TEN ESSENTIAL RATIOS FOR YOUR FINANCIAL PLANNING (PART 2 OF 5)
3. SOLVENCY RATIO (SOLVR)
- It measures your ability to service debts and other financial obligations.
- It also helps to assess your capacity to stretch your finances.
- It is also called your asset to liability ratio (ALR).
- SOLVR = Total assets / Total debts ; Ideal SOLVR is > 1
- If SOLVR falls below 1, it means you have more debt than assets.
- If SOLVR is over 2, then you are quite safe.
4. DEBT TO INCOME RATIO (DIR)
- It measures your ability to pay debts and reach your financial goals on time.
- It also reflects your financial stability.
- DIR = Debt repayment / Gross income ; Ideal DIR is less than 0.3
- If you include credit card roll-overs, the target can go up to 0.4 – 0.45 in the higher income category, but it could delay some financial goals.
- The ratio should not exceed 40% for mortgage-based repayments and 10% for other debts.