Understanding financial ratios to achieve personal finance success

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Understanding Notícia

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FINANCIAL planning involves more than just setting goals and saving money. To truly understand the health of your finances, you need a comprehensive approach that incorporates key financial ratios. Accountants and stock analysts use these ratios to assess the strength and stability of companies.

By applying similar scrutiny to our personal finances, we can gain a clearer understanding of our financial position and make informed decisions to improve it. This guide introduces five essential financial ratios and how they can guide you toward better financial well-being.Current ratioThe current ratio measures your ability to cover short-term debts with your liquid assets. To calculate it, divide your liquid assets by your short-term liabilities .

Debt-to-income ratioThe debt-to-income ratio reflects the portion of your income that goes toward servicing debt, including car loans, mortgages and other borrowings. This ratio should not exceed 30 percent of your monthly income. Exceeding this threshold may indicate that you're overextended and at risk of financial distress.To lower this ratio, focus on paying down high-interest debt and avoid taking on new debt for nonessential purposes.

 

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