#currentratio

Current Ratio: Definition, Formula & Impacts

Current Ratio: Definition, Formula & Impacts

This post is also featured on Adventure Rich!   We’re living longer than ever before. The average life expectancy is over 80 years for females and close to 80 for males.   We’re finding that more and more people are living well past 100.  All that being said, it’s important to maintain a quality of life so that we are able to enjoy life up to these ages and beyond. For that to happen, maintenance is required – financial as well as physical.   Just like you maintain a car or a home, maintenance from a financial and physical standpoint is needed to ensure your life operates at a desirable level. A car’s maintenance requires oil changes, tune-ups, balance and rotating tires.   Your financial maintenance requires benchmarking to ratios, investment income, and returns, assessing cash available in case of emergencies, low to no debt, and overall worth and its composition.   Your physical maintenance requires physicals, diet, and exercise and the continuation of an active lifestyle.    

Maintain Financial Health

  Current Ratio – A current ratio measures an organization’s ability to pay its current debts. So why not measure your own to see where you stand? The calculation is simple: current assets/current liabilities. A higher current ratio (1 or above) means that your assets are greater than your current liabilities thus are in a healthy position to pay those debts.   Cashflow – your personal cashflow is comprised of two components; inflow and outflow. The inflow would include things like your salary, interest, dividends, and any other flows of money like rent if you are a landlord, sale of securities or even gift cards.  The outflow is comprised of bills generally; rent and/or mortgage, utilities, groceries, insurance, entertainment, etc. The calculation is simple; take the total of the inflows and subtract it with the total of the outflows.   For example, if at the end of the month your total inflow is $4,000 and your total outflow is $3,200, then your net cash flow is $800. You want your net cashflow to be positive because this means you are earning more than you are spending.   If the cashflow is not positive, identify where the large outflow are and ways they can be reduced (e.g., move to a smaller home, lower your utility bills, eat out less often). You can also find ways to increase your cash inflow (e.g., deploy idle cash into high-yield investments, ask for a raise or promotion, look for a higher paying job, or increase your rent as a landlord if it’s priced significantly below the market).   Overall Net Worth – in a nutshell, this is your assets minus your liabilities.  It essentially measures what you are worth from a financial standpoint. A steady increase in net worth is an indicator of good financial health.   There’s some debate about counting and not counting certain items. For example, I do count equity in my home as part of assets because if I were to liquidate and sell, the cash in my hand would be equity, minus the selling expenses. Additionally, I do not count my kids' savings accounts and college savings plans because I strictly treat that as their assets.   For me, a huge inspiration for starting a blog was from Financial Samurai. I read a lot of his content before taking the plunge into writing myself. He has a great guide for what one’s net worth should be at various ages. Ofcourse everyone’s situation is different and anyone can catch up and slow down by making adjustments in their life in terms of income generation and expense reduction.    

Maintain Physical Health  

  Cardio – any form of cardio (e.g., running, climbing, and hiking, swimming) can get the heart rate up. As a result, it may help with weight loss if needed, strengthen muscles and prevent diseases like cancer and diabetes. The American College of Sports Medicine recommends 30 minutes of cardio five days a week or 20 minutes of intense cardio three days a week. For me, the latter is more suitable and I usually get it done at lunch during work. If you have a gym at work, I highly suggest taking advantage of it. It may save you time, money, and ofcourse poor health.   I’ve added a personal purpose to this as I’m preparing for a 5k run this coming spring.   Dieting – dieting doesn’t necessarily mean eat less. It is about making thoughtful food choices that maintain good physical health. This includes balancing with fruits and vegetables – leafy greens vegetables including broccoli. Recently I learned a quick and easy way via YouTube of course on how to steam broccoli. It takes 5 minutes and turns out great with some salt or any other seasoning you like sprinkled on top and served as a side. Check it out:   Annual Physical – most health plans allow you to get one free physical per year that is covered by your healthcare provider. It’s also an opportunity to ask your doctor questions about your health and ways to improve it based on your specific health situation. This physical may also include a blood test that can test many important things such as your cholesterol level, blood sugar, and triglycerides (which are a type of fat in your blood) among many others.     Both your physical and financial health go hand-in-hand. You need to maintain one in order to do your best job maintaining the other. Maintaining means having the ability to take care of yourself and your family as you age into different stages of your life.   There are numerous other things you can do to maintain your physical and financial health. And actually, any of them are laid out in The New York Times Best Seller Age Proof, which I’ve read and highly recommend.   What types of maintenance do you perform for your financial health? How about physical health? Do you wait for something to happen, are detective in nature or are proactive preventative in nature? Can you think of a change you can make to better maintain your financial and/or physical health?   _________________________________________________________________________

