7 Types of Financial Ratios to Assess Your Personal Finance

Anita: Hey Siya, yesterday you were talking about some ratios with your husband, what was that?

Siya: Oh yes, I was talking about the financial ratios we should know in order to manage our money

Anita: What is it? Can you explain me?

Siya: They’re simple calculations that show things like how much you’ve saved, your debt levels, and more.

Anita: That sounds useful. Can you help me figure mine out?

Siya: Of course! This is the detailed blog on the same.

For every woman knowing about her own money is very important for making smart choices, reaching goals, and protecting the future. Learning the types of financial ratios can help figure out what’s going on with your money, where can be improved, and how much progress you’ve made over time. 

What is Financial Ratio, and Why is it Important for Personal Finance?

These personal finance ratios (financial ratios) can help you figure out different parts of your financial health. These ratios give you a clear picture of your financial situation like: 

• Help you figure out what your financial skills and weaknesses are.
• Assess your financial health
• Make informed decisions
• Plan for future financial goals
• Set realistic goals

Check out this list of seven important types of financial ratios that every woman should know and financial ratios examples.

1. Emergency Fund Ratio

Formula: 

Emergency Fund Ratio= Emergency Savings/Monthly Expenses

Purpose: This percentage indicates how many months of expenses your emergency fund can cover. Ideally, your emergency fund should cover 6-8 months of your monthly expenses.

Example: If your monthly expenses are ₹30,000 and you have ₹1,80,000 in emergency savings, your ratio would be:

Emergency Fund Ratio = 1,80,000/30,000 = 6

If you want to build an emergency fund for yourself then you should check out Lxme’s Emergency Fund which is well-researched and curated by experts.

2. Debt-to-Income Ratio (DTI)

Formula: DTI = Total Monthly Debt Payments/Total Monthly Income × 100

Purpose: This ratio indicates how much of your income is going toward debt repayment. If your DTI ratio is low, you have a manageable level of debt. The DTI ratio should be 35% or less.

Example: If your monthly debt payments are ₹15,000 and your total monthly income is ₹60,000, your DTI would be:

DTI=15,000/60,000×100=25%

3. Savings Ratio

Formula: Savings Ratio = Monthly Savings/Total Monthly Income × 100

Purpose: This number tells you how much of your income you are putting away for saving. If you save more, it means you are smart with your money and think about the future. Ideally one should save at least 20% of their income.

Example: If you save ₹10,000 each month and your total (monthly income the total amount of money received in a given month before any deductions, including taxes) is ₹50,000, your savings ratio would be: Savings Ratio= 10,000/50,000 × 100 = 20%

Ideally, one should invest the amount saved in order to get inflation-beating returns over a longer period of time and fulfill all of your goals.

You can start investing with Lxme’s goal and time-based portfolios which are well-researched, diversified, and curated by experts.

4. Net Worth Ratio

Formula: Net Worth Ratio = (Total Assets−Total Liabilities)/Total Assets × 100

Purpose: This ratio provides an instant picture of your financial health by comparing your assets and liabilities (debt/loans). A positive net worth number indicates financial stability. An ideal net worth ratio for younger individuals should be 20%-50% and for individuals nearing retirement or retired should be 90%-100%

Example: If your total assets are ₹10,00,000 and your total liabilities are ₹4,00,000, your net worth ratio would be = (10,00,000−4,00,000)/10,00,000 × 100 = 60%

5. Expense Ratio

Formula: Expense Ratio = (Total Monthly Expenses/Total Monthly Income) * 100 

Purpose: The expense ratio measures how much of your income you spend on needs (essential expenses) and wants (non-essential expenses). This financial ratio is important because it can help you understand how you are spending your money and identify areas where you can cut back.  

As per the golden rule of budgeting, one can allocate 50% towards needs & 30% towards wants

Example: If your total expenses are ₹7,00,000 (including needs & wants)  and your total monthly income is ₹10,00,000, your investment ratio would be = 7,00,000/10,00,000×100 = 70%

6. Liquidity Ratio

Formula: Liquidity Ratio = Liquid Assets/Total Current Liabilities

Purpose: This figure represents how well your short-term debts can be paid off with liquid assets. A liquidity ratio of 1 or greater than 1 is generally considered to be good.

Example: If your liquid assets (cash, savings) are ₹2,00,000 and your total current liabilities (short-term debts) are ₹1,00,000, your liquidity ratio would be: Liquidity Ratio= 2,00,000/1,00,000 = 2

7. Retirement Savings Ratio

Formula: Retirement Savings Ratio = Retirement Savings/Annual Income

Purpose: You can use this ratio to determine whether you are on the schedule to meet your retirement goals. Your age and planned retirement date determine the ideal number for you.

Ideally, the higher the ratio better it is as it means that you are saving or investing more for your retirement.

Example: If you have ₹5,00,000 in retirement savings and your annual income is ₹6,00,000, your retirement savings ratio would be = 5,00,000/6,00,000 = 0.83

This is just a ratio, however, if you want to calculate how much retirement corpus you’ll require in order to retire peacefully, then you can try out this retirement calculator. Also, you can start investing for your retirement with Lxme’s Long-Term Plan which is diversified, well-researched, and curated by experts.

Conclusion

Understanding and using financial ratios is crucial for every woman. These simple calculations offer a clear picture of your financial health, helping you manage savings, debt, and investments effectively. Whether it’s building an emergency fund or planning for retirement, knowing your numbers empowers you to take control of your finances. 

Check out the Lxme app which can guide to financial planning 

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