Personal financial health is essential in ensuring stability and sustainable development for each individual. Like physical or mental health, financial health not only affects your daily spending capacity but also has a direct impact on major life decisions such as purchasing a home, investing, or planning for retirement.
What is Personal Financial Health?
Personal financial health can be understood as the ability to meet financial obligations, prepare for unforeseen events, save for long-term goals such as retirement, and have the financial freedom to enjoy life as you desire. This index is based on three fundamental factors: spending, saving, and investing. It is not fixed but rather fluctuates depending on market volatility and domestic and international economic conditions.
Many individuals strive for stable and well-maintained financial health, which provides peace of mind against unexpected financial risks.
Four Key Indicators of Personal Financial Health
Liquidity Ratio
The liquidity ratio is the first tool to assess personal financial health most accurately. This metric reflects the ability to cover short-term debts without needing to source additional external capital. In personal finance, the liquidity ratio shows the ability to pay off short-term debt with readily available assets without borrowing further. Even those with sound financial health can face liquidity crises. However, as long as they maintain the ability to meet payment obligations, they can overcome such challenges. It is essential to distinguish between liquidity and solvency ratios. The solvency ratio reflects the ability to meet all long-term debt obligations, calculated by dividing net income plus asset depreciation by total short-term and long-term debts. On the other hand, the liquidity ratio measures the ability to cover short-term expenses, calculated by dividing liquid assets by monthly payments.
Liquidity Ratio = Liquid Assets / Monthly Expenses
For example, an office worker with monthly living expenses of 6 million VND and total assets of 120 million VND can calculate the liquidity ratio by dividing total assets by monthly living expenses: 120/6 = 20. This means the individual can cover living expenses for up to 20 months without income.
Debt Ratio
The debt ratio helps determine the total debt relative to assets. The debt-to-asset ratio is calculated by dividing total debt by total assets. As the credit balance increases, the debt ratio rises.
Debt Ratio = Total Debt / Total Assets
For instance, when you use a bank credit card to make a 10 million VND payment, you owe the bank 10 million VND, and your debt ratio increases while assets remain unchanged. Debt repayment and credit repayment ratios are used to assess the financial capacity of borrowers, determining their future creditworthiness and ability to repay loans.
The debt repayment ratio evaluates the percentage of post-tax income needed to meet minimum monthly debt payments (mortgages, car loans, credit card debt, student loans, etc.), calculated by dividing total monthly debt by post-tax income. Meanwhile, the credit repayment ratio measures the percentage of total income relative to credit debt. To calculate this, add the principal investment, interest, tax, and insurance, then divide by total monthly income.
Savings Ratio
The savings ratio helps calculate the percentage of income allocated to savings. This is a straightforward calculation: divide monthly savings by monthly post-tax income. The savings ratio will be negative when spending exceeds income, putting your financial situation on alert and potentially leading to debt.
Savings Ratio = Savings / Post-Tax Income
Financial experts recommend saving at least 10% of your income each month.
Investment Ratio
The investment ratio reflects the percentage of income allocated to investments. This is calculated by dividing the monthly amount set aside for investments by total post-tax income minus other expenses. The investment ratio can be negative, zero, or positive, depending on one's financial situation and risk appetite.
Investment Ratio = Post-Tax Income - Savings Ratio - Debt Ratio - Other Expenses
This ratio is directly proportional to risk: the higher the investment ratio, the higher the risk, and vice versa. Although a decline or loss in the investment ratio does not have an immediate impact on daily life, it has the potential to become a valuable new source of income over time.
Solutions to Improve Financial Health
First, developing a financial plan tailored to different life stages is essential in helping you achieve personal goals. Regularly saving to prepare for future risks or proactively planning to repay debts early are critical factors in reducing daily spending pressures. In addition, seeking and engaging in investment activities that align with your preferences and capabilities can optimize income. Currently, there are various forms of investments, such as savings accounts, stock purchases, corporate bonds, or real estate investments. Each type of investment carries different levels of financial risk. A beneficial solution is to continually enhance financial knowledge, improving your ability to manage finances and optimize personal resources, thereby achieving long-term stability and sustainability.
Conclusion
Personal financial health is crucial for ensuring a stable life and serving as a foundation for achieving dreams and future goals. Only with sustainable and prosperous financial resources can you enjoy life as you desire.
