facebook8 Personal Finance Ratios That Everyone Should Know
260
shares

Advertisement

271221 personal finance ratios

8 Personal Finance Ratios That Everyone Should Know

profileSudhan P

Just like how we can use financial ratios to analyse companies before investing in stocks, we can also use specific ratios to do a pulse check on our finances.

Source: UCHealth | Giphy

Here are eight important personal finance ratios that everyone should know about to identify potential financial pitfalls and help us make smarter financial decisions for the long term.


TL;DR: Get Your Finances in Order Right Away With These 8 Personal Finance Ratios

RatiosDefinitionFormulaGeneral Acceptable Range
Basic Liquidity RatioIndicates how robust a person's finances are to handle an emergencyCash or Cash Equivalents / Monthly ExpensesThree to six months
Liquid Assets to Net Worth RatioDetermines how much of an individual’s net worth is in the form of cash or cash equivalentsCash or Cash Equivalents / Net Worth At least 15%
Savings RatioCalculates the amount of income a person sets aside as savingsMonthly Savings / Monthly Gross IncomeAt least 20%
Debt to Asset RatioAssesses whether a person’s debt level is highTotal Liabilities / Total Assets50% or less
Solvency RatioAnother method to find out about potential longer-term solvency issuesTotal Net Worth / Total Assets The higher, the better
Debt Servicing RatioCalculates the amount of net income that is used to make regular debt repaymentsTotal Monthly Debt Repayments / Monthly Take-Home Income35% or less
Non-Mortgage Debt Servicing RatioSimilar to the previous one but excludes debt repayments for mortgage loansTotal Monthly Non-Mortgage Debt Repayments / Monthly Take-Home Income 15% or less
Net Investment Assets to Net Worth RatioReveals how much of an individual’s assets are used to accumulate capital for the long-term, excluding the place of residenceTotal Invested Assets / Net Worth 50% or more

1. Basic Liquidity Ratio

The basic liquidity ratio, also known as the emergency fund ratio, indicates how robust your finances are to handle an emergency such as job loss or unexpected expenses.

When an asset is liquid, it can be converted to cash quickly without losing value.

The basic liquidity ratio is calculated by comparing the cash (or near-cash) amounts to monthly expenses.

Basic Liquidity Ratio = Cash or Cash Equivalents / Monthly Expenses

The higher the number, the more liquid the person’s assets are.

The general guideline is three to six months of expenses should be in cash or near-cash to cover any emergency needs.

2. Liquid Assets to Net Worth Ratio

It may not be easy to convert one’s assets into cash in an emergency situation, so it’s essential to have some of the assets in liquid form.

The liquid assets to net worth ratio determine how much of an individual’s net worth is in the form of cash or cash equivalents.

Net worth is simply the difference between the things you own versus what you owe.

Here’s how to calculate the liquid assets to net worth ratio:

Liquid Assets to Net Worth Ratio = Cash or Cash Equivalents / Net Worth 

Generally, a minimum ratio of 15 per cent is safe.

3. Savings Ratio

The savings ratio calculates the amount of income a person sets aside as savings, which could be used to fulfil financial goals.

The formula behind the savings ratio is:

Savings Ratio = Monthly Savings / Monthly Gross Income

Gross income is what we receive before the mandatory CPF contribution.

In terms of savings, 20 per cent is healthy according to the 50-30-20 rule that you can follow as a general guideline:

4. Debt to Asset Ratio

The debt to asset ratio assesses whether a person’s debt level is high.

Source: Brooklyn Nine-Nine | Giphy

Thus, it highlights the potential medium to longer-term solvency issues.

Solvency refers to the ability to pay one’s debt as they come due.

The debt to asset ratio is calculated by comparing the total liabilities with the total assets.

Debt to Asset Ratio = Total Liabilities / Total Assets 

In general, any figure of 50 per cent or less means that there are enough assets to cover the liabilities.

5. Solvency Ratio

Another method to discover potential longer-term solvency issues is to use the solvency ratio.

This ratio reveals the probability of a person becoming insolvent or bankrupt.

The math behind the solvency ratio is:

Solvency Ratio = Total Net Worth / Total Assets 

The higher the ratio, the better it is, as this means that the person has a robust financial position.

6. Debt Servicing Ratio

The debt servicing ratio calculates the amount of net income that is used to make regular debt repayments.

Net income is known as “take-home” income, which is income after CPF contributions.

This is how we calculate the debt servicing ratio:

Debt Servicing Ratio = Total Monthly Debt Repayments / Monthly Take-Home Income

Usually, any ratio of 35 per cent or below shows there’s enough income to pay for the monthly debt repayments.

7. Non-Mortgage Debt Servicing Ratio

The non-mortgage debt servicing ratio is similar to the previous one but excludes the debt repayments for a mortgage loan.

This ratio shows how much of a person’s take-home income goes towards non-mortgage debt repayments.

Non-Mortgage Debt Servicing Ratio = Total Monthly Non-Mortgage Debt Repayments / Monthly Take-Home Income 

Generally, a ratio of 15 per cent or below is considered safe.

Too high a ratio could mean that the person has borrowed excessively as most non-mortgage loans tend to be related to lifestyle expenses rather than long-term investments.

8. Net Investment Assets to Net Worth Ratio

This ratio reveals how much of an individual’s assets are used to accumulate capital for the long term, excluding the place of residence.

Source: Harry Potter | Giphy

 

As retirement approaches for the person, the ratio should go higher since the goal is to have enough assets for retirement.

Net Investment Assets to Net Worth Ratio = Total Invested Assets / Net Worth 

In general, a ratio of 50 per cent or more is healthy.

Have Burning Questions About Personal Finance?

You should join groups on Seedly and participate in the lively discussion about everything money:

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised financial advice. The acceptable figures given above are general guidelines only and may differ from individual to individual. It is best to have your financial planner analyse your financial situation based on your circumstances and financial goals. 

Advertisement

profile
About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
You can contribute your thoughts like Sudhan P here.

🔥 What's Popular

    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
Stay updated with the latest finance tips!
Receive bite-sized finance on Telegram here.

🔥 What's Popular

    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles
    • Loading articles

Join our Community!

Discuss your thoughts with like-minded members in these community groups!

Stay updated with the latest finance tips!
Receive bite-sized finance on Telegram here.