Personal Finance Ratios
Updated: Sep 3, 2020
One may have often come across financial ratios in terms of businesses and corporate houses, but here we have tried to bring to you personal financial ratios, which could help you run your personal financial life like a successful corporate house or a business, irrespective of your background.
They say, number never lie. Similarly the aim is to create a model which makes you clear about where you stand at any given point in respect to your future in financial terms.
1. Budgeting Ratio – This is the ratio which helps you streamline your in-hand income after taxes.
It is a very simple one. 50:30:20. 50 percent to be spent towards expenses, 30 percent towards installments, and 20 percent towards savings.
2. Emergency Fund – A cumulative of your 7 months income post tax. A sum of seven months of your income is recommended towards your emergency fund. The figure may increase or decrease depending upon the number of dependants you have, do all or some of them have an health insurance policy or not and other such variable factors.
3. Life Insurance – 12 times your annual expenses. Purpose – to pay off any of your debts and provide for expenses of your family for next 8 years at least, inflation adjusted.
4. Debt ratio – 2.5 times your annual income. In any case, your total debt should not be more than 2.5 times your annual income. If it gets more, things begin to get ugly due once, a lot of your disposable income goes in repaying debt, more interest burden and lesser amount goes towards savings / investments.
5. Retirement Corpus Ratio – 25 times your annual income. This could look like a huge figure but it isn’t actually. Just keep setting aside a part of your money, which you’re not going to touch irrespective of your needs. It could be invested, maybe in real estate and you can keep paying your EMIs which eventually will create an asset for you in multiple of your annual income. This could be one of the ways. For our young audience, it is difficult to asses how much money would you be requiring for your retirement, hence keep aside the maximum money which you can go on with without touching it to begin your financial planning journey, be it in fixed income instruments or any other asset.
The above points would help you know where you stand as of now with respect to your desired and essential financial position and can work on it accordingly.