminate PMI after heavily leveraging into our first home in 2013 so we are cash poor right now, only carrying about $8-10k. I just set up a $20k HELOC as a liquidity safety net that allows us to play closer to the edge during this correction while still being able to pay tuition bills every 4 months. Things feel pretty tight right now and I’m budgeting maniacally to get Mrs. grad school but I know we’re on the right track. Both of our incomes should be substantially higher in 2017. We’re probably the diet version of the physician who just graduated and bought a house. Should be temporary.

    1. Beware of using a HELOC as a safety net. One of the first things banks/credit unions did during the last real estate downturn was cancel HELOCS or reduce them to the balance owed. Read the fine print, they can (and do) do that. I know a couple of people that were shocked (and un prepared) when that happened to them. One lost his house when he lost his job, he assumed that the worst that could happen was that he would use his HELOC to pay his bills (and mortgage) until he found another job. Had he known what could happen he would have written a check from HELOC into a savings account (itself ill advised).

      1. Thank you for the warning, it’s always nice to know those who have witnessed or experienced financial errors are willing to lend guidance to young people like my wife and I who want to do things the right way.

        I’ve heard horror stories (a lot of them from FS) of those leveraged to the gills via HELOCs when the 08 downturn occurred. The endless cautionary tales out there are enough to keep me on the straight and narrow. I have no intention of ever drawing against the HELOC unless we choose to invest a % of savings into the right position at the right price and then suddenly a car dies or our heater comes up craps in January. It’s untouchable unless survival depends on it and would then immediately be paid off.

        I’m incredibly fortunate to have an uncle who was a federal bank auditor for many years until he reached FI and he serves as a free financial counsel/investor for our whole family. I seek his (and Google’s and Sam’s) guidance before any major financial move.

        I appreciate your concern and advice though. This community is amazing.

    2. Don’t be afraid to take out grad loans for the Mrs. My wife is an NP and makes a very healthy living (close to or more than some MD’s). She went to a very expensive school, but graduated summa cum laude and is called daily by recruiters with offers.

      The field is very much under served. NP’s are desperately needed. Don’t worry and stay the course. Her hard work will pay off one day.

      1. Love the insight and great to hear of the successful career your wife has built. I’m attempting to get into an accelerated development program with my job that would have us both in new, much higher paying jobs by mid-2016 for me, early 2017 for her. We pull in more than enough to live and pay our expenses now and we’re already over halfway through her grad school so unless the sky falls, I’m going to do my best to avoid any additional debt right now so we can squash the debt we already have upon graduation and really ramp up investments. She’s a machine and I can’t wait for her to no longer have to carry the stress of school and work combined.

        I appreciate you shedding some positive outlook on her future profession! Good luck to both you and your wife in your FI journey.

    3. Nice job eliminating PMI! PMI is such a waste of money. The good thing about being cash poor is that you should feel agitated enough to maximize your savings while putting in the extra effort to make more money.

      Based on my recent review and conversations with SoFi, you should be able to get a student loan interest rate below 4.9%. I was paying 2.6% to 3.2% and the 10-year yield was higher in my day.

      1. Your SoFi article definitely piqued my interest (ah ha ha) and I’ll be exploring my options there.

        I have several questions about it.

        1. What approach would you take on when to re-finance student loans if ours are currently in deferment until end of 2016? Obviously the lower rate would be ideal yesterday, but I’d be worried about having to service them immediately since we’re both gainfully employed.

        2. My wife and I are both grads of the same public state school (in the very middle of the country) and it seemed the idea from your article is that alumni lend to other alumni, but it seems like it’s mostly west coast private universities thus far. Would we be eligble to refinance with anyone on the website if our numbers look good?

        Love your work, all of your efforts are greatly appreciated!

        1. Howdy Ken,

          Deferment still means the interest is accruing, so yes, I would refinance if you can find a rate that’s low enough. Might as well get a quote.

          You should be eligible to refi w/ anyone. The alumni to alumni is just how SoFi started. Now it’s nationwide.

          Let me know what quote you get with them and what you have now!

  22. I’m 23 and my debt to savings is roughly 7200%. This is due to a recent downpayment on my new house. While this should put up huge red flags, I am not worried that much due to the fact the my debt to income ratio is 35%, the majority of my debt is in my mortgage and I have 3 roommates, and I am young so I can lever up and hope for the best.

    Also, with smaller balances, the number can get very skewed.

    1. Living dangerously man! The D / C ratio is always skewed massively high right after a downpayment. Hence, just do everything you can to rebuild that cash hoard and earn more money.

      A 35% debt to income ratio is standard, and not something that should instill great confidence in your fiscal solvency at a 7,200% D/C. Seriously, don’t treat it lightly. Banks don’t lend beyond a 42% Income / debt ratio.

