Cash flow
Your cash flow refers to the relationship between your income and expenses. Your income level is less easily changed in general, so financial advisors will first examine your expenses, where we can identify leaks or areas to cut back on.
Guidelines to a healthy cashflow
What is it
Also known as liquidity ratio, this refers to liquid cash that a person should have for unforeseen situations, such as a sudden loss of income.
This money should be kept in cash or equivalent financial products that can be liquidated and accessed instantly.
Recommended
Although its impossible to be prepared for all scenarios, we recommended 6 months of your monthly expenses to be set aside for those who are employed.
For the self-employed, or for those who believe it will be harder to find a new job within a few months, that number goes up to 12 months.
Calculation
Emergency fund adequacy (a.k.a. liquidity ratio) = Cash / monthly expenses
Note: For medical emergencies, we suggest the use of insurance to mitigate these. We’ll cover this in the Protect pillar.
What is this
This refers to the percentage of your income that you save.
Recommended
A general rule of thumb is 10% of your income. This amount could go into investments if you have already set aside an adequate emergency fund.
Calculation
Savings ratio = Amount saved / amount earned
What is this
This measures the proportion of your take home salary that is used to service all debts. This includes housing loans, credit card loans and automobile loans.
Recommended
As a general guide, debts should be less than 35% of your monthly income.
Calculation
Debt service ratio = All debt repayment / net monthly income
What is this
Outside of paying off a mortgage, other types of debt include credit card payment, or a car loan. These are not ideal debts in general because they tend to be related to lifestyle expenses instead of contributing to long-term investments, such as property.
Recommended
Spend less than 15% of your income for on these non-mortgage debt payments.
Calculation
Non-mortgage debt service ratio = Non-mortgage debt / net monthly income
What is this
This indicates a person’s ability to repay all their existing debts with their assets. It reveals the probability of a person becoming insolvent, or bankrupt. The higher the ratio, the better your financial condition.
Solvency refers to the ability to pay one’s debt as they come due while this ratio helps to highlight the potential medium to longer-term solvency issues.
Recommended
As a general rule of thumb, your net worth should be at least 50% of your total assets.
Calculation
Solvency ratio = Total net worth / total assets
What is this
This ratio determines how much of your assets are funded by debt.
Recommended
You should have no more than 50% of your assets leveraged through debt. 50% or less means that there are enough assets to cover your liabilities.
Calculation
Debt to Asset Ratio = Total liabilities / total assets