Have you ever caught yourself going through your mobile banking app to see your bank balance, or checking your portfolio to see how much it has grown or your clock to tell the time? It is simply a natural tendency for humans to be curious about what is going on.
Personal Finance Ratios are important tools that help you understand what is happening to your financial health. These ratios are often easy to compute when you know what to look out for and can help you make better decisions regarding finance.
Savings Ratio
Savings Ratio shows how prudent you are.
It measures the size of the income portion you are setting aside for future consumption and can be computed by dividing total savings by gross income.
Gross income includes all your earnings from salary, side jobs, interest received, bonus, dividend, etc.
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Suppose you earned N500,000 in January and you kept N100,000 aside whether, in a fixed deposit account, savings accounts, liquid funds and the likes, your savings ratio is 100,000 divided by 500,000 then expressed as a percentage. This gives you 20 percent.
Elizabeth Warren advises people to save 20 percent of their income (the 50:20:30 rule) while some financial planners say it should be a minimum of 10 percent.
Financial
Freedom Ratio
Many times when we talk about financial freedom we imagine having enough money to spoil ourselves anytime we want to.
One way to measure this is to look at how many times your monthly income can cover your expenses (a better version adds savings to expenses.)
The rationale is that once you can meet your monthly expenses (and savings or investment target) the extra money can be used to “make your dreams come true.”
To calculate your financial independence, add up all your monthly income including side jobs then divide by your monthly expenses (and savings/investment target).
For example, if you have a monthly income of N700,000 and monthly expenses and investment target amounting to N350,000 then your financial freedom is 2. This means you have twice as much as you need to provide for your needs every month.
A higher expense like N800,000 will result in a ratio of less than one which means you do not earn enough to consider yourself financially free.
Inflation Protection/Hedge Ratio
This ratio helps you know how insulated your investment is from the purchasing power erosion that comes with rising price levels in the economy.
As you are well aware a naira today is worth two tomorrow; this means keeping a naira till tomorrow will only be worth it if that naira earns enough interest to offset losses due to inflation.
To calculate your inflation hedge you simply need to compute the difference between the performance of your portfolio and annual inflation rate, or in the case of savings, the difference between interest rate offered by the bank and annual inflation rate. This is the real rate of return.
For instance, if you have a mutual fund that is up 10 percent till date and annual inflation is say 8 percent, then your real return or inflation hedge is 2 percent. That 2 percent guarantees that your naira today is at least worth one naira tomorrow.
Personal Worth/Net Worth
How much are you worth? It is an uneasy question for some but one that would require answering if you want to improve your net worth. Ask Dangote.
To calculate your net worth, you need to subtract all your liabilities from all your assets.
It’s easy, only that tracking all your obligations (current and long-term) and assets (including liquid or near cash and fixed like properties) will require meticulousness.
