NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients
In personal financial planning, which ratio is computed by dividing a client's liquid assets by monthly non-discretionary cash outflows, and is used to judge emergency preparedness?
The emergency fund or liquidity ratio divides liquid assets by monthly non-discretionary cash outflows. It shows how many months of essential expenses the client can meet without income, which measures emergency preparedness, unlike savings, debt service or solvency ratios.
- ASavings ratio
- BEmergency fund (liquidity) ratioCorrect
- CDebt service ratio
- DSolvency ratio
Explanation
The liquidity ratio divides liquid assets by monthly non-discretionary expenses, giving the number of months the client can sustain essential outflows. Savings ratio uses savings over income, debt service ratio uses EMIs over income, and solvency ratio uses net worth over total assets.
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