Liquidity Ratio (Method #1) |
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Liquid assets divided by total current debts; this measures one's ability to pay current liabilities (debts and debt payments due within 1 year). It helps to show how well you could, in the event of income loss, continue to pay current liabilities with existing liquid assets. The formula to compute the Liquidity Ratio (Method #1) is: For example, a married couple with a total of $1,000 of liquid assets and total current liabilities of $10,000 would have a liquidity ratio of 10%. (1000 / 10000 = .10, or 10%) This would indicate that our married couple could cover only about 10% of their existing 1-year debt obligations with their current level of liquid assets. If an unexpected circumstance decreased their income, their liquid reserves would be depleted very quickly. There is no strict guideline as to what this ratio should be. | |||
Liquidity Ratio (Method #2) |
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Liquid assets divided by average total monthly expenses. This shows how many months you could, in the event of income loss, continue to pay your monthly expenses with existing liquid assets. The formula to compute the Liquidity Ratio (Method #2) is: For example, a married couple with a total of $8,300 of liquid assets and total average monthly expenses of $3,100 would have a liquidity ratio of 2.68. (8300 / 3100 = 2.68) This would indicate that our married couple, should something unforeseen occur and they lose their income temporarily, could use their liquid assets to cover their monthly expenses for just over 2.5 months. General guidelines suggest that this ratio exist in a range from 3 to 6, meaning that one had enough savings available to cover 3 to 6 months of normal living expenses. | |||