Liquidity Ratios Overview

Study Notes

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.

Description

This quiz explores liquidity ratios, also known as emergency fund ratios, which measure your financial ability to cover monthly expenses using liquid assets. Understanding these ratios is crucial for managing personal finances and preparing for potential income loss.