Just like how we can use financial ratios to
analyse companies before
investing in stocks, we can also use certain ratios to do a pulse check on our finances.
Here are eight important personal finance ratios that everyone should know about to identify potential financial pitfalls and help us make smarter financial decisions for the long-term.
TL;DR: Get Your Finances in Order Right Away With These 8 Personal Finance Ratios
| Ratios |
Definition |
Formula |
General Acceptable Range |
| Basic Liquidity Ratio |
Indicates how robust your finances are to handle an emergency |
Cash or Cash Equivalents / Monthly Expenses |
Three to six months |
| Liquid Assets to Net Worth Ratio |
Determines how much of an individual’s net worth is in the form of cash or cash equivalents |
Cash or Cash Equivalents / Net Worth |
At least 15% |
| Savings Ratio |
Calculates the amount of income a person sets aside as savings |
Monthly Savings / Monthly Gross Income |
At least 10% |
| Debt to Asset Ratio |
Assesses whether a person’s debt level is high. |
Total Liabilities / Total Assets |
50% or less |
| Solvency Ratio |
Another method to find out about potential longer-term solvency issues |
Total Net Worth / Total Assets |
The higher, the better |
| Debt Servicing Ratio |
Calculates the amount of net income that is used to make regular debt repayments |
Total Monthly Debt Repayments / Monthly Take-Home Income |
35% or less |
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