Personal Financial Ratios
Personal financial ratios are quantitative metrics computed from an individual's income, expenses, assets, and liabilities to assess the health of their household finances, including the savings ratio, debt-to-income ratio, liquidity ratio, and solvency ratio.
Just as financial analysts use ratios to assess the health of a company, individuals can apply analogous ratios to their own finances to identify strengths, stress points, and areas requiring corrective action. These ratios are especially useful when reviewed annually alongside one's net worth statement.
The Savings Rate (or savings ratio) is defined as savings divided by gross income. A commonly cited target in Indian personal finance literature is a savings rate of at least 20–30%, though this depends heavily on income level, age, life stage, and financial goals. A savings rate declining over successive years despite income growth signals lifestyle inflation. Note that for this ratio, savings should include all forms — EPF contributions, PPF, SIPs, FDs — not just cash in savings accounts.
The Debt-to-Income (DTI) Ratio equals total monthly debt obligations (EMIs on home loan, car loan, personal loan, credit card minimum dues) divided by gross monthly income. Banks and housing finance companies typically set a maximum DTI of 50–55% for loan eligibility assessment. A DTI above 40% signals financial stress: a significant portion of income is pre-committed, leaving little room for savings or emergency expenditure.
The Liquidity Ratio is liquid assets (savings accounts, liquid mutual funds, short-term FDs, overnight funds) divided by monthly expenses. The recommended minimum is 3–6 months' expenses, forming the emergency fund. Those with volatile income, single-income households, or no health insurance should target 6–12 months.
The Solvency Ratio (Net Worth divided by Total Assets) measures whether total assets exceed total liabilities — a fundamental check on whether the household is solvent. Young earners with large home loans may temporarily have a low or even negative solvency ratio, but the ratio should improve over time as the loan amortises and assets accumulate.
Tracking these ratios annually, alongside a net worth statement, provides a structured framework for financial self-assessment that moves beyond simple budgeting.