By La Vanguardia.

Domestic finances, just like business finances, is an area where families win and lose. Financial ratios help families take care of their financial situation

How measure the financial health of your family?

Just like states and businesses, families earn, save, spend, invest and exchange. The ability to monitor home finances depends on knowledge on financial ratios.

What do financial ratios mean? How do they work?

Ratios are tools used by financial experts to analyse the state of company, estate, or family accounts. Getting to know them properly is important when managing resources so that the survival and growth of this small economy can be guaranteed.

These instruments help us to locate and anticipate a possible situation in which our money could be at risk. For example, pretend in the middle of the month you wanted to buy a new car and take a holiday. Depending of your economic situation, you could afford one or the other, both, or neither. Without realizing, we are analysing and calculating different ratios.

Housing, mortgage, education… all of these are areas you should manage together with your family, establishing priorities. Most of us know how much we pay on mortgage, education for our children, and food every month. However, very few people know how to cooperatively and realistically analyse all the data.

That’s why Santander Bank supports a project aimed at bringing the world of finances closer to everyone: Finanzas para mortales (Finance for Mortals).

Types of ratios

A ratio is the relationship between two magnitudes, i.e., the productivity ratio of a company is the hours worked by employees versus the earnings generated by their work.

“Ratios provide information in relative terms, not in absolute. When viewed on their own they are practically useless”, according to Sotero Amador, professor at the Universidad a Distancia de Madrid. He adds that: “There are so many ratios that we could imagine any number of them. That’s why we must seek out those which are useful to us”.

1. Liquidity: Indicates if we have the capacity to meet our immediate needs. The term “liquidity” refers to bank accounts, deposits and shares which can be turned into money. If the result is a positive figure, then we have good financial health. If it is less than 1, we find ourselves in a situation of limited liquidity which could complicate things for us when faced with debt.
2. Guarantee or solvency. Compares our assets and investments with our debts. If it is more than 1, our assets are greater than our liabilities, which means that our wealth is positive. If the opposite is true then we have a deficit, or are in a state of insolvency, or bankrupt.
3. Debt. It helps us measure the size of our debts with consideration to our real assets. If the ratio is higher than 1, the debt is great. This is usually an undeniable warning sign.

In short, ratios are financial indicators we can use with relative ease and which effectively allow us to check the state, good or bad, of our personal finances.

Techniques to improve our financial well being

1. What is your family’s financial health?
   Now is the moment to take into account. Create a record of income and expenses. This way we will be able to understand our capacity to save, that is to say, if we are able to meet unforeseen moments or any debt we might have.
2. Taking action considering the results
   After carrying a check of balance, we will know if our account is positive or negative. If we are in the red, we will need to make certain adjustment. If the figures are favourable, we will be able to decide what to spend our saved money on.
3. Invest in financial assets with what’s left over
   You can opt for continuing to save money with a pension scheme in mind, or you could invest it, for example, in the stock exchange. However, we must take into account that money invested is not guaranteed a return.
4. Less mortgage expenses with Euribor at a low
   With the Euribor so low, now is a great moment for those who pay a mortgage. Fees have gone down, and it is advisable that saved money goes towards reducing the mortgage. That should always be the priority.
5. Pay your credits on time
   We have to pay special attention to paying loans during the established period. Banks usually apply a high interest rate when we are late on a payment.
6. Use credit cards responsibly
   It is almost certain that we use credit cards excessively when on holiday. We must keep an eye on our expenses and use credit cards as rationally as possible during the year. Without keeping track of it we would easily get into debt.
7. Teach your children to save
   In a future, your children will find themselves in a similar situation. Make them participate in saving. Every in the family should know the know the balances. This way, the youngest members of the family avoid unnecessary expenditures. Experts recommend giving them a monthly allowance which is then managed themselves.
8. Look over your insurances
   Apart from reviewing them, check if they give us the coverage that best suits our lifestyle, and make sure that it is the cheapest insurance available on the market.
9. Reduce superfluous expenses
   Eating out every day, smoking, grabbing taxis, drinking beer… all these expenses are avoidable, and without realizing, they make up a large portion of our daily expenses.
10. Save on daily expenses
    In a world dominated by smartphones we could easily get rid of the landline phone. Other recommendations include making a list before going shopping and saving on our energy bills. Various Apps can help you to organize your savings.
11. Buy on sale, Black Friday, etc.
    Due to a decrease in consumption as a consequence of the crisis, companies usually launch discount campaigns throughout the year. Take advantage of them.
12. Take advantage of grants and assistance for families
    We are referring particularly to education. We can find free online courses and many universities offer online courses as well.
13. Getting an upper hand on bank commissions
    Most banks have eliminated commissions on account ownership or maintenance. Keep in mind what your bank discounts.