6 financial formulas to help you succeed

Formula No. 3: Find leverage ratio using equity
Total debt ÷ Total equity = Leverage ratio

You can also find the leverage ratio for your liabilities compared to your equity (rather than income). Equity, simply put, is ownership interest. For example, if your house is worth $200,000 and you owe $50,000, then you have equity of $150,000 in the house. Stocks are also equities.

Using this leverage ratio "lets you know how much risk you currently have," says Lovell. It's a quick way to see how at risk your debt is, a calculation you may want to make before you take other financial risks, such as changing jobs or going back to school.

The lower the ratio, the better your overall financial health. Lovell points out that if you have fewer assets, you need to make sure your leverage ratio is lower. Someone with more assets can have a higher ratio.


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