When we want to determine how physically healthy we are, we undergo blood tests, X-ray, ECG and other similar tests. Ideally, these tests are done twice a year so that any abnormal findings can be immediately treated and cured. And so isn’t it just right that we also do tests to check how financially healthy we are?


Companies use financial ratios to evaluate their financial health. We can also employ the same thing to our personal finances as well. Ratio analysis can help us analyze the success, failure and progress of our money management.

1.)    Current ratio

This ratio answers the question, “Do I have enough current (liquid) assets to meet my current debts?” The ideal ratio is 2 to 1, meaning you have P2.00 of cash for every P1.00 of debt. It can’t go lower than 1 to 1 otherwise, you have to result to borrowing to finance the debts or sell other assets to raise the cash. The higher the number, the better it is. It is calculated by dividing the liquid assets such as cash and receivables by the short-term payables such as credit card debts and personal loans.

If you’re ratio is low, you can raise this by:

• Acquiring loans with a longer maturity or due date
• Selling some assets or possessions

2.) Liquidity ratio

This ratio measures your current assets against your monthly expenses. It answers the question, “How long can my savings sustain me in case I don’t earn a single peso for some time.” This ratio often measures our emergency fund. The ideal number for this ratio is above six. It means your savings or liquid assets can sustain you for half a year.

If your ratio is too low, you can raise this by:

• cutting down expenses
• increasing savings

3.) Savings ratio

This ratio measures how good you are in saving. Savings ratio is calculated by dividing your savings for the year against your income. The ideal savings ratio is 10 to 20% but this may vary depending on your circumstances. Savings means liquid assets.

Increasing this ratio is self-explanatory.

4.) Solvency ratio

This ratio measures your total assets against your total liabilities/debts. The answer should be at least one. Otherwise, you’re considered “bankrupt”. The difference between the solvency ratio and the current ratio is that the former includes your long-term debts or loans, which include home mortgages, car loans and other loans maturing more than one year.

To increase your solvency ratio:

• Invest wisely to make your assets grow even if you cannot increase your savings ratio. Do this so your assets will grow passively.
• Find ways to increase your income so you can pay off more of your debts.

Knowing our financial ratios can help us determine how we are doing with our personal finances. It’s not enough we know how much we are worth; we need to understand how our finances can affect us. When they’re low, we need to improve it. If they’re within the acceptable range, we need to maintain it. We are our own CFOs and we should run it like how any effective CFOs would—for profit and growth.