Financial ratios aren’t simply used by companies as benchmarks to assess their financial performance. It can also be used by individuals alike to determine one’s own financial health, identify potential pitfalls, and plan ahead.
Knowing your financial ratios also enables you to make smarter financial decisions for the long term, and reap the benefits of delayed gratification. These financial ratios are also relatively easy to calculate once you have all your numbers down clearly.
Hence, we have prepared a downloadable personal financial statement excel template for you to use that will save you tons of time when calculating your financial ratios.
Once you have filled the information in, all these ratios will automatically be calculated for you via the excel sheet. Now let’s dive right in, we have lots to cover!
- SAVINGS RATIO
- NET WORTH RATIO
- LIQUIDITY RATIO
- DEBT-TO-ASSET RATIO
- CURRENT RATIO
- INVESTING RATIO
- INVESTMENT ASSETS : TOTAL ASSETS RATIO
- PASSIVE INCOME RATIO
- SIDE HUSTLE INCOME RATIO
- FINANCIAL FREEDOM RATIO
- PERSONAL COST OF DEBT
- PERSONAL DEBT SERVICING RATIO
- SOLVENCY RATIO
- BUDGETING RATIO
- MORTGAGE RATIO
- LIFE INSURANCE RATIO
- NET WORTH RATIO VERSION 2
- RETIREMENT SAVINGS RATIO
- EMERGENCY FUND RATIO
- ENDING NOTES
- ACHIEVING FINANCIAL INDEPENDENCE
SAVINGS RATIO
Your savings ratio essentially depicts the amount you have set aside as savings for future use.
What counts as savings?
It can come in the form of:
- Fixed monthly deposits
- Liquid funds
- Money accumulated in your high savings accounts, etc.
What about Gross Income?
Gross Income refers to the money you derive from your various income sources.
For example:
- Monthly salary
- Business profits
- Annual bonus
- Dividend income, etc.
Ideal savings ratio?
It is best to save as much as possible especially in your early years if you are planning for an early retirement. Otherwise, 10% of your gross income is a good start for a savings ratio.
NET WORTH RATIO
This is an especially important ratio to keep track of as your personal net worth is a measurement of your total wealth. This ratio indicates what you own after deducting what you owe. Ultimately, this helps to evaluate your financial worth.
What counts as Total Assets?
All the physical and monetary resources that you own will fall under your “Total Assets” column of the balance sheet.
For example:
- Cash
- Savings accounts
- Treasury bills
- Money market accounts, etc.
What falls under Total Liabilities?
Any and all aggregate debt and financial obligations owed to external parties or other individuals at any specific period of time.
For example:
- Student loans
- Credit card balances
- Mortgages
- Monthly rental, etc.
LIQUIDITY RATIO
This ratio is an indicator of your financial ability to meet committed expenses when an emergency arises. It gives you insights into how fast you are able to pay off any short term obligations.
What counts as Liquid Assets?
Liquid assets are assets that can easily be converted to cash while retaining its market value.
For example:
- Equities
- Marketable securities such as stocks and government bonds.
- Cash equivalents (Eg: Savings accounts, money market accounts, etc.)
Ideal liquidity ratio?
Maintaining at least a 15% level of liquidity helps to combat unforeseen financial emergencies such as a recession, sudden loss of jobs due to the pandemic, etc.
Alternatively, having too high a liquidity ratio also means that you may be holding too much cash. This cash can however, be better utilized in other areas such as investing into other equities/stocks or building a side business to help your money grow.
DEBT-TO-ASSET RATIO
This ratio depicts an individual’s borrowing position. Thereafter, with such information, it facilitates better and more responsible financial decisions.
Some examples of these financial decisions include:
- Do I have the capacity to take on another loan currently?
- Should I wait till the previous loan is settled before taking on a new loan?
Ideal debt-to-asset ratio?
An individual should ideally maintain a maximum debt-to-asset ratio of 0.5. In other words, the greatest amount of debt that an individual retains should not exceed 50% of your total assets.
Debt ratios above 0.5 also makes it difficult to borrow money or obtain external financing from institutions. A ratio of greater than 1 signifies that you own more liabilities than assets which should be a red flag to pay attention to.
CURRENT RATIO
This ratio measures your ability to repay short-term obligations which are due within a year or earlier. It also provides an individual with information on how to better utilize current assets to repay any current debts or other payables.
