Skip to content

How to Check Your Financial Health: The Four Financial Ratios for Aussies

Assessing your financial wellbeing with the four financial ratios

Checking your financial health isn’t just about well-being scores and mindsets. By making a few basic calculations, you can assess your finances in a way that provides thorough, empirical insight into where you stand.

Net Worth Ratio

The net worth ratio illustrates how much of your assets you own when considering your debts. Typically, this ratio increases with age as people’s mortgages tend to decrease over time.

A higher ratio indicates a better financial position, with anything over 50% considered excellent. However, don’t be discouraged if your ratio is lower, especially if you’ve borrowed money to invest.

Liquidity Ratio

The liquidity ratio reveals how much money you have available to pay off current debt obligations. It’s crucial to exclude assets not intended for liquidation, such as long-term investments or assets like cars.

Multiplying the liquidity ratio by 12 shows the number of months your liquid assets can cover debt payments. Aim for a liquidity ratio of more than six months to ensure sufficient financial flexibility.

Savings Ratio

The savings ratio indicates the percentage of your income that you’re saving over a specific period. Include any investments or super contributions as savings made during this time.

A higher savings ratio is generally preferable, although younger and older individuals may have lower ratios due to different financial priorities. Be cautious of a negative savings ratio, which indicates that you’re spending current savings or taking on debt.

Debt Service Ratio

The debt service ratio highlights the portion of your income allocated to servicing debt obligations. A high debt service ratio indicates vulnerability to interest rate fluctuations and income loss.

If your ratio exceeds 30%, it’s essential to prioritize debt management strategies to mitigate financial risks.

Assess Your Financial Health Today

By evaluating these four key financial ratios, you can gain valuable insights into your financial health and make informed decisions to improve your financial well-being.

If you need assistance interpreting these ratios or developing a comprehensive financial plan, please don’t hesitate to contact us at Advice Loop for personalized guidance and support. Let us help you navigate your financial journey with confidence and clarity.

Secure your financial future today!