How to check your financial health: I
How to check your financial health: II
How to check your financial health: III
How to check your financial health: IV
How to check your financial health: V
Welcome to the last leg of this series on personal financial ratios.
By now I am sure all of you must have calculated the simple ratios discussed in earlier and must be on their way to achieve a healthy financial life. This is the sixth and the final destination in our quest for achieving financial stability via the ratio route.
In this issue, we will not only understand the last ratio but also have a look at all the previously discussed ratios in brief once again so as to refresh what we have learned already and understand them all together.
Please bear in mind that a constant vigil on your personal finances is a must.
So here goes, the sixth and final ratio: net invested assets to net worth ratio. This ratio states your accumulated wealth vis-a-vis your net worth.
In simple words, it states the accumulated wealth each individual has earmarked for her/ his retirement and other financial purposes. This ratio is calculated by dividing net invested assets with your net worth.
Where, net invested assets includes:
- Bank fixed deposits
- Shares/stocks
- Mutual funds
- Bonds
- Public Provident Fund
- Real estate (for investments)
- National Saving Certificates
- Kisan Vikas Patra
- Post office small saving schemes
- Any other invested assets
These assets have to be taken at their approximate market value for calculating the net invested assets to net worth ratio.
Net worth is your total assets less total liabilities. It shows your worth after paying off all your liabilities.
Total assets would include:
- Cash/ Near cash assets (which includes savings account, fixed deposit, liquid funds, cash in hand)
- All your invested assets as stated above
- All your personal assets (which includes your house, jewellery, car scooter and any other personal assets)
Let us assume the following:
- You have net invested assets worth Rs 7.5 lakh that includes shares worth Rs 5 lakh, Public Provident Fund of Rs 1.5 lakh and equity mutual fund of Rs 1 lakh. Hence your net invested assets comes out to Rs 7.5 lakh (Rs 5 lakh + Rs 1.5 lakh + Rs 1 lakh)
- Your total assets are worth Rs 1.5 crore
- Your total liability being Rs 5 lakhs
- Hence, your net worth would come out to Rs 1.45 crore (Rs 1.5 crore less Rs 5 lakh) and
- Your net invested asset to net worth ratio would be equal to: 7,50,000/1,45,00,000 *100 = 5.17 percent.
But is it good?
No. The ideal ratio is preferably 50 percent. It is advisable that after paying off all your liabilities, at least 50 percent of the balance assets should be invested.
What does it signify?
It signifies that every individual should have clear goals on accumulating capital (assets) so as to have sufficient assets to meet financial goals and have an independent financial life.
Having now understood the last ratio let us recap all the six ratios for you.
By now I am sure all of you must be convinced that financial ratios are not only important for company analysis but also for personal financial health. Unlike company ratio analysis, personal ratio analysis is relatively quite simple to perform.
Note: It is important to perform these simple ratios at least once a year to check your financial health. Also, maintain a record in order to compare your financial standing and try to improve on areas where you have been lacking. For instance, you can always improve upon your savings by spending less.
Like you go for a regular health check up for a physically fit life do perform a regular health check of personal financial ratios to have a financially healthy and independent future.
How to check your financial health: I
How to check your financial health: II
How to check your financial health: III
How to check your financial health: IV
How to check your financial health: V
The writer is a certified financial planner and can be reached at dhanplanner@rediffmail.com.
