We know our physical health is important and we understand that the numbers that reflect our temperature, blood pressure, cholesterol and weight provide insight into our physical health.
Want a simple way to understand your financial health? Then check out financial ratios. They give you a quick look at your financial health. Better than just letting you know where you’re at, the ratio can help you decide where you need to go to improve your financial health.
Let’s check out one important ratio: Basic Liquidity
Question: Do you have enough savings to deal with emergencies & loss of income?
Things happen. The water heater breaks. The car needs a new alternator. The kids need braces. The dog needs a surgery. Extended Illness sends you into unpaid leave or there’s a cut in your work hours. You move to a location where a spouse can’t find work. How prepared are you for unwanted, but not unforeseeable, life events?
Answer: Basic Liquidity Ratio = Monetary (liquid) Savings divided by Monthly Expenses
This ratio will tell you how long your liquid savings will cover your monthly expenses. Put another way, how long you can live with an income loss, within running up those credit cards, borrowing money from family or defaulting on your loans.
For optimum financial health the goal is to have liquid savings in order to cover 3-6 months of living expenses. So, a family who spends $4,000 a month would want to have $12,000 ($4,000 times three months) to $24,000 ($4,000 * 6 months) in liquid savings.
Compute Your Number:
My Liquid Savings: $_______ /divided by My Monthly Expenses: $_____ = _____ months
How did you do? If you have 3-6 months saved, good for you! You have met a key measure of financial health! You have built a safety net for yourself in tough times in the form of your savings account. If you haven’t reached this level see the prescription below.
Prescription: Curing the financial health issue of lack of liquid savings
- Get inspired. Visit the Savers Stories section at https://americasaves.org/for-savers and be inspired by real people in real life who improved their family’s financial health through savings.
- Set a Goal. How much savings do you need to build up that emergency fund?
- Make a Plan. How much can (or should) you save a month? How many months of saving that amount is needed to reach your goal?
- Save Automatically. Set up an allotment from your paycheck into a special account for your emergency savings. You can set up a unique savings account at your bank, or if you’re very tempted to spend, set up a savings account at a separate bank that is not easily visited.
Marjorie McLean, MBA, AFC®
Want some professional guidance on your financial health journey? Contact one of us–the Accredited Financial Counselors at Better Financial Counseling Network.