This article is a contribution from Fall. Autumn offers a mobile application that helps us manage our money and life.
Oh proportions. They can remember painful math classes and solving complex problems. However, in the world of personal finance and investing, knowing some of these financial ratios can make you a smarter investor.
The beauty of these financial ratios is that they can help you a) quickly check the health of your finances and b) analyze the areas where you are performing (or underperforming). Just as our doctor advises us to get regular health checkups, the same can be said for monitoring your financial health. Below, get acquainted with 8 financial ratios that everyone should know!
Liquidity Ratio #1
Liquidity ratio = (Cash Assets / Monthly Expenses)
Also known as the emergency fund ratio, this ratio refers to your ability to support your monthly expenses with your current liquid or cash reserves. It indicates how many months you can continue to pay your fixed expenses, in case you lose your current source(s) of income.
Monetary assets are the most liquid of assets. They can be quickly converted to cash with little or no principal loss. These include your cash or cash equivalent securities such as time deposits, cash management accounts and Singapore Savings Bonds (SSBs). Experts often recommend having at least 6 months of expenses as monetary assets to cover any emergency needs.
#2 Liquid assets at net worth
Liquid assets to equity = (Cash / Net Value)
This ratio measures the percentage of its assets that is in the form of cash or cash equivalents. This number can also determine if you are in an “asset rich, cash poor” position. Having a high liquidity ratio ensures you have a bigger cushion against temporary loss of income. However, if your liquidity ratio is too high, you may be holding too many assets in cash and not enough in investments.
Ideally, you should have at least 15% of your net worth in liquid assets or assets that can be easily converted into cash. This can be used to cover short-term debt obligations or other emergency scenarios where you’ll need to raise funds quickly.
#3 Savings Rate
savings ratio = (Monthly Savings / Monthly Gross Income)
This ratio indicates the proportion of your monthly income that is channeled towards savings. If you adopt a “Pay Yourself First” philosophy (also known as the 50-30-20 rule), you should book at least 20% of your gross monthly income for savings to meet your financial goals. The higher the savings rate, the better.
#4 Debt to Asset Ratio
Debt to asset ratio = (Total Liabilities / Total Assets)
Also known as the Personal Gear Ratio, this ratio measures how much of your assets are financed by debt. In turn, it also highlights its borrowing capacity. As a general rule, you should have no more than 50% of your assets leveraged through debt. Having a high debt ratio means having a high level of debt which can expose you to greater risks when interest rates rise.
#5 Debt Service Ratio
debt service ratio = Total Debt / Monthly Net Income
This ratio measures how much of your net income is used to pay your debt obligations. This is a critical ratio for homebuyers, as lenders (banks) determine your loan limits based on how much debt you’re paying off and how much additional debt you can comfortably take on based on your “pay-as-you-go” ” current.
the Monetary Authority of Singapore (MAS) has given a guideline that no borrower should exceed 60% Total Debt Service Ratio (TDSR). This means that no more than 60% of your gross income should go towards paying your monthly debt obligations. In general, the guideline is for your debt service ratio to fallless than 35% of your net income. Having a low ratio ensures that you don’t become enslaved by debt.
#6 Non-mortgage debt service ratio
Non-mortgage debt service ratio = Total Monthly Non-Mortgage Debt Payments / Monthly Net Income
This ratio measures how much of your net income goes toward paying off all of your debt obligations, excluding mortgage payments. Some of these debt obligations include your credit card debt, personal loan, car loan, and other non-mortgage debt. Personal finance gurus advocate paying off this type of debt as quickly as possible, since they charge the highest effective interest rates. Therefore, it is good practice to first identify and classify these non-mortgage debts by their interest rates, so that you can effectively work on paying off your debts.
Since these debts are not usually “good debts” to assume, it is advisable to have no more than 15% of your net income pay your non-mortgage debts.
#7 Ratio of net investment assets to net worth
Ratio of net investment assets to net worth = Total Assets Invested / Net Worth
This ratio measures how much of your net worth is invested in assets (excluding place of residence) and whether they are efficiently implemented in income-generating asset classes. In short, it tells you how well you’re using your money to work harder for you. We should seek to accumulate investment assets throughout our lives. These include stocks, bonds, unit trusts, endowments, or even automatic advisor funds. aim to have at least 50% of your assets invested in some form of equity to put you in a good place for your retirement years.
#8 Solvency Ratio
solvency ratio = Total net worth / Total assets
This ratio measures whether you have the means to cover all your liabilities using your existing assets. (To calculate net worth, subtract your liabilities (debts) from your assets.) Sometimes we acquire assets by assuming debt. Sometimes this amount of debt could exceed the amount of assets. In a nutshell, we calculate the solvency ratio to measure our risk of bankruptcy due to our inability to pay the debts incurred. The higher your credit rating, the stronger your financial position.
Looking for tools to better understand your financial health?
Use these 8 financial ratios as a starting point to understand your financial health and what needs improvement. If you need help managing the health of your personal finances, you can rely on Autumn to consolidate your finances across different bank accounts, CPF accounts, and investment platforms, into one. finance dashboard.
That said, these ratios are in no way a substitute for a sound financial plan. If you’re looking for tools to better understand your financial health, Autumn can help. Ourretirement chart It shows how much you need to save by the time you retire and whether you’re on track to meet your retirement needs, based on your lifestyle and current spending.