Are you financially Diabetic?

As diabetes has become a common phenomenon in Indian households resulting in higher medical costs, it is important to check if we have not become financially diabetic too.

Mar 16, 2015 09:03 IST India Infoline News Service

Sedentary and stressful lives are leading to an increased risk of Diabetes in India. The dreaded disease has many repercussions, and a diabetic individual might have just to cut down on everything he eats to contain the sugar levels. As diabetes has become a common phenomenon in Indian households resulting in higher medical costs, it is important to check if we have not become financially diabetic too. Here are some of the monitoring tools that help to identify that out financial health is hale and hearty.
  1. Emergency Fund or Liquidity Ratio - This ratio is arrived at by checking how long your cash and bank balances will last to pay your monthly living expenses. Cash + Bank/ Monthly Expenses. If the ratio is in between 3-6, then it is a comfortable level that implies you have adequate money to pay off your monthly expenses.
  2. Debt Service Ratio - Calculated as (All EMIs & other debt payments) / (Family Gross Monthly Income), the ratio indicates a person's ability to pay off monthly EMIs. It reflects the percentage of income spent on paying debt, which should ideally be not more than 40% of your income.
  3.  Savings To Income Ratio - It indicates the percentage of savings in relation to total income earned per month. While higher the percentage, better the savings but a minimum of 20-30% of the income should go towards savings. The formula is: (Savings per month) / (Total Income per month).
  4. Solvency Ratio - The ratio is meant to find out a person's ability in paying off the debts. It compares the total assets with total liabilities as (Financial Assets) / (Total Liabilities). Though the ideal ratio may differ person to person and is based on age and income, but 50% debt of financial assets is an acceptable level. If the ratio comes above 100%, then it should ring an alarm.
  5. If any of these ratios fall below the ideal line, then it signals that the person is diabetic, and he might have to cut on his spending, reduce debt and increase savings. 

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