Have A Good Look
• What major fiscal challenges do you face?
• State your financial positives in terms of revenue, debt management, and savings.
• How do you think you arrived at this point—and what would you like to see altered?
• How well organized are you for a financial emergency?
Write it out now:
The amount we have put away an emergency fund is?
• How is the subject of money addressed in your family: emotionally or rationally?
• Who makes the fiscal decisions? How come? How much collaboration is there?
Why it counts: Clarity and commitment. Authorities agree that before crunching the numbers, families need to scrutinize their financial wellness—and the best chance of success comes from having both mates on board.
Here we will explain to you the basic principle of personal financial ratio and its analyses. This will help you keep a tab on your personal finances.
Now what are personal finance ratios, you'd ask.
As the name hints these ratios deal with your personal riches, assets or cash in hand. All the more they're exceedingly simple to understand. Just plain discipline of sustaining a budget and statement of assets (what you earn or have) and liabilities (what you spend or what you owe to other people) will help you check your financial wellness.
Here is an easy guide which will help you to comprehend these ratios in detail. Let us have a look as to how these ratios may help.
Basic Solvency Ratio
This ratio signals your power to meet monthly expenses in case of any emergency or calamity. It's calculated by dividing the near-term cash you have with your monthly expenses.
Basic solvency ratio = Cash / Monthly expenses (this ratio isn't mentioned in percentage).You are able to also call it as emergency or contingency preparation ratio. This ratio helps you prepare for unexpected troubles.
An illustration, a 30-year-old businessman whose wife had an emergency gallbladder surgery last year. In spite of the fact that they had enough insurance to take care of exactly such an event, due to a few administrative problems on the day of discharge, he was informed that he would have to pay in cash as the bill couldn't be settled.
He had a hard time arranging the funds on an emergency fundament. He was fortunate to have good acquaintances and relatives who lent him the money. But not everyone have such great admirers or relatives to bail them out at such short notice. I'm sure no one wants to be in the same shoes.
Therefore we have to be organized for such a situation. How? By sustaining an emergency fund!
Let's examine how much money is adequate. Here is where basic solvency ratio comes handy. The numerator of the basic solvency ratio formula, cash (near cash), would commonly comprise of the following things:
• Savings account
• Bank fixed deposits
• Liquid funds
• Cash on hand
The above elements are liquid assets which come on handy at the first possible hint of financial problems. Liquid funds may be delivered immediately. Same goes for fixed deposits as they may be broken and liquidated at once in case of an emergency.
Only the mandatory fixed and varying expenses are taken here for ease. Any amusement outlay shouldn't be taken as these expenses can be quashed. Mandatory fixed expenses include the income you pay for, loans, insurance premium, and rent.
Mandatory varying expenses, on the other hand, comprise of food, transit, clothing/ personal care, medical care, utilities, education expenses and assorted compulsory expenses (the above expenses can vary depending upon individuals).
The total of the above divided by 12 (that is 12 months) helps you attain the monthly average as your variable expenditure might change. Assuming that you've cash of 60,000 and median monthly expenses of 25,000 your basic solvency ratio would work out to: 60,000 / 25,000 = 2.4.
But is it great?
An Ideal ratio should come to 3.
What does the number 3 mean?
It means that you must have money equal to or at least 3 months of your mandatory expenses in a contingency or emergency fund. How come just 3 months?
This is because research shows that 3 months time is enough to emerge from any type of financial pinch. As individuals near their retirement age, they should make certain that this fund is kept up to six months of their required expenses. The fund should be divided and kept in the form of cash, fixed deposit, or liquid fund.