Everything gets measured. Thats' how things work, information is collected, decisions are taken; all based on measurements. Every thing around us, whether it is physical or non-physical has a measure.In the field of finance & corporates, these measure assume a great significance. There are measures for evaluating stocks, valuations of companies, credit quality of lenders, returns potential for opportunities, and so on. Most of the measures are in form of ratios like for eg., Price to Earnings (PE) ratio, Dividend Yield ratio, etc.

Amidst all these measures, have you ever wondered about how can you evaluate your own financial health? What measures would be appropriate for you? Well in this article, we would be presenting few measures that you can use to assess your own financial health. We hope, our readers would take the effort of actually measuring their financial health after reading this article.

RATIOS FOR ASSESSING FINANCIAL HEALTH:

EMERGENCY FUND RATIO
Formula: (Cash + Bank Balance) / (Monthly Living Expenses)

Ideal Value: 3 to 6

This ratio measures your ability to pay for expenses with cash in hand.

This ratio indicates an individual’s ability to meet its' monthly expenses in case of an emergency or a catastrophe. Typically, one should have enough cash + bank balance to cover for 3 to 6 months of living expenses. There is no exact measure but typically would be higher for those with high chances of unforeseen expenses, variable income, change in job or unemployed, start-ups, etc where risks are higher. Those with stable jobs and settled in life stage can follow the ratio at a lower end. It does not include voluntary expenses like those on entertainment, vacation or those that can be avoided, if needed.

LIQUIDITY RATIO
Formula: Liquid Assets / Net Worth

Ideal Value: 10% to 20%

This ratio helps a person to know his financial liquidity.

Typically any person would be investing in multiple avenues / asset classes and products – both financial and non-financial. Prudent personal finance planning requires us to maintain a certain level of liquidity in our holdings to face any unforeseen financial challenges. Investments in say property can be a good investment avenue but lack of liquidity is its' biggest negative. Typically, we must have at least 10% to 20% of holdings into liquid assets/products which can be redeemed at a short notice. Anything less is not healthy.

Liquid assets can include all cash (near cash assets), equities, Equity Mutual Funds (except ELSS with lock-in period, FMPs & closed-ended funds), Debt Funds and other assets which can be redeemed within three to four working days.

SAVINGS RATIO
Formula: (Amount invested per month) / (Total Income per month)

Ideal Value: 20-30%

This ratio indicates the savings made from the total income earned for a given period, say month.

Every family must save some portion of their income to ensure some wealth creation over time. AThe extend of savings depends a lot on the income earned, life stage,expenses of the person and so on. A minimum 10% can be considered as a must while we must aim for at least 20-30% savings from our total income. The savings can be in form of cash, bank balance, mutual fund, etc. Total income includes income earned through business, profession or in the form of salary, bonus, EPF contribution, interest, dividend, rent/royalty and any other form of income.

DEBT SERVICE RATIO
Formula: (Total debt payments /EMIs) / (Family Gross Monthly Income)

Ideal Value: Below 40%

This ratio shows the ability of a person to pay the loan installments on a regular basis. It indicates how much percentage of your monthly income is used for paying loan EMIs. Typically, the disposable income of a family would be portion which remains after paying the EMIs as such payments cannot be avoided. The lower this ratio, the better it should be for you to manage your finances and save. Typically you will have to manage your investments and expenses with the remaining amount. The lower this ratio the better your debt management skills. It is advised that debt servicing should not take up more than 40% of your income.

SOLVENCY RATIO
Formula: (Financial Assets) / (Total Liabilities)

Ideal Value: >= 1.5

This ratio assesses the total assets and total liabilities to find if the person has the ability to pay off his debts.

The higher the ratio, the better is the person's financial situation as the ratio indicates the debt carrying capacity of the person. Ideally, the total debt on a person should not exceed 50% of his disposable /financial assets. A ratio of less than 100% simply means that you are in a bad financial situation and you need to get rid of your debt soon. A higher ratio of over 150% would mean that you could easily sell of some of your assets and pay off the debt.

NET WORTH
Formula:Total Assets (less) Total Liabilities

This last measure ie., Net Worth, we are covering is not a ratio but an important direct measure of your financial strength. It is the amount left after deducting total liabilities from total assets. Your net worth is a snapshot of your financial life at one moment in time, a single number representing your financial health.

Net worth is a concept applicable to individuals and businesses as a key measure of how much an entity is worth. A consistent increase in net worth indicates good financial health; conversely, net worth may be depleted by losses /liabilities or a substantial decrease in asset values relative to liabilities. One can use the measure to set say yearly Net Worth targets or to track changes to find if you are getting wealthier or not.

