Yep, I am giving all of you, dear readers, a quiz on your debt management and savings practices. The rules are easy; There’s 10 questions. For every question, you give yourself one point if you answer it “right.” A 10 is a perfect score. Some of the questions are based on conventional standards of debt management and savings and others are just personal rules for me. Here we go…

1. DEBT MANAGEMENT. When you apply for a loan, a financial institution looks at your debt-to-income ratio (in other words, how much of your gross income you use to pay debt). The first ratio is known as the front ratio and measures the cost of carrying a home (mortgage payment, home insurance, municipal taxes, mortgage insurance premiums and condo fees if applicable) as a percentage of your gross income. To calculate your front ratio, add up the cost of carrying shelter and divide by your gross income monthly. For example, if your shelter costs are $1,500 and your gross income monthly is $4,000, your front ratio is 37.5%. If your front ratio is 31 or less (the recommended ratio according to the Federal Housing Administration in the U.S.), score one point (good luck Vancouver-ites!).
2. DEBT MANAGEMENT.The second part of the debt-to-income rati0, the back ratio, measures your total debt load (the front ratio plus credit card payments, car loans, student loans, LOC payments etc) over your gross income. Using the above example, if your housing costs are $1, 500 and all other debt is an additional $500, your back ratio is 50% ($1500+$500/$4,000). If your back ratio is 43 or less (i.e. you spend 43% or less of your gross income on debt), score one point.
3. MORTGAGES. The Millionaire Next Door (one of my favorite personal finance books) recommends that to achieve financial success never purchase a home that requires a mortgage that is more than twice of your household’s realized annual income. In other words, if your household income is $75,000, never carry more than a $150,000 mortgage. Score one point if your mortgage is 2 times or less of your household income.
4. AUTO EXPENSE. The Bureau of Labor Statistics reported in 2005 that all households spent on average $8,344 in automobile expenses (gas, car loan, insurance, repairs, fuzzy dice etc.); that’s a lot of money on a depreciating asset. Score one point if you spent less than that (you may have to ball-park this).
5. CREDIT CARDS. The median (not average) amount of credit card debt in the U.S.A. is estimated to be $1,900. Score one point if you have credit card debt of less than $1,900.
6. CREDIT CARD BALANCE. A debt ratio on your credit card means how much of your credit limit has been used. For example, if you have a credit card limit of $5,000 and you use $3,000 of it, your debt ratio is 60%. A debt ratio of over 50% lowers your credit score. Score one point if your debt ratio on your credit card is less than 50%.
7. RETIREMENT CONTRIBUTION. In 2005, the CA Magazine (a magazine for accountants) estimated the average retirement portfolio was $50,000. Score one point if your retirement portfolio is over $50,000 (if you have a pension, lucky you, and score a point since the average pension for public sector worker is worth $500,000).
8. SAVINGS RATE. Score one point if you save 10% or more of after-tax income (and kudos to you if you make it automatic). For reference, most experts agree that a 15% savings rate makes you comfortable and anything over 20% savings will, over time, give you financial independence.
9. MINIMIZING TAXES. According to the Millionaire Next Door, the average American pays 11.6% of their net worth annually in income tax. In other words, if your net worth is $200,000, you are paying $23,200 annually in taxes. The best way to reduce this ratio is to put your money in appreciating assets and hold onto them (since you are only taxed upon sale), tax-free instruments (i.e. municipal bonds) or invest in assets that produce tax-friendly distributions (i.e. dividends). Score one point if you pay less than 11.6% of your net worth in taxes annually.
10. CASH ON HAND. Score one point if you have cash on hand or unused line of credit equal to three months of fixed expenses.

Add up your score, if you scored…

0-2: Nowhere to go but up. Tackle things one step at a time. Most of all, stay positive.

3-5: Need work but you have a foundation to work on.

6-8: Great work, you are well on the way to financial success

9-10: what are you doing reading this blog? Don’t you have your own island to tend to?

I scored an 8. How did you do?