What counts as Short-Term Liabilities?
Also known as “Current Liabilities”, the liabilities that fall under this category are usually due within a year.
For example:
- Income taxes
- Credit card outstanding balances
- Interest payable on outstanding debts
Ideal current ratio?
A number higher than 1 generally signifies that you have current assets available to repay your short-term obligations.
If however, your current ratio turns out to be less than 1, it shows that your assets are not liquid as expected. It also signifies that you do not have adequate capital on hand to repay capital your short-term obligations if they were all due at once.
INVESTING RATIO
This ratio serves as a gauge when determining the percentage of your assets to be placed into equities and bonds.
For example, if you am of 25 years of age this year in 2021,
Formula: 120 – 25 = 95
What it means is that your recommended investment portfolio will look something like this:
- 95% stocks & equities
- 5% bonds
A more risk-averse individual could opt to replace the “120” in the formula with “100” instead.
This however, is not a cookie cutter approach. It will vary from person-to-person depending on your financial goals, risk appetite and tolerance. As this is only a general guideline, it would be great to seek advice from a financial advisor to supplement the information here.
There are also various types of financial instruments and classes of investments with different levels of risk and returns. Building a balanced portfolio that suits your risk tolerance should be your priority.
INVESTMENT ASSETS : TOTAL ASSETS RATIO
This ratio aids individuals in comparing the liquid assets held against the total assets accumulated.
It is important to remember the power of compound growth, and start expanding one’s portfolio of investment assets early.
Ideal investment assets to total assets ratio?
Every individual should strive to maintain a ratio of at least 0.2. This shows that at least 20% of your total assets are liquid enough to help you deal with any financial emergencies.
PASSIVE INCOME RATIO
How close are you to replacing your day job income with your passive income? This ratio is a measure to attest to that financial goal of yours.
What is passive income?
Also known as making your money work for you, passive income refers to income you obtain at regular intervals with little/no additional effort. Here are some passive income ideas you can refer to.
Ideal passive income ratio?
As a benchmark, a target of 50% is ideal for starters.
SIDE HUSTLE INCOME RATIO
This ratio measures how much of your earnings from your side hustle is able to replace your day job. This is an especially useful metric if you are looking to quit your day job and focus on your side hustle.
What is a side hustle?
Side hustles are great ways to supplement your 9-5 income. Moreover, this is something you spend time to work on outside of your work hours. In addition, you earn an hourly, or fixed fee from working on these side projects or by selling products in your own free time.
Looking for side hustle ideas? Here’s a list of over 100 to consider!
Ideal side hustle income ratio?
Similarly, a target of 50% is ideal for starters.
FINANCIAL FREEDOM RATIO
Everyone wants financial freedom and independence right? Being able to live without worrying about your finances is definitely achievable.
This ratio is a great indicator of how close you are to quitting your day job fully and living off your passive and side hustle income.
You do not need a 100% financial freedom ratio to be financially free as financial freedom varies for everyone. However, if you have 50% passive income ratio and 50% side hustle income ratio, you are pretty much set!
PERSONAL COST OF DEBT
Your personal cost of debt is essentially the effective interest rate you are paying for all your debt obligations. This ratio is especially useful in calculating debt prepayment or assessing your credit situation. Thus, it can be considered a good indicator of your overall financial health.
Here’s an example of calculating your personal cost of debt:
| Debt | Debt Amount | Interest Rate | Weighting (Debt Amount / Total Debt) | Interest Rate x Weighting |
| Housing Loan | $ 100,000 | 5% | 80% | 4% |
| Student Loan | $ 25,000 | 2.5% | 20% | 1% |
| Total | $ 125,000 | 100% | 5% |
Ideal personal cost of debt amount?
Keeping your personal cost of debt at 4.5% or lower is ideal. To keep this figure low, it makes the most sense to repay the loan with the highest interest rates first.
It is also important to note that interest rates may increase or decrease depending on the economic environment or legislations within your country. Hence, you may need to revise and reassess your personal cost of debt at regular intervals.
PERSONAL DEBT SERVICING RATIO
This ratio indicates the percentage of your income that is used for debt repayment. The lower the ratio the better your current financial health is.
Ideal personal debt servicing ratio?
It is recommended to maintain a percentage of 35% or less as you want to ensure you have adequate income for expenses and savings too.
