Check Your Financial Health with 8 Key Personal Financial Ratios

When we go for our yearly health check-up, we use typical health indices like Body-Mass-Index (BMI), cholesterol level, blood pressure to determine if we are in good health.

Beside physical health, financial health is also important for a successful and happy life. Likewise, we should do a financial health check-up annually. But what are the indicators that of good financial health?

I share 8 key personal financial ratios that you could use to check your financial health:

Liquidity Ratio (L)

1) Basic Liquidity Ratio = (Cash / Monthly Expense)

This ratio measures how much cash you have set aside to cover your monthly expenses. It indicates how strong your financial ability is to handle an emergency.

The amount of cash that you should set aside for emergency purpose should be able to cover at least 6 months of your expenses.

2) Liquid Asset to Net Worth = (Cash / Net Worth)

This ratio measures how easily you can convert your assets to cash.

Ideally, you should have at least 15% of your net worth in asset that can be easily converted into cash. This can be used to cover short-term obligations like mortgage and expenses.

Financial Stability Ratio (F)

3) Debt to Asset = (Total Liabilities / Total Assets)

Debt to asset ratio will tell you whether you are taking excessive leverage. It indicates your ability to pay your debt.

Try to maintain less than 50% for this ratio so that you have enough assets to cover liabilities and thus are financially stable.

4) Debt Servicing Ratio = (Debt Repayment / Total Income)

This ratio measures your capacity to make debt payment.

Debt servicing ratio should be less than 35%. Too much debt repayment will reduce your monthly savings which could be used for investment.

5) Non-Mortgage Debt Service Ratio = (Non-Mortgage Debt Payment / Total Income)

Non-mortgage debts usually are not good debts.

We should spend less than 15% of our income for non-mortgage debt payment. Examples of non-mortgage debt payments include credit card payment, car loan instalment, renovation loan instalment.

Investment Ratio (I)

6) Savings Ratio = (Savings / Total Income)

There is a saying that it is not how much you earn, but how much you can save and invest that matters.

A healthy savings ratio should be at least 20% of your income so that you can have sufficient savings for investment.

7) Investment Ratio = (Investment Assets / Net Worth)

Investment ratio measures how much of your net worth is in investments.

We should make use of our savings to invest and grow our wealth. If possible, you should aim to invest more than 50% of your net worth. *this may vary depending on your current life situation and financial goals.

8) Regular Investment Ratio = (Regular Investment / Total Income)

Part of our monthly savings should be invested regularly. We should regularly invest at least 10% of our income for wealth accumulation. Regular investment like dollar cost averaging will be a good way to ensure that we are constantly investing our savings.

Are you financially healthy? Check out your 8 financial ratios by using this template. If you need a financial review, do let me know here.