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Find Out Your Financial ‘illness’ by Looking At These 4 Financial Ratios

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financial ratios | Find Out Your Financial ‘illness’ by Looking At These 4 Financial Ratios

Like a healthy body, financial conditions can also be infected with “diseases” that disrupt the work cycle. In order to detect the presence of a “bully” in your financial condition, you should check your finances at least once a year.

It is also imperative to check your financial condition when something changes your life. Things like getting married, having children, or work problems will affect the flow of finances.

As a result, doing a financial check-up will be the right decision for you to do because it can provide an overview of your financial condition after this happens.

Besides being able to find out the problems that are disrupting your financial condition, you can immediately find a way out of these problems. That way, the financial condition does not drag on being plagued by these problems and avoids financial collapse.

In looking for risks that might damage your financial condition, there are a number of things you can check for yourself. One of them is financial ratios.

4 Financial Ratios

For that, in order to check your financial condition and find out the indicators of the presence or absence of disease, check the following 4 financial ratios:

1. Emergency Savings Ratio

One of the things that you must have is emergency savings. By having an emergency fund, you can use it when something bad happens that can make financial conditions fall apart.

When the emergency savings ratio has too little value, the ability to seek additional funds when finances are in trouble will be smaller. That way, the risk of bankruptcy is like having debt, no doubt it will occur in financial conditions.

Filling up these emergency savings should be included in your budget planning. Ideally, the value of these savings should be in the range of 3 to 12 months of total salary.

The value that you must save, of course, depends on the financial needs and risks that may occur in family finances. So, you can estimate for yourself how much money should be saved in an emergency savings account, and try to keep it above the predetermined value.

2. Savings and Investment Ratio

In this ratio, you will be able to find out the level of your ability to set aside your income for saving and investment needs. When the value is high enough, it means that finances are in a healthy condition.

However, when the value of this ratio is too small, or even absent, you need to be aware of it. Besides meaning that your income is always drained away, you also do not have any savings of wealth or the ability to increase your source of income through investment.

So that your financial condition can be said to be “healthy”, try to always set aside around 10% of the total salary earned for savings and investment needs. Although the value is not very large, with one-tenth of the income you can have a good financial condition.

3. Expenditure Ratio

By checking the expense ratio, you can find out what percentage of your salary is being drained to meet your monthly needs. In addition, you can also find out what things make your expenses exceed the limit.

This ratio often takes up a large part of the income you receive. No doubt, when the value of this ratio is too high, the ability to maintain a healthy financial condition becomes difficult.

When your income is often used up, you must check the expense ratio immediately. So that you can always fulfill other needs, such as saving and investing, try to keep the expense ratio below 70%.

That way, the financial condition will be healthier and the ability to increase the ratio of emergency savings and investment will be better.

4. Debt and Credit Ratio

When you have a high enough salary but find it difficult to set it aside, it could be that the problem lies in the debit and credit ratio that is too high. By choosing to go into debt or credit, expenses will be greater than what should be paid.

Interest expenses and penalties for late payments will make expenses soar. Therefore, a lot of your income will be eroded to pay off bills from debt or credit.

When this is your experience, carefully check the ratio value of debit and credit owned. When the value of this ratio approaches 30% or more, then the ability to meet the needs of saving and investing will become smaller.

With a debt ratio of that size, you will certainly experience economic difficulties when suddenly the interest expense increases. If that happens, then like it or not, you have to look for additional sources of income so that the debt bill can be paid off.

So, to keep your financial condition under control, make sure that the debt and credit ratio is not more than 30% of the total salary.

Safe Ratio, Healthy Financial Condition

Maintaining financial conditions in order to stay in control is tricky. Even though there is help from a financial consultant, you can still do a financial check-up yourself by checking these financial ratios.

When one of the 4 financial ratios is problematic, you can immediately find a solution, or ask a financial consultant for help when you can’t handle it yourself.

However, when there are no problems with these financial ratios. of course, you can feel calm and remain disciplined in controlling your financial condition to stay healthy.

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