CONCLUSION:
The personal finance ratios help you to evaluate your financial position and take next steps. The ideal ratios can be used as general targets and you can then plan your finances / portfolios accordingly. To keep a period record of your ratios and tracking them over time can reveal a lot of information / insights into your financial situation. Only with proper information and insights can you plan and take measures to improve your financial health.

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As it is said there are two unavoidable events of human being's life cycle : Death & Retirement. Although we can not really predict the first, we can really foresee our retirement and plan for it.However, retirement, although the most important and unavoidable event of life, it mostly remains unplanned due to other priorities in life. We plan for all important events of life - be it buying a home, planning for kids marriage, but fail to plan for this most challenging part of our life-stage . We all need to retire in peace and when asked we all would like to have a happy retired life but without quantifying the same in financial terms definition of 'HAPPY Retired Life' remains very vague.

But before we go ahead and discuss about how to go about retirement planning and things to consider, lets try to understand at first as to why do we need retirement planning.

Compared to yesteryears during the period of high interest rate region planning for retirement was much easier with fixed income products offering interest rates as high as 12-13%, which have gradually come down now and expected to fall further in future. Against this, life expectancy of an average Indian has gone up with medical advancement. Now aspirational levels have gone up as people want to fulfill their dreams and hobbies during their retired life, which they were unable to do during their professional life. Let us summarize the Why factor of retirement planning as under:

• Falling interest rates (Interest rates on fixed income products have now become market linked and have come down considerably in last one decade or so).
• Aspirational levels are going up with more and more people wanting to pursue their hobbies/dreams during their retired life.
• Change in social structure with growing urbanisation, trend of nuclear families with children often staying away from parents.
• Higher life expectancy due to advancement of medical science.
• Ever increasing medical cost and 78% of total health expenditure is privately funded.
• The most important factor: Inflation

Among all, inflation can be considered as the most important factor affecting retirement planning with ever increasing cost of living for developing country like India. With an average inflation rate of around 7%, your monthly expense of around 25000 can grow to around 1 lakh in 20 years time and close to 2 lakhs in next 30 years.

(Inflation assumed @7%)
As can be seen from the above graph just to maintain the same standard of living for a family with monthly expense of .25000 one would require 1 lakh per month after 20 years. Again this is just with an assumed inflation of 7%.

This was about the importance of retirement planning. Now another important question to be answered is how much retirement kitty should one have? Although there are no simple answers to this as there is no single figure that can apply to all. Every individual has to calculate on his/her retirement corpus requirement after considering the following important factors:

• The age at which one needs to retire.
• His/her current life style. (Mainly monthly expense)
• Assume realistic rate of return during your working life as well as during the retired life.
• Rate of inflation
• Consider any of your current retirement savings plan (pension plans, insurance, provident funds etc)
• Any specific dream/hobby one likes to pursue during retired life.

(Note: Assume that the above list is not comprehensive and just for example purpose. One needs to consult his adviser to do know about retirement planning process)

After assigning specific numbers to all the above questions one can arrive at retirement corpus required and then arrive at investment required to be made with the assumed rate of return.

The idea of retirement fund is that the money should last for all of our retirement years, meeting our expenses. The income from kitty and withdrawals from later years should match the expenses (growing with inflation) in post retirement years.

This is very critical, since with better medical services, average retirement years have increased and it is possible that a person retiring at say age 60 would easily have nearly 30 years as retirement. Developed countries have higher life expectancy, something India will sure achieve in the next coming decades. The criticality can be very simply understood by acknowledging that we may normally have 35 working years (age 25 to 60 years) in which we have to save for the 30 retirement years (60 to say 90 years) when we will not be working. Thus it is very critical that we realize this requirement and start planning immediately. Ever increasing cost of living will only add to our misery during retirement years when we mainly have to rely on our savings without having any major source of additional income.

Be vigil and open for course correction:
To arrive at a retirement corpus is just first stage of planning process. As we all go through different phases in life it is very important to keep one self open to make necessary changes on a regular basis. Major life events which require modifications in retirement plan are:

• Change in employment status ( One can increase contribution with promotion/increment in job)
• Change in family status (Getting married, arrival of a child etc.)
• Change in tax laws
• Getting any lump sum financial benefit through inheritance

Retirement Planning Options Available:
There are different retirement benefit solutions available in the market like insurance products aimed retirement benefits, planning through SIP in equity mutual funds, pension plans, employer sponsored retirement benefits etc.

