Using ratios to assess my financial position
If we analyze companies using financial ratios, I believe we can adopt the same concept to keep track of our financial health. The personal financial ratios aim to serve as warning signals and help detect any deterioration in my financial position. And if situation arises, I can take any necessary actions such as altering my expenditure pattern or evaluate my goals. Here are some ratios to use which I have classified them accordingly: 1) Solvency Purpose - indicates the probability that an individual will become bankrupt Equation - net worth / total assets Implication - the higher the ratio, the stronger is my financial position Warning bell - negative = insolvent 2) Liquidity Purpose - measures my ability to pay off the short-term liabilities Equation - current (liquid) assets / current liabilities Implication - the higher the ratio, the stronger is my current financial situation Warning bell - lower than 1.0 3) Savings Purpose - measures the proportion of my income saved in a year E