X-A chapters / Module 1: Personal Financial Planning

Chapter 3. Evaluating the Financial Position of Clients

How an adviser assesses where a client stands: cash management, household budgets, the personal balance sheet, emergency planning and personal finance ratios.

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Total watch time 30 min · Hindi audio

Key topics

Cash management and income–expenditure statements
Preparing, forecasting and monitoring a household budget
Personal balance sheet and net worth
Contingency planning and the emergency fund
Personal finance ratios and their benchmarks

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Formulas in this chapter (9)

Full formula sheet →

Net worth

Ch 3.5

Net worth = Total assets − Total liabilities

Example →: Lakshmi: assets ₹36.22 lakh − liabilities ₹12.07 lakh = ₹24.15 lakh.
Trap →: 'Gross assets of ₹50 lakh means a strong position' is wrong. Subtract liabilities; net worth is the right measure.

Savings ratio

Ch 3.2

Savings ratio = Total savings ÷ Total income × 100

Example →: ABC family: savings ₹34,000 (surplus ₹7,000 + PF ₹9,000 + investments ₹18,000) on income ₹1,37,000 → 24.8%.
Trap →: Savings isn't just the monthly surplus in hand (₹7,000). PF contributions and other investments are added back.

Leverage ratio

Ch 3.7

Leverage ratio = Total liabilities ÷ Total assets

Example →: Liabilities ₹13 lakh, assets ₹65 lakh → 20%. Higher is riskier; above 1 means assets can't cover liabilities.
Trap →: Not the same as debt-to-equity or DSCR. Here the denominator is total assets.

Solvency ratio

Ch 3.7

Solvency ratio = Net worth ÷ Total assets = 1 − Leverage ratio

Example →: Net worth ₹52 lakh, assets ₹65 lakh → 80% (check: 1 − 0.20 = 0.80).
Trap →: An insurance company's solvency ratio is a different concept; don't mix them up.

Liquidity ratio

Ch 3.7

Liquidity ratio = Liquid assets ÷ Monthly expenses (benchmark 4–6)

Example →: Liquid assets ₹13 lakh (savings ₹7L + short-term FD ₹2L + liquid MF ₹4L); monthly expenses ₹1.5 lakh → 8.67, comfortable.
Trap →: Equity shares, long-term FDs and closed-end funds are not liquid assets; they're excluded because of value uncertainty or lock-in.

Liquid assets to net worth

Ch 3.7

Liquid assets ÷ Net worth

Example →: A client with long-term goals should have a low ratio, since excess liquidity drags returns; near-term goals justify a higher one.
Trap →: 'Higher is always better' is wrong. The right level depends on the client's goal horizon.

Financial assets ratio

Ch 3.7

Financial assets ÷ Total assets × 100

Example →: Shares ₹5L + FD ₹10L + MF ₹12L = ₹27L financial; land ₹9L + gold ₹14L physical; total ₹50L → 54%.
Trap →: Physical gold is not a financial asset. Gold, land and real estate are physical; shares, mutual funds and deposits are financial.

Debt-to-income (debt servicing) ratio

Ch 3.7 / 4.2

DTI = Monthly debt servicing (principal + interest) ÷ Monthly income (above 35–40% is excessive)

Example →: Salary ₹15,000, loan repayments ₹7,500 → DTI 50%, too high.
Trap →: Use the full EMI (principal + interest), not just one part. If figures are annual, convert to monthly first.

Emergency fund

Ch 3.6

Emergency fund ≈ 6 × Monthly expenses (laddered: some highly liquid, the rest slightly less liquid)

Example →: Monthly expenses ₹80,000 → target emergency corpus ₹4,80,000.
Trap →: The benchmark is months of expenses, not months of income. Review it yearly and whenever a new EMI is added.