Check the Financial Ratio's

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There are few financial principles / ratios for tracking good financial health.

1.   Emergency Fund    = Liquid Assets

                                      Monthly expenses

·      This is the provision for unexpected expenses like job loss, medical treatment, marriage or any other requirements in family

·      A lower Ratio means you run a risk of not having adequate money & too high ratio means not making money to work hard for you

·      It is in the form of Cash + Saving Account Bal + Liquidity and Flexi Deposits

·      People with more stable income may need a lower ratio than those who are having irregular income.

·      Idle Ratio should be around 3 to 6 months of our total expenses  

2.   Savings Ratio = Amount invested per month

                                     Take home part 

·      We need to have Healthy saving ratio to protect our Future

·      As our life span are increasing, job spans are reducing so we have to built a large retirement corpuses

·      But too much saving at the cost of not enjoying the life is also bad idea.

·      This Ratio differs from person to person but it should be minimum 20% to 30% of our take home pay

3.   Debt /Loan coverage Ratio = Total loan EMIs per month

                                                   Per month take home pay

·      Easy availability and lower interest rates induces us to take a personal / home / vehicle loans, credit card outstanding balance etc.

·      In case of uncertainly in life due to job loss, accident etc it would be advisable that as your age increases you should try to make your ratio zero .No loan into your retirement

·      It should not be above 30% to 40% of our take home pay

4.   Net worth = Assets (Minus) – Liabilities

     This is the most important indicator among all ratios which shows progress of financial health

 5.  Life insurance coverage Ratio = (Net worth + Today s life cover)

                                                             Annual take home pay

Ø  This ratio takes care of the life cover needs for the earning member & will   determine how many years the family will sustain if something happens to earning members.

6.  Expenses to income Ratio = Total monthly expenses

                                                 Monthly take home pay

Ø  Total monthly expenses /Monthly take home pay (House hold + Lifestyle)

Ø  It should not be more than 30% to 35% of our take home pay.

7.  Net worth growth Ratio = Net increase in net worth

                                             Net worth at the beginning of the year

·      Which indicates Net worth growing rate and our net worth should increase minimum above inflation

“Every financial worry you want to banish & every financial dream you want to achieve comes from taking tiny step today that put you on the path towards your goal.” – Suze Orman