Personal financial ratios are tools or calculations designed to help you evaluate your current financial strength and position.

These will help you prepare for your financial freedom, writes Mapalo Makhu.

There are many tools to help you navigate the road to financial success. These include a budget and using apps to track your spending. But what other tools are there to help you evaluate your financial position?

Personal financial ratios are tools or calculations designed to help you evaluate your current financial strength and position.

Doing these calculations at least once a year can give you a benchmark to help you work towards better financial health.

NET WORTH CALCULATION

The net worth calculation is in effect your personal balance sheet, which measures your assets versus your liabilities. The bigger your assets are, compared with your liabilities, the higher your net worth will be.

Net Worth = Assets Liabilities

SAVINGS RATIO

A savings ratio is the level of savings as a percentage of your total income. This calculation indicates the amount of money you put aside as savings for future use. To achieve this, you need to practise the principle of paying yourself first meaning that even before you pay for anything else, you save first.

Another brilliant way to make sure that you save is by not inflating your lifestyle. With every pay increase, at least 10% of that should go towards your savings and not expenditure.

Savings ratio = Savings/net income x 100

DEBT-TO-INCOME RATIO

Data produced by Tymebank last year into just how indebted we are showed that just 15 days after payday, the majority of South Africans have no money in their bank accounts and therefore need to use expensive debt to get through the rest of the month.

The debt-to-income ratio is a calculation that compares the amount of debt you have to your overall income.

Debt-to-income ratio = Total recurring monthly obligations/gross monthly income

The ratio is really a reflection of just how much of your income goes towards servicing your financial obligations. An acceptable debt-to-income ratio is anything below 36%.

There are two ways to lower your debt-to-income ratio:

LIQUIDITY RATIO

Liquidity is the ease with which you can turn your assets into hard cash. This includes money in your savings account, as well as cash earmarked for an emergency fund.

When you are liquid, you can withstand financial shocks such as a retrenchment or illness. Another big advantage of being liquid is that when opportunities present themselves to you, you can swiftly take them without borrowing money.

When thinking of liquidity, the adage cash is king rings true.

Liquidity ratio = Liquid assets/current debt x 100

SOLVENCY RATIO

The solvency ratio is important and you should familiarise yourself with it. This is because, as you grow in your career and acquire more assets, debt is often used to finance these assets, especially property and cars (although cars are a depreciating asset).

This ratio lets you know if the assets in your balance sheet are enough to repay your debts. It is for this reason that your solvency ratio should be at least greater than one.

Solvency ratio = Net worth/total debt x 100

FINANCIAL FREEDOM RATIO

Unless you follow the Financial Independence Retire Early (Fire) movement closely, you will not be too familiar with the financial freedom ratio calculation. The Fire movement advocates saving and investing aggressively so you can retire early.

While we sometimes dream of being able to stop working in our fifties or some as early as in their forties, how do you measure your readiness to do exactly that?

The financial freedom ratio measures how close you are to being able to hand in your resignation, and live the financially free life youve been working hard for.

READ: The faces of financial freedom

The ratio is in effect the current income which you could sustainably replace if you were to stop working today.

To get to this number, you will need to know:

This ratio gives you an estimate of just how close you are to that seemingly elusive financial independence.

Although you can quickly and easily do these calculations, it is good to remember that tax has a big impact on them. However, do not let that put you off the number crunching.

Even getting just an estimate can shift how you currently view your finances and hopefully motivate you to improve and manage your finances better.

news you need

Originally posted here:

Personal financial ratios you need to know | Citypress - News24