As retirement planning is mostly done with long term investment horizon of above 5 years it should ideally be done by getting maximum exposure to equity as an asset class as over long time horizon equity has the potential to outperform all other asset classes. Investing systematically on a monthly basis through SIP route in equity mutual funds can benefit investors by taking advantage of power of compounding. Although one is always advised to keep his/her asset allocation in check to make sure that one does not overboard on a single asset class.

Another idea is to create assets that will give returns post retirement, like property, which can be put on rent or land which can be farmed, etc.

Conclusion: Retirement planning is an ongoing, lifelong process which requires commitment, patience and consistency on part of investors to reap rich dividend of final payoff of retirement kitty. No matter how big retirement corpus requirement may look like, one needs to start at some stage no matter how small that start may be. So don't wait for the right opportunity or the right time to come as the right time is NOW to make your retired life comfortable.

Financial literacy is regarded as an important requirement for the effective functioning for any economy and society. Over the years, financial literacy ensures supports social inclusion and enhances the well-being of our communities. While financial inclusion is the primary criteria while evaluating the level of development & progress of any economy, true financial independence cannot prevail in absence of literacy. In this article, we shall be taking a closer look at what financial literacy truly means and the advantages of it.

What is financial literacy?
Financial literacy refers to the ability to make informed judgments and to take effective decisions regarding the use and management of money. It thus includes the awareness, knowledge and skills to make decisions about savings, investments, borrowings and expenditure in an informed manner. In other words, financial literacy would mean that you understand the risks & rewards associated with every monetary decision and are also aware of the other options available to you.

Signs of financial illiteracy:

• Lack of awareness upon the need and importance of various financial services/ products.
• Lack of access or knowledge as to how to access to services/products
• Lack of knowledge and understanding of financial services/ products
• Inability to 'rightly' chose between alternate financial services/ products
• Inability to make proper assessment of the present & future financial situation
• Inability to understand the risks & rewards of any financial decision

Why financial literacy is needed?
The need for financial literacy is felt in developed and developing countries alike. Even if you have financial inclusion wherein you have easy and fair access to banking, investment and credit products, the real benefit can only be enjoyed if you are financially literate. There are many cases and even high chances that in absence of proper knowledge, one can be exploited by intermediaries and manufacturers, alike, leading to grave financial loses or crisis. In a world with growing financial inclusion, rise in number and complexity of financial products and a need for financial independence, financial literacy has become a must for everyone.

From a regulatory perspective, financial literacy empowers the common man and reduces the burden of providing protection and even grievance redressal to the common man by the regulators. It thus makes the entire financial system more efficient, disciplined and progressive. Financial literacy not only marks an improvement in the quality of life but also on the integrity & quality of the markets.

Who needs financial literacy?
Financial literacy is for anyone who has somthing to do with money. Thus, there is no one who doesn't need it since all of us are either engaged in earning, borrowing or spending money and do take financial decisions in our daily lives. Perhaps only infants, lunatic, godly men or old age dependents may be excluded from this group.

The focus of this article is on financial literacy that relates to you and your family members. Financial literacy is important for you, your spouse, parents and even children. Though one may argue upon the level and depth of the financial literacy knowledge required between different groups, an overall understanding is a must for all. With financial literacy, we have the following advantages

• Clarity of financial concepts and terms
• Making better financial decisions related to savings, investments, borrowings, etc.
• Accessing financial products & services easily, without fear or prejudice
• Building assets and wealth over time, leading to better financial health
• Overcoming vulnerability and avoiding exploitation by people around us
• Planning towards economic security to self and for family

Components for Financial Literacy:
The next question that arises is to what does financial literacy comprise of? You, most probably, may consider yourself as financially literate but may not be able to clearly outline the required knowledge surrounding it. We are presenting the broad outline to test oneself on financial literacy.

The following together can be considered as comprising financial literacy for any individual.

The above may seem to be a very comprehensive outline but the idea is to cover all the major aspects of money that one has to deal in their lives. While detailed knowledge may not be necessary under each heading, one should however have the broad conceptual understanding of the idea and/or knowledge of options, as the case may be.

Conclusion
Financial literacy is the primary step for financial inclusion since introspection changes behavior which in turn makes people seek and receive financial services and products. Financial literacy can lead to financial wisdom and financial independence in knowledge. It will give the ability to manage money not just deal with it and to use skills & knowledge to take wise decisions for the future.

We advise all our readers to ensure that they are 'financially literate' in the truest spirit. We also encourage all the readers to make their family members, especially spouses, parents and growing children financially literate. One may use the outline shared to impart such knowledge. Indeed it would be a great learning for anyone that would otherwise take great time & experience to gain. This would help increase the economic space, self esteem and the confidence level of any individual and make him/her ready to easily engage in the mainstream of the financial systems.