Handling finances is a little tricky! But not if you learn the tricks of the trade – Money Ratios. Money Ratios are like a torch on the foggy road, so they will teach you how to evaluate the financial health.
What are Money Ratios?
Money Ratios refer to the financial perimeters which can be calculated based on the components of Personal Finances like debt, monthly expenditure etc.
Let’s learn about Money Ratios
- Liquidity Ratio
Liquidity Ratio helps you evaluate the cash position so as to understand the capability of the individual to cover the monthly expenditure in case of unforeseen events.
It is calculated as below
Liquidity Ratio = Cash / Monthly Expenditure
Liquidity Ratio denotes how many months of income you have at disposal in case of contingency. Ideally, it is better to have Liquidity Ratio of 5-7 for the individuals who do not have a stable income.
- Solvency Ratio
Solvency Ratio is helpful for those individuals who have debt (housing or otherwise) in their portfolio. Solvency Ratio denotes whether the assets in your portfolio can pay off the debt liability.
It is calculated as below
Solvency Ratio = Net worth / Total Assets
Net worth is calculated by deducting the liabilities from the assets.
For e.g. if an individual has loan of Rs.10 lakhs and has total assets of Rs. 20 lakhs including fixed deposits and real estate. In this case, Net Worth = 20 lakhs – 10 lakhs = 10 Lakhs. Solvency Ratio will be 0.50 which means that assets can service the debts sufficiently.
- Debt to Income Ratio
Debt to Income Ratio refers to Equal Monthly Instalments divided by monthly income. This denotes the individual’s ability to pay the monthly instalments of the debt with his monthly income.
Debt to Income Ratio on the lower side is considered satisfactory by the lenders. More the monthly income is, lower is the Debt to Income Ratio.
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