Last week, we began a series on personal financial ratios. As company people too must maintain certain financial ratios to ensure good financial health. As part of the series until we discussed the debt service ratio, the main liquidity and leverage ratio. Today we discuss savings.
Culturally the Indians known as the keepers unlike the West who spend on credit. Of course, times have changed. Wealthy urban Indians are no longer very shy. Still overall, we remain custodians of the country. Take, for example, in line with the Reserve Bank of India, annual report 2011-12 domestic household savings was Rs 17.493 billion in 2010-11 compared with Rs 16.390 billion in 2009-10. (See report here)
It is important to understand your savings. What is the ratio of savings? Simply put, this figure tells you whether you are saving enough for your future. So what is the percentage of income you set aside as savings and is expressed in percentage terms.
Example: to get the savings, you will need to divide your savings per month on your net income per month. So if you keep the 20000 rupees per month and your income is Rs 1 lakh per month, your savings, that ratio is 20000 rupees, divided by the Rs 100.000, which comes to 20 percent. This means that you will save 20 percent of your income.
You are in the red zone?
Ideally you should have a minimum ratio of 10 per cent. For those starting out in their careers and have a relatively lower wages, make sure that you meet the minimum ratio, without fail. By the time you settle in your career, get married, buy a House and have a child or two, you're pretty much reach mid to late 30 's. in such a situation, the ratio of 10 per cent is very important and you must ensure that you save it.
By the time you reach the mid 40 's, will substantially increase the salary. Accordingly, savings ratio should be increased to 25 per cent. When the children have left home, 50 and pretty financially independent, you should provide big savings, is at 30 per cent or more.
By this time most of your loans will bear fruit and can have a positive balance to maintain. As a rule of thumb, remember that less than 5 per cent savings means that you are in the red zone.
Keep tracking this space as we bring more personal finance rates to your learn the status of your financial health.