BUDGET SPECIAL
H
igh take home salaries gives a
high, but not knowing where
exactly it goes can make
you even feel depressed at times.
Knowing where you stand financially is
a challenge, especially at a time when
knowledge of personal finance is pretty
low. The difference between need and
affordability is narrow, especially if you
are used to borrowing money to fund
your desires. Naturally, often the first
real financial lesson one leans is when
one realises the credit card dues that
they have stacked up.
When it comes to your finances –
the liquidity to meet emergencies andyour ability to serve debts is important.
As you go up the ladder, knowing your
net worth is equally important. Here
are some of the ratios that will help
you get a fix on your financial status.
Remember, the figures indicated in the
table are to give you a fair idea of your
financial standing.Use these ratios to take control
of your money and be a step
ahead of your financial life
Measure your
financial health
Ratio What it indicates? What it means to you? RemarksLiquidity (Liquid
assets/Monthly
expenses)Indicates the con-
tingency fund that
you have created and
how many months
this will support you.= It is a measure of your ability to
meet unexpected expenses (medical
emergency).
= Helps you tide over tough finan-
cial situations such as job loss.
= Allows you to take advantage of
financial opportunity that may ap-
pear (down payment on the house).= Target of 3 to 4, that is hav-
ing easy access to funds (like
FDs, liquid fund) thrice the
amount of your monthly ex-
penses, is a reasonable reserve
= A figure of above 6 indicates
over cautious nature and you
may be losing out on using
your funds prudently
= Anything below 2 is risky.Debt Service Ratio
(Monthly loan pay-
ment/Monthly take
home income)Measures your abil-
ity of repaying debts
promptly.= Indicates the percentage of as-
sets financed with borrowing.
= Indicates your debt quotient.
= It should ideally reduce with age.= Housing loan: 40-45%;
auto/personal loan: 20-25%;
credit card: 10-15%.
= Overall EMI servicing
across categories should not be
more than 40-45% of take-
home pay.Savings Ratio
(Cash surplus/In-
come after tax)Whether you are
saving as much you
think you should.= Indicates proportion of your
post-tax income being saved.
= It is a measure of your risk
profile – whether you are proactive
with investments or not.= Anything above 10% is fair
= If it is above 25%, you can
use your money much better
through superior investments.Solvency Ratio
(Net worth/Total
assets)Indicates the degree
of insolvency or
cushion that you
have.= Indicates your risk bearing ability
= Is a measure of true worth. Un-
paid home loans means you do not
“own” that Rs 2 crore house.
= The net worth of your stocks will
plummet if the markets go into a
tailspin.= A cushion of above 50% is
being safe, indicating quality
assets.
= Anything less than the 30
level indicates a 30% variation
in your assets has could make
you insolvent.essential Personal Finance ratios
70 12 FEBRUaRy 2018Avenues