In our last in the series on personal finance ratios, we explain a concept called savings-to-income ratio. Until now, we covered net-worth growth ratio, solvency ratio, life insurance coverage ratio , basic liquidity ratio, debt service ratio, leverage ratio and savings ratio.
Savings-to-income ratio is probably the most important ratio you need to pay attention to especially when you start working. This is because the sooner you get the hang of this ratio, the better you are financially early on in life.
What is it: To find out this ratio you need to divide the current value of your savings by the current value of your income.
Current savings means all your money in savings accounts, fixed deposits and other current investments. Remember to take into account the amount lying in your employee provident fund as well. Remember that though, you can include the value of gold, you should not include the value of your self occupied house in your current savings.
If your current investments are of Rs 12 lakh, the amount in your EPF account is Rs 3 lakh and the value of your self occupied house is Rs 50 lakh. Your current savings is Rs 15 lakhs. Remember, not to include the value of your house here. Now assuming that your current annual salary is 6 lakhs.
Savings to income ratio= 15,000,00/ 6,000,00
Are you in the red zone? The above example shows that your savings are 2.5 times of your annual income. A savings to income ratio of 3 is the minimum required number. This means, your savings need to be al least 3 times your annual income to be in a safe place.