Just like companies use ratios to measure
their performance, individuals can also use personal financial ratios to
understand how strong (or shaky) their financial health really is.
Financial ratios bring together numbers
from your income, expenses, assets, and debts — and translate them into clear
insights.
They help you:
- Track how your financial health changes over time.
- Evaluate your current situation objectively.
- Find ways to improve your money management.
In short, they’re your personal
financial report card.
Let’s break down the most important ones.
1️. Savings Ratio
This one’s simple but powerful - it tells
you how much of your total income you actually save every month.
A higher savings ratio means you’re
managing money wisely and are well on track to achieving your goals.
Formula:
Savings Ratio = Monthly Surplus ÷ Monthly Income
Example:
|
Particulars |
Amount (₹) |
|
Salary |
25,000 |
|
Rental Income |
10,000 |
|
Interest on FD |
5,000 |
|
Dividend Income |
4,000 |
|
Total Income |
44,000 |
|
Household Expenses |
12,000 |
|
Short-term Liabilities |
22,000 |
|
Total Outflow |
34,000 |
Monthly Surplus =
44,000 – 34,000 = ₹10,000
Savings Ratio = 10,000 ÷ 44,000 = 0.23 (≈23%)
Target: Ideally between 15–20%, depending on your age and life stage.
2️. Liquidity Ratio
This ratio measures how easily you can
cover your monthly expenses if an emergency hits — basically, your financial
cushion.
Experts recommend keeping an emergency fund
equal to 3–6 months of expenses.
Formula:
Liquidity Ratio = Cash & Cash Equivalents ÷ Monthly Committed Expenses
Example:
If you have ₹60,000 in cash and bank deposits, and your monthly expenses are
₹15,000:
Liquidity Ratio = 60,000 ÷ 15,000 = 4
That means you can manage for 4 months without fresh income — perfectly within the healthy range.
3️. Asset-to-Debt Ratio
This tells you what you own versus
what you owe.
It compares your total assets with your total liabilities. A higher ratio means
stronger financial stability.
Formula:
Asset-to-Debt Ratio = Total Assets ÷ Total Liabilities
Example:
|
Assets |
Amount (₹) |
Liabilities |
Amount (₹) |
|
Cash & Bank |
25,000 |
Credit Card Dues |
6,000 |
|
Financial Investments |
12,000 |
Personal Loan |
10,000 |
|
Real Estate |
8,000 |
Other Liabilities |
4,000 |
|
Total Assets |
45,000 |
Total Liabilities |
20,000 |
Asset-to-Debt Ratio = 45,000 ÷ 20,000 = 2.25
For a young earner, this might be lower due to new loans; it generally improves with age and higher savings.
4️. Current Ratio
This one checks how capable you are of
paying short-term debts from your easily available cash and equivalents.
Formula:
Current Ratio = Current Assets ÷ Current Liabilities
Example:
|
Particular |
Amount (₹) |
|
Cash & Bank Balances |
28,000 |
|
Short-term Liabilities |
22,000 |
Current Ratio = 28,000 ÷ 22,000 = 1.27
Anything above 1 indicates you
can comfortably meet your short-term dues.
5️. Debt Service Ratio
This ratio shows how much of your monthly
income goes toward paying debts (like EMIs or credit card bills).
A lower ratio means healthier debt
management.
Formula:
Debt Service Ratio = Short-term Liabilities ÷ Total Income
Example:
Short-term Liabilities = ₹18,000
Total Income = ₹27,000
Debt Service Ratio = 18,000 ÷ 27,000 = 0.67
Here, around 67% of income is tied up in EMIs — which is high. Ideally, aim for under 40%.
6. Solvency Ratio
This measures whether your cash flow can
cover both your short-term and long-term debts.
It’s an indicator of long-term financial strength.
Formula:
Solvency Ratio = (After-tax Net Profit + Depreciation) ÷ (Long-term +
Short-term Liabilities)
Lower solvency ratios suggest higher
default risk — so the goal is to keep it as high as possible.
7. Investment Assets to Total
Assets
This ratio shows how much of your total
wealth is invested in liquid assets (like FDs, mutual funds, or stocks) versus
illiquid ones (like property).
Formula:
Investment Assets to Total Assets = Liquid Assets ÷ Total Assets
Example:
|
Asset Type |
Amount (₹) |
|
Cash & Bank |
25,000 |
|
Bank Deposits |
40,000 |
|
Real Estate |
20,000 |
|
Equity Investments |
10,000 |
|
Total Assets |
95,000 |
Investment Assets to Total Assets = (25,000
+ 40,000) ÷ 95,000 = 0.68 (≈68%)
Ideally, keep at least 20–25% of your total assets in liquid investments for flexibility.
Why Financial Ratios Matter?
Your personal finances are as important as
any business’s balance sheet.
These ratios turn scattered numbers into clear insights about your money
habits, debt levels, and financial security.
Instead of comparing your wealth with
others, compare your ratios with ideal benchmarks.
That’s how you stay on track, confident, and in control of
your financial journey.
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