| Personal Financial Ratios |
| |
Application of the ratio analysis technique to personal financial statements offers potential in expanding insight into specific strengths and weaknesses of a family's financial situation.
These ratios could provide the family with information about the liquidity of their net worth, their solvency, and their financial position in relation to a number of personal financial goals.
|
| |
| |
Liquid assets/monthly expenditures |
0.0000 |
Liquid assets are those assets which are in spendable form or easily and quickly converted to cash. This ratio provides insight into the adequacy of liquid asset holdings to cover monthly expenses if the family experienced a sudden loss of income due to interruption of employment. The adequate savings fund to meet emergencies varies from 2 to 6 months of expenses in liquid form. A reasonable standard for a specific family might vary by the number of earners in the family, the availability of credit to handle emergency situations, and the stability of employment of family members in their present occupations.
| |
Liquid and financial assets/monthly expenditures |
0.0000 |
While similar to the previous ratio, this index provides a broader definition of assets which could be used to cover monthly expenditures. Though some financial assets are not in liquid form, they could be converted to spendable form with little or no loss in value, provided enough time is allowed for the conversion. The recommended value for this ratio is 6
| |
Liquid assets/total debt |
0.0000 |
This ratio examines the relationship between liquid assets and the total debt obligation of the family. It is reasonable to evaluate the financial capability of a family to retire some of its outstanding debt using liquid assets should unexpected financial situations arise. Another use of this ratio, perhaps just as important, is its use alongwith the other debt related ratios in determining whether the family has over extended itself or has maintained a debt level within reasonable limits given the family's level of liquid assets. A value above 0.1 should provide a "comfortable" liquidity cushion.
| |
Liquid assets and financial assets/total debt |
0.0000 |
Similar to Ratio3, this index includes other financial assets in the numerator which could be used to handle debt if the need arose. We suggest that the value of 0 .2 to 0.3 be considered a minimum level for this ratio which would indicate a healthy financial situation.
| |
Liquid assets/non-mortgage debt |
0.0000 |
Mortgage loans generally fall into the category of long-term debt, yet it would seem more realistic to view liquid assets as a cushion for handling short-term debt. For this reason Ratio 5 measures the relationship between liquid assets and a family's debt load excluding those liabilities linked to acquisition of real property. We recommend a value of 1 .0 or more.
| |
Liquid Assets/Net Worth |
0.0000 |
This Ratio measures the proportion of total net worth held in liquid form. This type of net worth component ratio should be evaluated in light of the family's specific financial goals rather than againstan objective standard. It should be noted that this ratio may also be used to determine if a family is holding too much of their total net worth in liquid form. Liquid assets tend to be held in ways which offer a low rate of return, therefore a very high value for this ratio might indicate a need to shift some assets into financial vehicles with higher earning potential.
| |
Liquid and financial assets/net worth |
0.0000 |
This ratio is designed to assess the total financial assets portion of net worth. It focuses on the savings component of a family's net worth. Because family savings goals vary considerably, no objective standard was suggested for evaluating this ratio.
| |
Liquid assets/one year's payment on debt |
0.0000 |
This index provides oneview of a complicated financial issue, the debt obligation of the family, by comparing liquid asset holdings to one year's worth of payment on all debt.Since family themselves often evaluate their debt level by their ability to meet debt payments, this ratio may serve an important function from their perspective. It is difficult to set goal for this ratio but a minimum of 0.5 is reasonable.
| |
Liquid and financial assets/one year's payment on debt |
0.0000 |
This index relates family debt payments to all financial assets, both liquid and those which would take more time to convert. Ratio 9 assesses a family's commitment to debt payment in relation to its total level of savings. We believe a value of 1.0 as adequate for this ratio.
| |
Total debt/net worth |
0.0000 |
The debt position of a family is not easily evaluated unless it is extreme. Ratio 10 expands the perspective of the evaluator in assessing the debt position of the family by relating total liabilities to total net worth value. We recommended families keep this measure below 1.0 but noted this would be difficult if a family had recently purchased a home.
| |
Non-mortgage debt/net worth |
0.0000 |
Because mortgage debt is generally long-term and has special implications for net worth, it may be enlightening to also index the family's consumer debt in relation to total net worth. There commended maximum for this ratio was 0.4.
| |
Net Financial and Tangible Assets/Networth |
0.0000 |
Financial and tangible assets may increase in value with inflation. Therefore, the intent of Ratio 12 was to assess the inflation protection aspect of net worth. While not all assets included in the numerator tend to increase in value as inflation increases, they at least have potential for doing so while fixed assets do not. Some personal assets such as automobiles are not likely to appreciate in value, but still act somewhat as a hedge against inflation since their services are available without any need to buy them at higher prices resulting from inflation. This ratio depends largely oneconomy inflation expectation. We consider a value of 1.0 as reasonable in periods of high inflation expectation.
| |
Net Financial and Tangible Assets minus Home/Net worth |
0.0000 |
Since thefamily home has seldom been purchased primarily for its investment value, Ratio 13 to provide information on the "investment aspect" of tangible and equity assets. When this ratio value is compared with that of Ratio 12, there is a clearer picture of the impact ofhome ownership on the inflation protection component of net worth. A valueof 0.2 would be reasonable for Ratio 13.
| |
Net tangible assets/Tangible Assets |
0.0000 |
Families might want to evaluate what portions of their tangible assets are free from any leverage and liabilities. The implications of a high value can only be evaluated in light of the family's financial goals. Younger families just setting up their home, a high value may help in achieving financial goals. As families approach retirement, a high value indicating high interest servicing charge may need some serious reconsideration.
| |
Net tangible assets/net worth |
0.0000 |
Ratio 15 provides information about what proportion of the family's wealth was acquired mainly for its use value.The implications of a high proportion of tangible assets in net worth can onlybe evaluated in light of the family's financial goals. Younger families just setting up their home may have financial goals directed mainly toward acquisition of tangible assets. As families approach retirement, net worth composed primarily of tangible assets may need some serious reconsideration.
| |
Income generating assets/net worth |
0.0000 |
Ratio 16 encourages a family to look at the proportion of total net worth invested in assets which themselves earn income. Those assets which earn interest, dividends, profits,etc. generate income which could be reinvested to increase future net worth.Such income might also be used to supplement earned income in providing higher level of living than would be possible on earned income alone. Again, no objective measure was recommended for this ratio. Families planning for their retirement might be especially interested in the implications of this ratio since potential retirement income could be generated from assets.
