Ratios are very common in our daily lives and one such common ratio is like Soccer Players who are generally evaluated by their goals to games ratio. Therefore in Financial Planning, there’s such ratios available to help you get a better understanding of your current Financial Health.
Before getting these ratios, there are a few preparations and understandings needed like:
– Liquid Assets – You need to know how much Cash and similar to cash resources that you can easily converted to cash typically within one year. Such items are like your savings account and fixed deposits.
– Monthly Expenses – You need to know how much you spend every month. If you are able to get the details very near to 100% of the actual expenses then that would be good and would definitely help to getting a more accurate result
– Net Worth – This is obtained by using the difference between your Total Assets and Total Liabilities. Total Assets usually consist of your Liquid Assets, Investment Assets (shares and Unit Trusts) and Personal Use Assets (like you Car and Home). Total Liabilities would include your Short-Term Obligations (Credit Cards), Investment Loans, Loans to Purchase Personal Assets (like Car Loan, Home Mortgage). Once you have these information ready, you will get your Net Worth
Are You Ready For Your Personal Financial Ratios?
1. Liquidity Ratios = Liquid Assets / Monthly Expenses
Guideline is Greater or Equal to 3-6 months. This will let you know the number of months you can meet your monthly expenses from your existing liquid assets assuming that you have lost/stop your job.
2. Liquid Assets to Networth = Liquid Assets / Net Worth
Guideline is Greater or Equal to 15%. This will let you know what amount of your net worth is in Liquid Assets.
3. Savings Ratio = Savings & Investments / Total Income
Guideline is Greater or Equal To 10%. These figures should be easily available to you as most Singaporeans like to keep track of their Savings Account and Investment Account on a regular basis. This ratio will let you know the percentage that you are using to save with your income.
4. Debt-to-Asset Ratio = Total Liabilities / Total Assets
Guideline is Less or Equal To 50%. This ratio actually let you know how much of your assets are financed by debt. Therefore the lesser the better.
5. Debt Service Ratio = Annual Loan Payments / Annual Take Home Pay (after your own CPF Contribution)
Guideline is Less or Equal To 35%. This ratio will let you know how much of your Take Home Pay is being used to pay off your loans.
6. Investment Assets to Net Worth Ratio = Investment Assets / Net Worth
Guideline is Greater or Equal to 50%. This figure will let you know how much you have devoted to accumulating money especially for purposes like Retirement or Long-Term goals. Another guideline to note is that this ratio should increase as you get older.
7. Solvency Ratio = Net Worth / Total Assets
There’s no guideline for this and this ratio actually show you how much of your assets really belong to you. In other words, how much belong to you after settling all of your debts (if any).
Are these Ratios commonly used during your Financial Planning stage?
I would say at least 50 – 80% of the time. The commonly used is No. 1 & No. 2. Before a proper Financial Health Check, Financial Planners need to know that you have done up your Emergency Funding (to sustain your daily lifestyle during out of job and also that your insurance/investment plans can still be continued)
You Are Ready To Start Planning…
If you take time to work out these Ratios and being able to adjust them to be within the Guideline, then I would say you are ready to start planning for your life and live life to your fullest.