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Understanding Personal Financial Ratios

Personal Financial Ratios are ubiquitous in our daily lives. They provide valuable insights, much like how a soccer player’s performance is assessed by their goals-to-games ratio. Similarly, in the realm of financial planning, we have ratios that offer a window into our financial well-being. These ratios can help you gauge your current financial health and make informed decisions about your financial future. Before diving into these ratios, there are some essential preparations and concepts you need to grasp:

  1. Liquid Assets: First, you should be aware of your liquid assets, which are cash or assets easily convertible to cash within a year. This category includes items like your savings account balance and fixed deposits.
  2. Monthly Expenses: Understanding your monthly expenses is crucial. The more accurate your expense data is, the more precise your financial ratios will be. Strive for near 100% accuracy in tracking your actual expenses.
  3. Net Worth: Calculate your net worth by subtracting your total liabilities from your total assets. Total assets encompass your liquid assets, investment assets (such as shares and unit trusts), and personal use assets (like your car and home). Total liabilities include short-term obligations (credit card debt), investment loans, and loans for personal assets (e.g., car loans and home mortgages). Your net worth reveals your financial position.

What Are The Personal Financial Ratios You Need To Understand?

Liquidity Ratios = Liquid Assets / Monthly Expenses

  • Guideline: Greater or equal to 3-6 months.
  • This ratio tells you how many months you can cover your expenses solely with your liquid assets in case of a job loss.

Liquid Assets to Net Worth = Liquid Assets / Net Worth

  • Guideline: Greater or equal to 15%.
  • This ratio shows what portion of your net worth is held in liquid assets.

Savings Ratio = Savings & Investments / Total Income

  • Guideline: Greater or equal to 10%.
  • This ratio indicates the percentage of your income that you save or invest. Most Singaporeans track their savings and investment accounts regularly, making this information readily available.

Debt-to-Asset Ratio = Total Liabilities / Total Assets

  • Guideline: Less or equal to 50%.
  • This ratio reveals the extent to which your assets are financed by debt. Lower values are generally better.

Debt Service Ratio = Annual Loan Payments / Annual Take-Home Pay (after CPF Contribution)

  • Guideline: Less or equal to 35%.
  • This ratio shows the portion of your take-home pay used for loan repayments.

Investment Assets to Net Worth Ratio = Investment Assets / Net Worth

  • Guideline: Greater or equal to 50%.
  • This figure indicates the proportion of your net worth dedicated to long-term goals, such as retirement. Keep in mind that this ratio should ideally increase as you age.

Solvency Ratio = Net Worth / Total Assets

  • No specific guideline.
  • This ratio reveals the portion of your assets that genuinely belong to you after settling all debts, if any.

How Common Are These Ratios Used in Financial Planning?

These financial ratios play a crucial role in financial planning, with a utilization rate ranging from 50% to 80%. The most commonly used ratios are the Liquidity Ratio (No. 1) and the Liquid Assets to Net Worth Ratio (No. 2). These ratios serve as a foundation for a comprehensive financial health check, enabling financial planners to ensure you have established emergency funds and insurance/investment plans to support your lifestyle during unexpected job loss or financial setbacks.

You Are Now Ready to Embark on Your Financial Journey

By diligently calculating and adjusting these ratios to align with the guidelines, you’ll be well-prepared to take control of your financial future. Armed with these insights, you can confidently plan for your life and make informed choices to live life to the fullest. Your financial well-being is within your grasp, so start your journey to financial empowerment today.

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