It indicates the amount of cash or cash equivalent you need to have in case of emergency to meet monthly household expenses.
Basic Liquidity Ratio = Liquid Assets
Monthly Expenses
The assets would normally include Savings/Current Account Balance, Investments in Money Market or Liquid Funds and cash in hand.
EXAMPLE – Mr Beeham Annual income and expenses.
Annual Salary = 6 lakhs, Annual living expenses = 3 lakhs, Car loan EMI = 5000, Credit card outstanding = 10000. Cash in hand = 15000, SB a/c balance = 65000, Liquid fund = 100000, Bank FD = 60000, Income fund = 50000.
Liquid Assets = 1, 80,000
Cash in hand = 15000 + SB a/c balance = 65000 + Liquid fund = 100000
Monthly Expenses = 30,000
Monthly living expenses = 25,000 + Car loan EMI = 5000
Basic Liquidity Ratio = 180000 = 6
30000
Mr Beeham has liquidity ratio of 6 which equals to 6 months of his monthly household expenses.
NOTE – The basic liquidity ratio will differ for each client based on his occupation.The minimum requirement is 3.