Key Personal Finance Ratios

Everyone is curious to know what is their personal finance score. As investors check the company’s financial ratios to understand its health, it is important for an individual to have a look at its own personal finance ratios. These personal finance ratios help you to understand your personal financial health and also help you to take decisions in that regards.

Liquidity Ratio
This ratio is the indicator of a person’s ability to meet his/her regular expenses in the event of a contingency or unforeseen circumstance. In other words, how many months will your money last if at all your sources of income stopped due to any unexpected circumstances. To calculate this ratio, you need to divide liquid assets by your total monthly expenses. Ideally, the ratio should be anywhere between 4 to 8.

Savings Ratio
This ratio reveals the amount a person should keep away as savings. The higher the savings ratio, the sooner you can reach your goals. To calculate this ratio, you need to divide your total annual savings by your total annual income. Ideally, the ratio should be anywhere between 30 per cent to 50 per cent.

Debt to Asset Ratio
This ratio helps to understand whether the situation is of over-borrowed or there are any solvency issues. It should be specifically used while taking a new loan. If already your borrowing is beyond repayment capacity, it’s advisable to not take a new loan. A better idea would be to wait until the existing loans are squared-off. To calculate this ratio, you need to divide your total outstanding liabilities or loans by your total assets. Ideally, the ratio should be less than 50 per cent.

Debt Servicing Ratio
This ratio measures monthly debt obligations against monthly incomes. The objective should be to move from a situation of high debt, if any, and low savings to a situation of no debt and high savings as your age and income increases. To calculate this ratio, you need to divide your EMI (Equated Monthly Instalments) by your total monthly income. It is better to calculate two debt servicing ratios, one for your home loan and another for any other liabilities apart from home loan. Ideally, for home loan, this ratio should be 50 per cent or less and for any other liabilities, it should not exceed 30 per cent. It is to be noted that here home loan is specifically for the first home and not for a secondary home.

Solvency Ratio
This ratio will help to know whether the assets in the portfolio are adequate to service debts. To calculate this ratio, you need to divide your total networth by your total assets. Your total networth can be calculated as deducting your total outstanding liabilities or loans from your total assets. Ideally, the ratio should be more than 50 per cent.

Life Insurance Coverage Ratio
This ratio can give an idea of whether an adequate amount of life insurance coverage is available or not. To calculate this ratio, you need to divide your total sum assured of existing life insurance by your total annual income. Ideally, the ratio should be 10 or above. It is to be remembered that this ratio only gives you the minimum life insurance cover that you must have. However, to understand the actual life cover required you need to carry out an insurance needs analysis based on which you can determine the actual cover required.