Hello, I146;m your basic liquidity ratio

For how many months will your money last if all your sources of income stopped today? This is a question financial planners ask to figure ou...

For how many months will your money last if all your sources of income stopped today? This is a question financial planners ask to figure out if you have an emergency cushion that can keep you going if your regular income sources dry up, without having to sell your family gold, art collection, property or equity.

Basic liquidity ratio = liquid assets / monthly expenses
The basic liquidity ratio BLR works out the number of months you can live off your cash and near cash assets if your source of income suddenly stopped up due to a job loss or an accident that causes disability. To calculate this ratio divide your 8216;liquid assets8217; by your monthly expenses. In 8216;liquid assets8217; include all that is cash or as near to cash as possible like the money you usually keep at home, the cash in all the savings bank deposits, the cash in money market mutual funds and the money in fixed deposits. Direct equity holdings and equity mutual funds are not counted as 8216;cash8217; even though they are very liquid today because their value is market determined and subject to sharp changes, unlike a bank deposit or a money market mutual fund, where capital preservation is the main aim. Some planners use half the present value of the stock market holding of a person to add to the 8216;liquid assets8217;.

Now estimate your average monthly expense. Take into account the usual suspects of expense in a month 8211; rent, EMIs, travel, school fees, groceries, entertainment 8211; and average out the periodic spends 8211; insurance premium, vacations, annual charge of clubs 8211; to get a fix on what you spend out each month. Now divided the first number by the second number.

3-6 BLR is good
Suppose you had liquid assets of Rs 2 lakh and your monthly expense was Rs 50,000, then your BLR is 4. A BLR of 3 to 6, or three to six months of living money with no income flowing in, is considered to be good by financial planners. Of course, this ratio will vary across income categories, age groups and individual circumstances. For example, people with more stable incomes or those with a large gap between income and expenses will need a lower ratio as compared to those with erratic incomes. A film maker who earns in lumps through the year will need a higher ratio as compared to a government servant who is in a pensionable job. A BLR of between 1 and 2 brings a person close to the danger zone of being financially unsteady in the face of an emergency. A sudden pink slip can cause trauma for such a person. A ratio of 1 or less is an alarm bell and a sign of quick corrective action 8211; either to reduce expenditure or to bring more assets near liquidity.

How liquid are you?