Showing posts from June, 2011

Using ratios to assess my financial position

If we analyze companies using financial ratios, I believe we can adopt the same concept to keep track of our financial health.

The personal financial ratios aim to serve as warning signals and help detect any deterioration in my financial position. And if situation arises, I can take any necessary actions such as altering my expenditure pattern or evaluate my goals.

Here are some ratios to use which I have classified them accordingly:

1) Solvency

Purpose - indicates the probability that an individual will become bankrupt
Equation - net worth / total assets
Implication - the higher the ratio, the stronger is my financial position
Warning bell - negative = insolvent

2) Liquidity

Purpose - measures my ability to pay off the short-term liabilities
Equation - current (liquid) assets / current liabilities
Implication - the higher the ratio, the stronger is my current financial situation
Warning bell - lower than 1.0

3) Savings

Purpose - measures the proportion of my income saved in a year