Question

1.
how can you utilize financial ratios in your personal finances?
2. why is it important for you to be aware of your personal financial ratios.
3. how can ratios help you with your personal goals. 300 words

Answer 1

(1): An individual can make use of financial ratios in his/her personal finances to properly determine one’s liquidity position, solvency position, ability to take additional debt in the form of loans and risk profile and risk appetite. Utilization of financial ratios with regards to one’s personal finances will enable one to systematically determine their financial health and their financial needs and requirements.

(2): It is important for a person to be aware of his/her personal financial ratios as this awareness will enable the individual to make informed decisions and make decisions that will be synchronized with his/her goals, objectives, financial requirements and risk appetite. For instance liquidity ratio can be computed by dividing a person’s cash and near-cash assets with monthly expenses. Suppose that a person’s cash and near cash assets stands at $3,000 and that his monthly expenses is $1,500. Thus the liquidity ratio of that person will be = $3000/$1500 = 2.00. In simple words it means that this person can cover two months’ worth of expenses. The person will understand that he should maintain a further quantum of cash and near cash assets so that he can cover around 3 to 6 months of expenses. Thus awareness of personal financial ratios will give a person a reality check and hence will enable him to take corrective action with regards to his financial health at the right time.

(3): Financial ratios can help a person with their personal goals by making them more able to align their personal goals with their financial situation. For every situation in life finances are required – be it education, or buying a house or car, getting married etc. These ratios will help a person to achieve their personal goals by aligning their requirements with their financial health and resources at their disposal.

(299 words)