Personal Financial Ratios

a) Liquidity Ratio
Liquidity means the ease and pace that an asset can be easily converted to cash. This ratio
is able to tell that how many months it will takes to pay the monthly expenses with the
liquidate money, such as cash. The benchmark for liquidity ratio is to be able to support
expenses for minimum 3 to 6 months in case of emergency situation. The formula for
liquidity ratio is as follows;
Liquid assets
Liquidity ratio=
Total outflows ÷ 12

Jack and Jill’s liquidity ratio:

Liquid assets
Liquidity ratio=
Total outflows ÷ 12

RM 125 000
¿
RM 116,76 6÷ 12

RM 125 000
¿
RM 9,730.50

¿ 12.85 months

This means that they can support for approximately 13 months of expenses if there is no
income. Therefore, they have attained the benchmark and it is above the recommended level.
Jack and Jill is in the safe position as they meet the requirement of the benchmark. A ratio of
13 means that the financial assets can pay the basic needs such as food, rent, utilities and car
loan for the next 13 months, if necessary.
b) Liquid assets to Net Worth ratio
Liquidity assets to net worth ratio shows the part of the family’s net worth is held in
liquid assets. It helps an individual to know their monetary liquidity. Maintaining a
certain level of liquidity is necessary to ward off any unpredicted financial hardships. The
benchmark for this ratio is at least 15%. The formula for this ratio is as follows;

Liquid assets
Liquid assets ¿ net worth ratio=
Net worth

Jack and Jill’s liquidity assets to net worth ratio:

Liquid assets
Liquid assets ¿ net worth ratio=
Net worth

RM 125,000
¿
RM 1,895,500

¿ 6.59 %

This specifies that the ratio is below recommended level as 6.59% < 15%. It did not meet the
minimum acceptable rate. Therefore, we recommend them to increase their liquid assets like
cash/cash equivalents. For instance, increase the cash amount in bank accounts and money
market account. It can be said that Jack and Jill’s liquidity assets to net worth is not healthy
because it is below 15% which indicates that in case of an emergency they could not
redeemed their assets immediately.
c) Savings ratio
Savings ratio shows the percentage of gross income put aside for expenditure purposes in
the future. It specifies the amount an individual put aside as savings for the usage in the
future. This savings are necessary to achieve retirement as well as other goals. For
savings ratio, a rate of 10% or greater is considered as healthy. The formula for this ratio
is as follows;

Savings
Savingsratio=
Gross Income

Jack and Jill’s savings ratio:

Savings
Savingsratio=
Gross Income

RM 8,200
¿
RM 195,000

¿ 4.21 %

 Add EPF as a part of the Jack and Jill’s savings as well = 20% + 27% + 4.21% =
51.21%

Their savings ratio is 51.21% which is above the recommended level as 51.21% > 10%. It is
considered healthy. It specifies that the couple really plan and consider of doing savings for
their future consumption. Therefore, they will have a comfortable retirement with the
adequate amount of savings to support themselves during their old age. Besides that, the
higher the savings ratio the sooner an individual can reach their goals.
d) Debt to asset ratio
This ratio assesses an individual’s ability to resolve debt. It is a better way to help on
whether the debts burden is too high compared to the gross income which is the amount
earned. It evaluates the individual’s solvency, which means one’s ability to pay off his
debts. This ratio disclose how much of assets are financed by debt. The benchmark for
this ratio is a percentage of 50% or lower is considered safe. The formula of this ratio is
as follows;

Total Debt
Debt ¿ asset ratio=
Total Asset

Jack and Jill’s Debt to asset ratio:

Total Debt
Debt ¿ asset ratio=
Total Asset

RM 129,500
¿
RM 2,025,000

¿ 6.40 %

This ratio designates they are in a safe zone as 6.40% is less than 50%. It also means that they
are very good at managing their debts as well as able to pay off their debts promptly. Based
on the results, it stipulates that the couple have less debt than assets to cover it, putting them
in safe position. The 6.40% means that for every ringgit of assets, Jack and Jill have 0.064
cents of debt. The percentage is typically demonstrated as a decimal, so 6.40% would be
0.064.
e) Debt service ratio
Debt service ratio shows the rate of income owned by the individual to meet his debt
payments on loans such as housing loan (mortgage, auto loan, and other consumer loans).
It estimates the debt obligation against the monthly income. A rate of lower than 35%
shows a strong position to settle debt payments. The formula of this ratio is as follows;

Annual Debt
Debt service ratio=
Annual take home pay

Jack and Jill’s debt service ratio:

Annual Debt
Debt service ratio=
Annual take home pay

RM 7,296+ RM 4,750
¿
RM 195,000−( RM 20,500+ RM 1,800)

RM 12,046
¿
RM 172,700

¿ 6.98 %

Their debt service ratio is 6.98%. It specifies that the couple are in a strong position to settle
their debt repayments as the rate computed is lower than 35%. Low debt service ratio
designates that the couple goals should be eventually achieved since they will never be the
slave for their debts such as housing loan and auto loan payment.
f) Net investment assets to net worth ratio
This ratio shows that how much a person has gave to accumulate money for objectives
such as retirement and other long-term goals. It is important to take note that this ratio
should get higher as a person’s age increases. A higher ratio indicates individual
accumulated sufficient investment assets that obtain investment income during his
retirement years. The benchmark is to acquire higher rate which is 50% or more would be
perfect. The formula of this ratio is as follows;

Net investment assets

Net investment assets ¿ net worth ratio=
Net worth

Jack and Jill’s net investments to asset ratio:

Net investment assets
Net investment assets ¿ net worth ratio=
Net worth

RM 1,485,000
¿
RM 1,895,500

¿ 78.34 %

This ratio specifies above the recommended level as 78.34% is higher than 50%. The ratio is
healthy and it shows that the couple is tremendously aware regarding their asset accumulation
and the couple have been accumulating pretty well.
Summary

Above is the five important personal financial ratios which is being calculated in order to
obtain information on Jack and Jill’s personal financial problem and how it is able to solve it.
By looking at the problems occurred Jack and Jill is able to make some betterment on that, so
that they will not face any circumstances in acquiring their financial goals in their future.
Personal Financial Ratios help an individual to analyse their financial health. These ratios
provides a practical tool to analyse an individual personal finances and track the progress that
making towards financial independence. The objective of the personal financial ratios is to
help individuals move from a situation of having low net worth, high debt and low savings to
one where they have high net worth, low debt and high savings. The target given for the each
ratio is on a generalized basis to ease individuals to use them as a benchmark to upgrade their
financial situation. Furthermore, these ratios are also used to regulate credit rating, which is
necessary financial metric. It is important to know each and every ratios and understand how
they relate to different financial situations.