Find out where you stand financially

When it comes to personal finance, the first thing one needs to understand is where they stand financially. Before even thinking of investments, knowing one’s financial state is important, or else your investments won’t generate the desired results. This is because whenever you would require money, you will first sell off your investments for the same. Therefore, it is crucial for you to understand where you stand financially. For this, there are various metrics available. In this article, we have listed a few personal finance ratios that will help you understand where you stand financially.

Liquidity ratio

The purpose of this ratio is to understand the amount of cash or cash equivalents available to cover any unforeseen contingency. Simply put, it shows how many months your money will last if there is a hindrance in all the sources of income due to some unfortunate circumstances. To arrive at this ratio, you need to divide cash (including cash at home, savings bank, fixed deposits, and liquid funds) by monthly expenses.

Savings ratio

This ratio simply shows how much you are saving for your future financial goals. You can calculate it by dividing your monthly savings by your gross monthly income. Gross monthly income is nothing but your money earned from salary, or business or profession, bonus, dividend, interest, royalty, rent, and all forms of earnings.

Debt to assets ratio

This ratio depicts your borrowing position. It shows whether you are over-borrowed or not. One should check this ratio before applying for any loan. If this ratio is more than the ideal, then you should think of re-paying some of the high-interest loans to bring back to ideal. To calculate this, you need to divide your total liabilities by your total assets.