4 Important Personal Finance Ratios to Learn About

When evaluating the market value of a particular company, records like a cash flow statement and balance sheet, etc. play an important role. However, there are some financial ratios as well that have to be considered in the process.

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In the same way, there are certain personal finance ratios that play an important role when evaluating the financial health of an individual. These are:

1. Asset to Debt Ratio

It compares the assets owned by an individual with their liabilities. So:

Asset to Debt Ratio = Total assets/Total liabilities

The asset to debt ratio varies from one person to another. For instance, for a young person who has just bought a new house, the ratio would be lower. Similarly, for a person in their 40s who is earning a good salary, the ratio would be higher.

2. Liquidity Ratio

The term liquidity is used with liquid assets (cash mainly), and so the liquidity ratio indicates the capacity of an individual to meet their urgent cash requirements.

Liquidity ratio = available cash or assets equivalent to cash/monthly expenses

The liquidity ratio can be used for the analysis of emergency funds.

Since it’s a good practice to have enough emergency funds to manage the expenses of 3-6 months, the liquidity ratio should also range between 3-6.

3. Saving Ratio

The saving ratio is one of the commonly used yet important personal finance ratios to focus on. It compares the monthly surplus to the monthly earnings. So:

Saving ratio = amount saved per month/monthly income

The saving ratio can shed light on the monthly savings of an individual and offer valuable insight into their personal finance. Other than this, it can be used to get an idea of how good the chances are for an individual to meet their future goals.

4. Debt Service Ratio

As the name suggests, the debt service ratio helps learn about how easily can an individual repay their loans/debt. So:

Debt service ratio = short-term liabilities/total income