Is your wallet healthy? Find out with these ratios
What's the story
In the modern, fast-paced world, personal finance management has become increasingly important for Indian families.
Knowing your financial situation helps you make smart decisions about saving, investing, and spending.
Personal financial ratios are simple tools that provide a quick picture of your financial well-being.
These ratios can help individuals and families in India take control of their finances and plan for the future.
Savings ratio
The savings ratio: Your financial safety net
The savings ratio, a crucial financial health indicator, gauges how much of your income you're stashing away, not spending.
The golden rule: Aim for at least 20%.
So, if you earn ₹50,000 a month, setting aside ₹10,000 is a powerful move toward financial stability.
It cushions you for unexpected costs and helps build wealth over time.
Debt-to-income
Debt-to-Income Ratio: Balancing earnings and obligations
The debt-to-income (DTI) ratio, crucial for financial health, indicates the portion of your income allocated to debt repayment.
A recommended DTI is 35% or less. For instance, if you earn ₹50,000/month, your monthly debt payments shouldn't exceed ₹17,500.
This keeps your finances comfortable and improves terms for any loans you might need in the future.
Emergency fund
Emergency fund adequacy: Preparing for the unexpected
A healthy emergency fund adequacy ratio is essential for navigating unexpected expenses or financial downturns.
Ideally, you should have three to six months of living expenses saved up.
So, if you spend ₹30,000 a month, you should have ₹90,000 - ₹180,000 in your emergency fund.
This way, you're ready for anything, whether it's losing your job or facing a medical emergency. It just gives you peace of mind.
Investment income
Investment-to-income ratio: Building wealth over time
The investment-to-income ratio indicates the percentage of income allocated to investments after expenses.
Investing 15% (i.e. if your monthly salary is ₹50,000, you should invest ₹7,500) in mutual funds or stocks allows your wealth to grow through the power of compounding.
This approach ensures financial security and the ability to meet long-term goals, which is a key aspect of financial planning for Indian families.