      72X more debt than cash is like having a $200,000 mortgage and only only $2,800 in the bank, while earning $66,000 a year. Honestly, that is a very precarious situation to be in. Time to burn the midnight oil to get to 1,000% D / C!

    2. I would be very nervous in that situation. I am 23 and just bought a house as well. I waited to buy until I would be able to maintain 3 months expenses (including the new mortgage payment) in an emergency fund. Even right after the downpayment, I was only ~1000% D/C and am quickly working to build up 50k in cash reserves as well as making some extra payments on the mortgage.

      I think that I am probably a bit more conservative of an investor than you though, as I have about 18% debt to income since I didn’t see a need for much more housing. As Sam said, I would be very careful if I were you.

      Good luck!

  23. sonny mehta

    what is an ideal personal debt service coverage ratio for someone with consistent earnings ?

  24. So I’m a bit confused….you said the ideal mortgage amount is ~$1,000,000 for yourself in a low interest rate period which we are in. Are you saying if someone makes about $200-250k per year- it’s OK to have a million in mortgage debt? My husband and I make about $1M gross income per year, or take home of about $500-700k, our mortgage debt is $750k which is about 1 to 1 ratio. Sometimes I wonder if we can be more aggressive in our real estate/debt portion of our net worth. Are we playing it too safe?? We own a small business that obviously like anyone else- could go bankrupt tomorrow. We do have almost 200k in cash. You always give such great and level headed advice! Thank you!

    1. There’s something to be said for peace of mind and being safe provides that. Your tolerance isn’t going to be the same as someone else so I’d let that be your guide.

    2. Hi Chris,

      First of all, congrats on taking home such a big income! Depending on what your total outstanding debt is, a $750,000 mortgage is not on the “efficient frontier curve” for optimal leverage and tax deductions with the current laws. But, don’t go out and get a $1M mortgage just because it isn’t! If you’re happy with your home, and your other investments, that’s all that matters. Please do read, The Ideal Mortgage Rate Is $1,000,000 If You Can Afford It.

      Second, $200,000 in cash is good. That puts you on a 375% D/C ratio. But given your annual income / debt is 100%, you are in a very secure financial position. The question is, what is your net worth? See, What Should My Net Worth Or Savings Be By Income? If you are 40, then with a $1M income, you should be at roughly $6M +/- $1M in net worth based on my chart.

      If you’re at much under $5M in net worth, perhaps you guys just started making $1M? And if not, you’ve got to ask yourself where did all the money go.

      1. Yes- thanks to your advice we are at $5-6M in net worth. We are self employed and as you always state in your blogs- it’s the best way to accumulate wealth. We try to save 20-30% of our take home pay. Keep up the great work and research!!! So helpful!

    3. IMHO once you’ve crossed a certain line as a high income earner it should change how much debt you carry. Let’s say in your case which sounds similar to mine…if you have over $5M in after tax relatively liquid investments, and you are not trying to live beyond your means…just have zero debt! It is quite liberating. When the market craters 15% and you won’t be kicking yourself that the money could have gone towards the debt. You start not to care about market swings and just enjoy life. Now if you are pressing and you want to live in a $3M home because you can technically afford it, go ahead and take on debt and roll the dice. I surely would have a much higher net worth if I took on debt, but the funny thing is that once you really have the money, you won’t want more stuff or a fancier house…you’ll actually want your life to be even more simple and less stressful.

      1. “…once you really have the money, you won’t want more stuff or a fancier house…you’ll actually want your life to be even more simple and less stressful.”

        If the Financial Samurai site is an oysterbed of personal finance wisdom, nbsdmp’s quote above is a giant black pearl.

        1. yet it’s amazing how many outside of the Samurai oyster bed DO want more stuff and a fancier house regardless… I am always amazed cruising around Huntington Harbor in my dinghy at the beautiful mansions with the huge yachts that are always empty with the doors, windows and blinds shut. Clearly 2nd, third or fourth homes that are rarely visited. Wasteful and disgraceful conspicuous consumption.

      2. Simplicity is definitely golden. I don’t find myself craving fancier stuff, just continued freedom.

        However, stress is a wonderful feeling for a writer. It allows me to put some emotion into writing posts that are more real, and therefore, may better connect with others who feel the same way or going through similar experiences.

        Everybody should spend all their money beyond $5.3 million! Why let the government take half when you die?

  25. I wonder if it might be better to have the ranges be “earning years” rather than age. So the first row 18-25 is “first five years” or something like that? Or some other category like “pre-earning/education years.”

    Age is a nice universal measure but a high school drop out at 18 and a college freshman are two drastically different groups.

    The overall point, of having a benchmark of some kind, is valuable and good to think about.

  26. It’s tough to have 100 percent debt to cash. In that case one probably isn’t using leverage properly. There are always prospective good or bad investments out there to use cash on.

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