SOLVENCY RATIO
Your solvency ratio indicates your ability to repay all existing debts with your assets in the case of a financial emergency.
The lower your solvency ratio is, the greater the probability of you becoming insolvent/bankrupt. Hence, you want to strive for a ratio as high as possible.
BUDGETING RATIO
Also known as the 50/30/20 rule, this budgeting ratio is a great guideline to help you reach your financial goals. Hence, this is a simple breakdown of how you can allocate your disposable income according to your needs, wants, and savings.
Here’s an example with a $4,500 monthly take home pay:
| Purpose | % of income | Amount |
| Savings | 20% | $ 900 |
| Housing (Rent/Mortgage/etc.) | 30% | $ 1,350 |
| Living Expenses | 50% | $ 2,250 |
| Total | $ 4,500 |
MORTGAGE RATIO
This ratio helps you understand how much you can afford for housing.
Assuming a $3,000 monthly take home pay as a fresh graduate, and each month, not more than 25% goes towards mortgage payments:
| Monthly take home pay | Yearly take home pay | Mortgage | 20% down payment (If any) | Total Housing value you can afford |
| $ 3,000 | $ 36,000 | 2.5 x $36,000 = $90,000 |
0.2 x $112,500 = $22,500 |
$90,000 / 0.8 = $112,500 |
LIFE INSURANCE RATIO
There are tons of financial situations, making this a difficult ratio to calculate. In other words, this ratio cannot be applied to everyone like a one-size-fits-all approach as age plays an important role here.
Depending on your circumstances, you may require more life insurance than another person. For instance, when you are 25 and have multiple kids, versus a person who is 45 and has no children.
When you are younger and starting a family, a larger portion of your income may be spent on life insurance. As such, your life insurance ratio can reach up to 15 times your annual salary.
However, as you age, this ratio should decrease. This formula indicates that if you make $60,000 in annual salary, you should have $600,000 worth of life insurance policy.
NET WORTH RATIO VERSION 2
This ratio supplements the first net worth ratio mentioned above. In this case, age is a factor in the equation. Hence, it is more relative to each individual.
For example, if you are 30 years old, with a $100,000 annual salary before taxes.
In this instance, you will be taking [30 x (100,000/10)] to obtain $300,000.
This ratio is not meant to discourage you! Don’t feel ashamed if you don’t have a net worth corresponding to what you have calculated. Instead, let this motivate you to save harder to reach you financial goals earlier!
RETIREMENT SAVINGS RATIO
This ratio gives you a long term view of how much money you should have in retirement savings at your current income level.
For instance, you’ve just joined the workforce, raking in a take home pay of $3,000 each month. This means your yearly take home pay amounts to $36,000.
Therefore, your retirement savings ratio should equate to (25 x $36,000) = $900,000.
Nevertheless, your primary income will increase as you move up the corporate ladder so this number will increase as you age. Thus, it is important to revisit this ratio at regular intervals!
EMERGENCY FUND RATIO
Your emergency fund is your bottom line, your safety net, in case of any financial emergencies! Before focusing on building on wealth, it is important to ensure that you have a stable emergency fund available first.
Your emergency fund size varies depending on your needs and living expenses. However, a great guideline is to maintain at least 6 months worth of emergency funds. Most importantly, this ensures that you have adequate funds (financial buffer) to last you in the event of a sudden job loss or home emergency.
ENDING NOTES
We want to emphasize again that this is just a general indicator of your financial health. There are also various exceptions that may apply to you.
Hence, performing a financial ratio analysis should not be treated as a substitute for doing in-depth critical analysis for situations like buying a house or planning for retirement. In addition, it is important to also seek advice from your financial advisor to supplement your financial ratio results.
The ratios you derive from the personal financial statement template or through your own calculations also need to be revised and reassessed regularly. Certain ratios are impacted by factors such as your age and require yearly reassessments.
ACHIEVING FINANCIAL INDEPENDENCE
Knowing your own financial ratios can provide you with insights on how close you are to your financial goals. It can also give you a general direction of how you can obtain accumulated wealth and achieve financial freedom. Hence, we hope this guide has provided you with a deeper understanding of what each ratio means.
If you are in need of some motivation to help you reach your financial goals, here are some habits of successful people that you can cultivate. In addition, if you are looking to grow your wealth with small capital, here are some examples of how you can do so.
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