TEN ESSENTIAL RATIOS FOR YOUR FINANCIAL PLANNING
(PART 1 OF 5)
1. SAVINGS RATIO (SR)
- It measures how much of your income you save.
- The higher the savings, greater the capacity to reach your financial goals on time.
- SR = Annual savings / Annual gross income ; Ideal SR is 0.08-0.2, based on age
- The higher the ratio, the better it is.
- Usually, the younger you are, the lesser the liabilities, hence the more the savings.
- If you are under 30 and single, aim for SR of at least 0.2, i.e.20%.
- When you are young, the ratio should be 30-50%.
- It will gradually come down as liabilities rise with every life stage.
- It could be as low as 15-20% in your 40s and 50s.
- Discretionary spending should not exceed 10-15% of your net take home income.
2. LIQUIDITY RATIO (LR) OR CONTINGENCY RATIO (CR)
- It measures your ability to use your assets to pay for any sudden liabilities.
- LR = Liquid assets / Monthly expenses ; Ideal LR is 5 to 7
- It means you have 5-7 months of emergencey funds to survive on if you go bust today, say after losing your job or sudden closure of your business.