Money may not buy happiness, but it can certainly help you buy things that make you happy. And that’s why there’s no end to the need for money. One way of getting wealthy is by saving and investing in plenty. But how do you decide if you have saved and invested enough?
Here are five measures you can use for this purpose:
1) Savings Ratio:
This one is quite simple: Just total the value of all your savings and investments and compare that with your total income. This will help you understand how much percentage of your income you save and invest. To calculate your savings and investments, add the cash in your bank accounts, the amount you invested in stocks, mutual funds, gold, and other assets. You can do this on a monthly, annual or cumulative basis. Now, let’s move to your total income; add your salary and professional sources of income. Next, add the profits and interests you earned too. Again, ensure you do this for the same period as your savings. Suppose you earn Rs 1 lakh in a month and manage to save and invest Rs 50,000, then your savings ratio is 50%. The more you save, the more well-off your finances are. Ideally, experts suggest that you should save at least 30% of your income. Another thumb rule is that you should save more when you are younger as your expenses and responsibilities will be lower. This will also help you fund your future liabilities like car and home loans.
2) Liquidity Ratio:
In the case of an emergency tomorrow, how much money do you have? That’s what this ratio deals with. Suppose a family member meets with an accident or you lose your job or some other issue, do you have enough money available readily? Hospital bills could go up to lakhs of rupees. A lack of monthly salary could mean you pay for your expenses from your past savings. All this includes liquid money. So to figure if you are ready for emergencies, you can use the Liquidity Ratio. Simply add up all investments that can be sold on a short notice and divide the value by your total monthly expenditure. This shows how prepared you are financially to meet expenditures in case of untoward situations. Ideally, you should have enough to cover expenses or income for 3-6 months. If you have a separate emergency fund altogether, nothing like it!
3) Investment Ratio:
And not all of your investments are liquid. For example, it takes a long time to sell your house or car. This makes it an illiquid investment. Similarly, you may not be able to cancel your Unit-Linked Insurance Plan and receive the proceeds on a short notice. What you can do is use your bank deposits, sell off stocks and mutual funds to get cash. So, take into account all the liquid assets you own and compare that with the total investments you own. This also helps you understand how emergency-ready you are.
4) Debt Ratio:
Have you borrowed too much? Do you earn enough in a year to pay it off? If not, then you may have to dip into your savings. This is where you can use the Debt ratio. Add up all your monthly or yearly loan installments and credit card dues. Divide this by your total income for the same period. Banks and lenders ideally prefer if your debt amounts to 43% of your income or lower. If your debt payments exceed this threshold, you may want to check your credit card spends. After all, excess debt can burn a bill hole in your wallet. You may also want to increase your savings or ensure you have enough to pay off costly debt.
5) Solvency Ratio:
Let’s suppose you have loans worth Rs 20 lakh. Do you have enough savings and income to pay off this debt in case your income stops? This is what the solvency ratio measures. To calculate this, you need to first measure your net worth. Subtract the value of all the assets you own (investments, properties, etc) from the value of all the debts you have to pay. This is your net worth. Divide this by the value of your total assets to get your solvency ratio.