This post is also featured on Adventure Rich!   We’re living longer than ever before. The average life expectancy is over 80 years for females and close to 80 for males.   We’re finding that more and more people are living well past 100.  All that being said, it’s important to maintain a quality of life so that we are able to enjoy life up to these ages and beyond. For that to happen, maintenance is required – financial as well as physical.   Just like you maintain a car or a home, maintenance from a financial and physical standpoint is needed to ensure your life operates at a desirable level. A car’s maintenance requires oil changes, tune-ups, balance and rotating tires.   Your financial maintenance requires benchmarking to ratios, investment income, and returns, assessing cash available in case of emergencies, low to no debt, and overall worth and its composition.   Your physical maintenance requires physicals, diet, and exercise and the continuation of an active lifestyle.    

Maintain Financial Health

  Current Ratio – A current ratio measures an organization’s ability to pay its current debts. So why not measure your own to see where you stand? The calculation is simple: current assets/current liabilities. A higher current ratio (1 or above) means that your assets are greater than your current liabilities thus are in a healthy position to pay those debts.   Cashflow – your personal cashflow is comprised of two components; inflow and outflow. The inflow would include things like your salary, interest, dividends, and any other flows of money like rent if you are a landlord, sale of securities or even gift cards.  The outflow is comprised of bills generally; rent and/or mortgage, utilities, groceries, insurance, entertainment, etc. The calculation is simple; take the total of the inflows and subtract it with the total of the outflows.   For example, if at the end of the month your total inflow is $4,000 and your total outflow is $3,200, then your net cash flow is $800. You want your net cashflow to be positive because this means you are earning more than you are spending.   If the cashflow is not positive, identify where the large outflow are and ways they can be reduced (e.g., move to a smaller home, lower your utility bills, eat out less often). You can also find ways to increase your cash inflow (e.g., deploy idle cash into high-yield investments, ask for a raise or promotion, look for a higher paying job, or increase your rent as a landlord if it’s priced significantly below the market).   Overall Net Worth – in a nutshell, this is your assets minus your liabilities.  It essentially measures what you are worth from a financial standpoint. A steady increase in net worth is an indicator of good financial health.   There’s some debate about counting and not counting certain items. For example, I do count equity in my home as part of assets because if I were to liquidate and sell, the cash in my hand would be equity, minus the selling expenses. Additionally, I do not count my kids' savings accounts and college savings plans because I strictly treat that as their assets.   For me, a huge inspiration for starting a blog was from Financial Samurai. I read a lot of his content before taking the plunge into writing myself. He has a great guide for what one’s net worth should be at various ages. Ofcourse everyone’s situation is different and anyone can catch up and slow down by making adjustments in their life in terms of income generation and expense reduction.    

Maintain Physical Health  

  Cardio – any form of cardio (e.g., running, climbing, and hiking, swimming) can get the heart rate up. As a result, it may help with weight loss if needed, strengthen muscles and prevent diseases like cancer and diabetes. The American College of Sports Medicine recommends 30 minutes of cardio five days a week or 20 minutes of intense cardio three days a week. For me, the latter is more suitable and I usually get it done at lunch during work. If you have a gym at work, I highly suggest taking advantage of it. It may save you time, money, and ofcourse poor health.   I’ve added a personal purpose to this as I’m preparing for a 5k run this coming spring.   Dieting – dieting doesn’t necessarily mean eat less. It is about making thoughtful food choices that maintain good physical health. This includes balancing with fruits and vegetables – leafy greens vegetables including broccoli. Recently I learned a quick and easy way via YouTube of course on how to steam broccoli. It takes 5 minutes and turns out great with some salt or any other seasoning you like sprinkled on top and served as a side. Check it out:   Annual Physical – most health plans allow you to get one free physical per year that is covered by your healthcare provider. It’s also an opportunity to ask your doctor questions about your health and ways to improve it based on your specific health situation. This physical may also include a blood test that can test many important things such as your cholesterol level, blood sugar, and triglycerides (which are a type of fat in your blood) among many others.     Both your physical and financial health go hand-in-hand. You need to maintain one in order to do your best job maintaining the other. Maintaining means having the ability to take care of yourself and your family as you age into different stages of your life.   There are numerous other things you can do to maintain your physical and financial health. And actually, any of them are laid out in The New York Times Best Seller Age Proof, which I’ve read and highly recommend.   What types of maintenance do you perform for your financial health? How about physical health? Do you wait for something to happen, are detective in nature or are proactive preventative in nature? Can you think of a change you can make to better maintain your financial and/or physical health?   _________________________________________________________________________