net worth are used to accumulate capital for the long-term, excluding the place of residence. This ratio measures how much of an individual’s assets i.e. Net Investment Assets to Net Worth Ratio (= Total Invested Assets / Net Worth) If you are in financial distress and facing difficulties in clearing your debt, you should focus on this area immediately! As a general rule of thumb, you should have no more than 15% of your net income going into non-mortgage debt.Ī high ratio would mean that you have borrowed excessively to fund your lifestyle expenses as opposed to long-term investments.ħ. Non-mortgage debts are usually not good debts.This ratio measures how much you use your take-home income to service non-mortgage debt repayments such as credit card debt, personal loan, car loan, renovation loan and other non-mortgage related debt.ĭo you know that the effective interest rates of all these debts are much higher than a mortgage loan? Non-Mortgage Debt Service Ratio (= Total Non-Mortgage Debt Repayments / Net Monthly Income) Start reducing your debt to less than 35% today if you don’t wish to be a slave to debt.Ħ. Net income is also known as “take-home” income, which is after CPF contributions.Īs per the general guideline, a ratio of 35% or belowindicates there is sufficient income to fulfil monthly debt repayments. The debt servicing ratio calculates the amount of net income that is used to make regular debt repayments. Debt Servicing Ratio (= Total Monthly Debt Repayments / Net Monthly Income) Solvency refers to the ability to pay one’s debt as they are due.ĥ. If one’s debt level is high, it can potentially give rise to medium to longer-term solvency issues. In general, it is advisable that you should have no more than 50% of your assets leveraged using debt. In other words, this ratio checks how much of your assets are funded by debt. This is also known as the personal Gearing Ratio. Debt to Asset Ratio (= Total Liabilities / Total Assets) Well, I would say the more the merrier! No one will ever regret saving more.Ĥ. As a general rule of thumb, you should put aside at least 10% of one’s monthly gross income. This ratio brings to mind the “ Pay Yourself First” concept. Gross income is what we receive before the mandatory CPF contribution. The savings ratio measures the amount of income that you set aside as savings, which could be used to invest regularly to fulfil your financial goals. Savings Ratio (= Monthly Savings / Monthly Gross Income) ![]() If you think you may be “asset rich cash poor”, check whether your ratio is meeting at least 15% of the guideline.ģ. Generally, a minimum ratio of 15% is safe. Hence, it is essential to have some assets in liquid form.Īs for net worth, it is the difference between the assets you own and the liabilities that you owe. Why is this ratio important? Think about it – in an emergency situation, you need access to cash immediately and it may be difficult to convert one’s assets into cash within a short period of time. This ratio indicates the percentage of your net worth that is liquid i.e. Liquid Assets to Net Worth Ratio (= Total Cash or Cash Equivalents / Net Worth) We have seen how a 6-month emergency fund was not sufficient for many people during this covid-19 pandemic.Ģ. Setting aside 8 or even up to 12 months’ worth of expenses is not a far fetched idea. While it is common to use 3 to 6 months’ worth of expenses as a guideline, families with more than 2 children, free lancers, unemployed PMETs may need to set aside more. ![]() The higher the number, the more liquid the assets are. When an asset is liquid, it means that it can be converted to cash easily without any loss in value. This ratio tells us whether we have adequate cash reserves to meet monthly expenses in the event of an emergency like retrenchment, urgent medical treatment and for how long. Basic Liquidity Ratio (= Total Cash or Cash Equivalents / Total Monthly Expenses) Here are eight basic financial ratios to keep in mind:ġ. ![]() These benchmarks can help you to develop better financial habits in these areas: savings, retirement, spending, investing, and debt management. To an even greater extent, personal financial ratios are useful benchmarks to help you evaluate your financial strengths and areas that need improvement. Financial statements, specifically cash flows and balance sheets, can tell a lot about one’s financial position.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |