How to analyse personal financial health

April 10, 2023
DD Planet

Analysing personal finance is an important tool in managing personal finance, for it can help us track our financial goals from time to time.

If you know how to use Microsoft Excel, you can easily use formulae to calculate some key ratios that are required for this. Otherwise you can use pen and paper, along with a basic calculator.

Here are the tips that would explain it in a layman’s language:

1. The first step is to calculate all the assets you have. By assets here, we mean everything that has a monetary value, such as your bank balance, your other deposits, your bonds, mutual funds, stocks, jewellery and gold, real estate and so on.
2. The next step is to calculate all of your liabilities, such as your loans, your credit card outstanding and your other credits of any kind.
3. Your net worth is total assets minus total liabilities, which you have calculated in the above two steps.
4. Next, calculate all the liquid assets you have which are either invested for shorter durations less than a year or are available to you immediately that could be cash, and the ones which can be converted into money in less than seven days.
5. Calculate your monthly expenses that should include all kinds of expenses that you do annually or quarterly (pro-rate it to a month) as well.
6. Calculate next your gross income, which is the total of all kinds of income you have, namely your salary, your interest income, income from other invested assets, your royalties, your capital gains and so on.
7. Calculate Cash and Near Cash, which is the money that is available with you either in cash or can be converted into cash in no time such as the money in your savings accounts et cetera.
8. The last calculation is for all kinds of investments you have done, such as the money you have put in deposits, bonds, funds, stocks, real estate, gold et cetera.
9. The first ratio to judge your personal finance is the ‘Debt to Asset’ ratio. Simply, divide the total debt you have by the total assets you have. You should target this ratio at less than 55%.
   
   Though in initial career stages it can be included, it is better to exclude the house you fully own and/or in which you are currently living from the total assets you have, especially when you are above thirty-five years in age.
10. The second ratio is ‘Savings Ratio’, which is the total savings you’re able to do divided by your gross income that you calculated in step 6 above. You should target a savings ratio of at least 20% under all circumstances.
11. The third ratio is ‘Basic Solvency Ratio’, which is the amount you calculated in step 7 above, i.e. your cash and near cash, divided by your monthly expenses (step 5).
    
    You can even include your deposits that can be available to you in a day or two while calculating cash and near cash component. The target here should be greater than 6 in early stages of career and 12 to 24 when you cross thirty-five years in age.
12. The fourth and the last ratio is ‘Net Invested Assets’. It is calculated by dividing the all kinds of investments that you have done (step 8) by the total assets you have (step 1). Here again, it would be better to exclude the house you are currently living in from the calculation (like we did in step 9 above). The target for this ratio should be at least 85 percent.
13. Keep tracking the above-mentioned key four ratios regularly and take suitable action whenever going off the track.