Liquidity Ratios Overview

Liquidity Ratios

• Liquidity ratios assess the ability to cover monthly expenses with current liquid assets, also termed emergency fund ratios.
• Monetary assets are highly liquid and include cash, cash-equivalent securities, fixed deposits, cash management accounts, and Singapore Savings Bonds (SSBs).
• A minimum of 6 months’ worth of expenses in monetary assets is recommended for emergency preparedness.

Liquid Asset to Net Worth Ratio

• This ratio indicates what portion of total assets is accessible as cash or cash equivalents.
• A high liquidity ratio provides a buffer against income loss, while an excessively high ratio may signal too much cash and insufficient investment.
• At least 15% of net worth should ideally be held in liquid assets for covering short-term obligations.

Savings Ratio

• Represents the percentage of monthly income allocated for savings.
• The "Pay Yourself First" approach suggests saving a minimum of 20% of gross monthly income for financial stability.
• A higher savings ratio correlates with improved financial health and goal achievement.

Debt to Asset Ratio

• Known as the Personal Gearing Ratio, it evaluates the proportion of assets financed through debt.
• Ideally, debt should not exceed 50% of total assets to mitigate financial risk, especially as interest rates increase.

Debt Servicing Ratio

• Measures the percentage of net income dedicated to repaying debt obligations, important for potential homebuyers.
• Lenders consider this ratio when determining borrowing capacity and limits.

Non-Mortgage Debt Servicing Ratio

• This ratio assesses the allocation of net income for non-mortgage debt, including credit card bills, personal loans, and car financing.
• Quick repayment of non-mortgage debts, often with high interest rates, is recommended.
• A target of 15% of net income is advisable for managing non-mortgage debt levels.

Investment Ratios

• Indicates the proportion of net worth invested in various assets, excluding primary residence, focusing on investment efficiency.
• Important to accumulate investment assets such as stocks, bonds, mutual funds, and retirement accounts.
• Aim for at least 50% of total assets invested confidently for a secure retirement.

Solvency Ratio

• Evaluates overall financial health by comparing total assets to liabilities.
• A baseline standard states that net worth should constitute at least 50% of total assets for sound solvency.