What is Liquidity Ratio?

Liquidity Ratio = Monetary Assets / Monthly Expenses

Looks familiar? Yes, you would calculate your Emergency Funds using this same formula as well.

 Liquidity ratio measures your ability to take care of your basic needs month to month based on your cash or near cash equivalents in the event of an emergency.

​So, what are Monetary Assets and what qualifies as Monthly Expenses?

Monetary Assets are:

1. Cash holdings

2. Fixed deposits

3. Bonds

4. Or any investments you can quickly convert into cash without any loss in value

Monthly Expenses can be varying from person to person, the basics include:

1. Food/groceries

2. Rent/mortgage

3. Car loan instalments/transport fare

4. Phone bills

5. Utility bills

6. Various subscriptions

7. and the list goes on based on personal lifestyle choices

Pro-tip: Create a list to track your expenses in order to better know how much your monthly (fixed) expenses are.

So, what does Liquidity Ratio mean to me?

Picture these scenarios:

1. You lose your job

2. A family member requires surgery

3. A family member passes on

4. Your computer dies on you

5. You lose your phone

These scenarios can happen individually, in tandem, or even multiple at one go (hopefully not). Despite the varying consequences in each scenario are, a common headache is that a large sum of money will be needed almost immediately.

Now, if any of these happened yesterday, how ready are you?

Alright, so now what?

With this knowledge, the first step you can take would be to start tracking your Monetary Assets and your Monthly Expenses.

“You can’t manage what you don’t measure” – Peter Drucker

Once you have a clearer picture, work towards setting aside a fixed amount when you receive your paycheque into another account (High Interest preferably) that constitutes part of your Monetary Assets before you spend them all in your Monthly Expenses account.

A healthy ratio to keep is >15%, or >6:1, and some of you may be shocked at this point as to your own Liquidity Ratio. You either have way too much liquidity, or too little, and you do not want to be in either camps

Reach out to your Financial Services Consultant to get your Liquidity Ratio checked out, or drop me a text if you have questions.

Your Trusted Advisor,

Daniel

References:

https://thecentsofmoney.com/eighteen-personal-finance-ratios-you-should-know/#:~:text=Liquidity%20Ratio%3D%20Monetary%20Assets%2F%20Monthly%20Expenses&text=A%20six%20ratio%20means%20that,next%20six%20months%2C%20if%20necessary.

https://blog.seedly.sg/personal-finance-ratios/