One’s education level is not only marked by the degrees and enough reading of newspapers.
But it also is in the smartness one has in taking care of one’s finances and maintaining the wealth accumulation levels.
It can also be termed as financial literacy, and this is an essential factor in ruling the level of one’s finances.
Whether it is for savings, avoid frivolous expenses or even for making loss-free investments.
And this knowledge comes with constant reading and studying of various financial concepts and news.
This vast world of finance equips its learners’ various tools and measures to calculate and gauge one’s present level of multiple aspects of income and debt.
And in this post, we are primarily focused on some critical ratios that will enable people to measure their wealth management performance.
SOME RATIOS AS TOOLS FOR DILIGENCE IN MONEY MANAGEMENT
Must know ratios for one’s sound financial management are:
1. LIQUIDITY RATIO
Primarily, this measures the amount of cash available after various financial commitments have been made for any emergency.
It is one of the fundamental ratios in financial management that measures the number of liquid funds available after various expenditures have done out of one’s income.
The word liquidity means the availability of liquid assets or those assets readily convertible into cash without much hassle and money.
The formula for calculating this ratio is
Higher this ratio, in comparison to the past months, better it is.
It shows that the cash management capability of the person is excellent and improving.
2. SAVINGS RATIO
It is a very crucial ratio and must no matter what calculated on a regular or intermittent basis.
This ratio measures how much a person is doing savings and how much-unwanted expenditures are being avoided.
Savings are very crucial in taking care of one’s emergency financial situations and thus to gauge one’s savings in terms of the ratio will give a good idea of one’s saving capacity.
The formula for calculating Savings ratio is
For this ratio as well, higher the ratio of savings to one’s income, greater will be the amount of savings.
This high ratio would ensure that an emergency fund is always maintained anytime.
3. DEBT TO ASSET RATIO
Very crucial as this ratio is one of the determining factors for people having various debt defaults and even face some regulatory action.
Constant calculation of this ratio ensures that all debt is systematically paid out along with interest and that no regulatory notices from banks are received.
The formula for this ratio is
Total Liabilities /Total Assets
Lower this ratio, good it would be because it would indicate that not much debt levels exist to service.
And the danger of making use of a person’s assets as collateral for paying off such debts is also canceled out.
4. DEBT SERVICING RATIO
It is another tool for calculating the level of debts to be paid by a person.
The debt servicing ratio measures the capability of a person can pay off the monthly or other instalments of loan taken.
And for this as well, higher this ratio means it has reached dangerous levels for the person unable to service the loan taken out of one’s monthly income.
The formula for this ratio is
People unable to give off any debt have this opportunity to avail easy installment loans for bad credit from direct lenders only in the UK.
The online lenders are already in the knowledge of the bad credit history of the person and their existing debt levels need to pay off.
These loans offer very competitive interest rates along with flexible repayment options to ease off the burden of borrowers struggling with existing debt servicing.
5. INSURANCE COVERAGE RATIO
Insurance taken by people is also another aspect worth considering.
As for insurance, just like any loan, monthly premiums are to make from one’s salary.
And thus, the rest of the salary available would determine the way debts to pay.
A person should always first pay off the debt from the monthly salary first and then pay for the insurance.
And if there is more than one type of loan taken, then the number of insurance taken should be minimised.
Or the decision is to make to pay off the debt first and then new insurance policies are now in the line.
The formula for insurance coverage ratio is
Net worth + Life Cover/Post Tax Salary
6. INFLATION HEDGE RATIO
This ratio is not very popular but is integral in helping people hedge themselves when the inflation rates get very high.
To hedge oneself from inflation, the return on one’s investment and assets need to calculate. If this return is higher than the existing inflation percentage, it’s considered to be a favourable position.
The formula for Return on investment
Net Profit/Total Investment*100