While you might not be planning a wedding, if you’re considering a major purchase of any kind, it might be prudent to run a financial ratio analysis first. Sometimes that new-car smell can be intoxicating, and it’s never advisable to make a significant financial decision while you’re intoxicated.
In 2019, Bryan and Lizzy met and fell in love during a Brazil Emersion program while earning their MBAs at UCLA. Both returned to school to advance in their established professions – Bryan, a retired Marine officer and congressional liaison, and Lizzy, a business development professional at a law firm.
While living between LA and DC, their individual expenses weren’t a priority. Today, however, Bryan and Lizzy are high individual earners. They wanted to discuss finances and answer the question, “Should we have a July wedding this year estimated to cost $75,000 or invest those funds and have a small court wedding?”
Before crunching numbers, I probed for the emotional value of having a wedding. My relationship with Bryan preceded them becoming a couple, so it was important to get to know Lizzy better. During our initial meeting, Bryan conveniently stepped away to feed his barking Dobermann. That’s when Lizzy confided that Bryan wanted the big wedding, and she was the sensible one. Noticeably, Lizzy’s eyes lit up with a guilty smile when she shared, “But I changed my mind after looking at venues.” I confirmed this when Bryan returned, and he added, “I feel a lot of financial anxiety about spending $75,000 for a wedding that will last one day.” I looked over at Lizzy and noticed her fading smile.
My objective was to assure them of the possibility of a beautiful wedding. But I needed to look at their financial situation first. To determine whether my friends were financially ready for that big expense, I performed a ratio analysis for them as a couple, comparing their actual liquidity and expenditures to benchmarks.
Here’s the process. I began with the liquidity ratio to determine an emergency fund. Surprisingly, their liquidity ratio of .97 wasn’t enough to cover one month’s non-discretionary expenses. That means they were spending more than they were bringing in. I recommend a three-month emergency fund for higher-income clients.
After the liquidity ratio, I assessed debt ratios, looking at consumer debt, housing debt, and combined housing with all recurring debt, divided by gross income. The benchmark ratios are 20%, 28%, and 36%, respectfully.
How did our couple do? Compared to the benchmarks, their consumer debt ratio is 52%, the housing ratio is 15%, and housing plus recurring debt is 73%. The couple’s weakness is noticeably individual spending, which is driving consumer debt to 32% above the recommended 20% ratio.
Since money disagreements are a significant driver of divorce, it was prudent for my friends to come to me before sending out their wedding invitations. They weren’t ready to have the big, beautiful wedding. However, they will be after a few meetings and some financial behavioral changes. Oh, but it won’t be in July 2022!
When running your ratio analysis, it’s advisable to use a third party to help keep the emotion out of the decision. Why not let us help you rather than going it alone.
If you already have an investment advisor, congratulations. However, if you’d like to learn more about what investment advisors do for their clients, please feel free to reach out to me at empirKalpartners.com for an individual assessment.
About the Author
Edward Vela is an Investment Advisor and Estate Planning Specialist at empiriKal partners, llc©, with 13 years of wealth management experience. He earned a Journalism Certification from the University of Massachusetts, a BA in Political Science, a Financial Planning Certification at UCLA, and an MBA from the UCLA Anderson School of Management. You can contact Edward at 925-300-8805 or email edward@empiriKalpartners.com.
