Knowing your personal financial ratio
Finance is a curious thing to me. Some of my social circle are into the "bag tag" game. Things like how many bags they bought this year, how many travels they made. This/that person is rich because of the bag in their hands. But deep down I know that is not even considered an assessment, it's just a social gossip. How do you know if you are handling your finance well? In my view, the best way to gauge is looking at your personal finance ratio.
Financial ratios give significant insights about how your actions have impacted your financial situation.
There are many ways to self-diagnose but here I pick the four simplest ratio that is directly related to financial vulnerability to start with.
In order to do this, you only need (and must) know your total income, how much you spend each month, your liquid asset and any insurance coverage.
The benchmark serves as a health guide and not a hard rule. Basically, if you meet the benchmark for all ratio, you are not financially vulnerable. And yes, you are also 70% likely better-off, compared to your peers.
Benchmark are situational based.
We're all different when it comes to our need and expectations in personal finance. A better assessment comes with consideration of your responsibility, lifestyle and preference. If you taken multiple loans, personal debt service and solvency ratio is crucial. Or liquid asset might be your default investment style, in which case you don't need to track your emergency fund. For me, insurance coverage is not as important as I don't have a dependent (although my mentor disagrees and my current saving ratio is a "wake-up" call). Or you might pulling yourself out of a sticky situation and being out of all the benchmark may be the best for you.
Ratio doesn't lie
Sometimes you can't see who took your five bucks. Sometimes you hide the thousand dollar purchase in your car. It didn't matter, ratio don't lie. There are recommended spending % for all expenditure categories, and there are golden ratio to follow.
Here's one, The 20-30-50 budget: 20% saving, 30% housing and 50% expenses.
I prefer to keep it 30-70 : 30% savings, 70% expenses.
At some point of your life, you'll be approached by financial planner that awe you with returns and ratios to talk about how you can work out your finance. Avoid the returns and stick to the ones that shows you how ratio. Well, if you are not hardworking enough to manage your own finance.
Keeping these ratio in mind helps you to better understand how your action today is shaping your future money.