Last Saturday, we focused on the reserve-to-income ratio, debt-to-income ratio and the net worth ratio. Let us now look at some more ratios.
Savings rate-to-income: This shows your monthly savings. Example: Annual salary is `12 lakh; `1.4 lakh go towards PF (including company’s contribution), `60,000 towards PPF, `1 lakh into a debt fund and `1 lakh into a fixed deposit. Savings rate will be `4 lakh / `12 lakh = 33.33%. As a thumb rule, a person in his 30s should save at least 20% of his salary.
Basic liquidity ratio: How many months can you survive without earning any income? This ratio tells you. It is cash (and cash equivalents such as savings and current accounts) and flexible deposit divided by monthly income. Example: `1 lakh are in savings account, `60,000 in current accounts and `2 lakh in flexible account (part of savings account that is transferred to FD).
Monthly expenses are `60,000. Basic liquidity ratio will be: `3.60 lakh / `60,000 = 6. If this applies to you, then you can survive for six months without earning any income. Ideally, this ratio should be between 6 and 12 to meet emergencies such as job losses or unpaid long leave.
Liquid asset coverage ratio: It is your liquid assets divided by your debt. The solvency ratio is your all assets divided by total debt. These ratios tell you whether you have enough assets to pay off your loan. Example: As shown in liquidity ratio example, your liquid asset is `3.60 lakh and total assets are `6 lakh. Suppose you have outstanding debt of `36 lakh. The liquid asset coverage ratio will be `3.60 lakh / `36 lakh = 0.1 and solvency ratio will be `6 lakh / `36 lakh = 0.17. Solvency ratio should be at least 1 for people above 40 and 0.3 to 1 for people below 40.
Risk exposure ratio: It measures whether you have adequate insurance coverage and assets to help your family in case your earning is not available. Example: A person has `20 lakh in assets and he has taken an insurance of `1 crore. His life insurance coverage ratio will be `1.20 crore / `12 lakh = 10. This means, his family can survive for ten years without changing their lifestyle. Of course, the real number will be high as the expenses will be lower than the salary. (Concluded.)
The writer is chief executive officer of BankBazaar.com
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