How Much do You Worth? (Part 2)

In my previous post, I have shared a simple formula on calculating your net worth. By having positive worth does not translate into good financial health. Just imagine, remaining healthy, it will be better to have regular medical check up so that any abnormal symptom can be taken care of at no time.



Have you ever wonder how much can your daily life go on without an active income? Well, a good way to examine it is to calculate the Basic Liquidity Ratio by dividing Liquid Assets with Monthly Expenses. Liquid Assets means those items which are cash equivalent (such as Cash, FD, Savings) but investment shall be excluded. If the ratio comes up a value of, say 5, it means your cash can last for 5 months of living without active income. Of course, we should keep this value as reasonable as possible. A too high value might not provide positive contribution to your financial health while too low will put your life in risk as life is full of uncertainty. As a rule of thumb, we shall keep the value at the minimum of 3. As for the maximum, it is totally depending on your life condition. Higher value may be required for those with uncertain income or vice versa.

Next, I would like to talk about Solvency Ratio. It is a ratio to check whether you are over exposing on loan or not. You can get the ratio by dividing your Net Worth by Total Assets. For aggressive investors, their loan exposure may be higher than those conservative investors. By having high loan will reduce your Net Worth and get lower Solvency Ratio. As a guideline, we should not have a Solvency Ratio that is lower than 50%. If it is, it means more than 50% of your assets are financed through loan. Any insolvency might put you at a great risk.

On my next post, I will share more ratios on evaluating your financial health. Stay tune.