Introduction
In today's complex financial landscape, understanding personal finances is more important than ever. Financial analysis of an individual helps assess one’s current financial health, plan for the future, and make informed decisions. One key outcome of financial analysis is the credit rating, a vital indicator used by banks, lenders, and financial institutions to evaluate creditworthiness.
This article explores the concept of individual financial analysis, its components, how credit rating is determined, and how both influence borrowing and investment decisions.
What is Financial Analysis of an Individual?
Financial analysis of an individual involves examining various aspects of a person’s financial life to evaluate their overall financial health. It includes reviewing income, expenses, debts, assets, savings, and investments.
Example:
If John earns ₹50,000 per month, spends ₹30,000, has ₹5 lakhs in savings, and a loan of ₹2 lakhs, a financial analyst would assess his income-expense ratio, debt-to-income ratio, and net worth to understand his financial standing.
Objectives of Financial Analysis
- Evaluate Financial Health
- Plan Budget and Expenses
- Identify Savings and Investment Opportunities
- Prepare for Emergencies
- Improve Credit Rating
- Ensure Retirement Readiness
Financial analysis allows individuals to make proactive decisions about spending, borrowing, and investing.
Components of Financial Analysis
A. Income Analysis
This includes all sources of earnings—salary, business income, rental income, interest, dividends, etc.
Example:
If Priya has a monthly salary of ₹60,000 and earns ₹5,000 in rental income, her total income is ₹65,000.
B. Expense Analysis
Understanding fixed (rent, EMIs) and variable expenses (entertainment, travel) is crucial.
Example:
If Priya spends ₹20,000 on rent, ₹5,000 on EMI, and ₹15,000 on other expenses, her total monthly outflow is ₹40,000.
C. Savings and Investment Review
This includes fixed deposits, mutual funds, stocks, provident funds, and other investments.
Example:
If Priya has ₹3 lakhs in mutual funds and ₹1 lakh in FDs, her total investment portfolio is ₹4 lakhs.
D. Debt Analysis
Includes home loans, personal loans, credit card balances, and other liabilities.
Example:
If Priya owes ₹10,000 on a credit card and has a ₹3 lakh home loan, her total debt is ₹3.1 lakhs.
E. Net Worth Calculation
Net Worth = Total Assets - Total Liabilities
Example:
If Priya’s assets (cash, investments, property) are ₹10 lakhs and liabilities are ₹3.1 lakhs, her net worth is ₹6.9 lakhs.
Tools for Financial Analysis
- Personal Budget Sheets
- Net Worth Calculators
- Financial Planning Software (e.g., Mint, YNAB)
- Credit Report Tools (e.g., CIBIL, Equifax)
- These tools help individuals keep track of their finances systematically.
Understanding Credit Rating
A credit rating or credit score is a numerical representation of a person’s creditworthiness, typically ranging from 300 to 900 in India.
Key Credit Bureaus:
- CIBIL (TransUnion)
- Experian
- Equifax
- CRIF High Mark
Credit Score Range:
- 300-549: Poor
- 550-649: Fair
- 650-749: Good
- 750-900: Excellent
Factors Influencing Credit Rating
A. Payment History (35%)
Timely repayment of loans and credit card bills.
Example:
If you consistently pay your EMIs and credit card dues on time, your score improves.
B. Credit Utilization Ratio (30%)
Percentage of credit used out of total limit.
Example:
If you have a ₹1,00,000 credit limit and use ₹30,000, your utilization is 30%, which is healthy.
C. Credit History Length (15%)
Longer credit history leads to a better score.
Example:
Having a 10-year-old credit card boosts your score more than a 6-month-old loan.
D. Credit Mix (10%)
A balance of secured (home loan) and unsecured (credit card) credit.
Example:
A mix of a car loan and credit card shows good credit behavior.
E. New Credit Enquiries (10%)
Too many applications in a short time can reduce your score.
Importance of Credit Rating
A. Loan Approval
A high credit score ensures easy loan approval.
B. Interest Rates
Good scores lead to lower interest rates.
Read: Principles of Investing and Interest Rates
Example:
A person with 800 score may get a home loan at 8% while one with 600 may get it at 10%.
C. Credit Card Approvals
Lenders offer better credit cards to high scorers.
D. Employment and Renting
Some employers and landlords check credit scores as a trust indicator.
Steps to Improve Credit Rating
A. Pay EMIs and Credit Card Bills on Time
Set reminders or auto-pay.
B. Reduce Credit Utilization
Try to use less than 30% of your credit limit.
C. Avoid Too Many Loans
Multiple new applications can signal financial stress.
D. Check Credit Reports Regularly
Identify and dispute errors.
E. Maintain Old Credit Accounts
Long-standing accounts positively impact scores.
Financial Ratios in Individual Analysis
A. Debt-to-Income Ratio (DTI)
DTI = (Total Debt Payments / Gross Income) x 100
Example:
If monthly EMIs = ₹20,000 and income = ₹60,000, DTI = 33%
A DTI below 40% is ideal.
B. Savings Ratio
Savings Ratio = (Savings / Income) x 100
Example:
If savings = ₹15,000 and income = ₹60,000, ratio = 25%
C. Liquidity Ratio
Indicates how easily one can meet short-term obligations.
Liquidity Ratio = Liquid Assets / Monthly Expenses
D. Investment Ratio
Investment Ratio = (Investments / Income) x 100
Personal Financial Statement Preparation
A personal financial statement includes:
- Assets (cash, investments, property)
- Liabilities (loans, credit card debt)
- Income Sources
- Expenses
Example Table:
| Item | Amount (₹) |
|---|---|
| Monthly Income | 60,000 |
| Fixed Expenses | 25,000 |
| Variable Expenses | 15,000 |
| Monthly Savings | 20,000 |
| Total Assets | 12,00,000 |
| Total Liabilities | 3,50,000 |
| Net Worth | 8,50,000 |
Case Study: Ramesh’s Financial Analysis
- Ramesh is 35 years old, working in IT with a monthly salary of ₹80,000.
- Fixed expenses: ₹30,000
- Loan EMI: ₹15,000
- Investments: ₹5 lakhs (mutual funds, stocks)
- Home loan: ₹10 lakhs
- Credit card outstanding: ₹20,000
- Savings: ₹2 lakhs
Analysis:
DTI: ₹15,000 / ₹80,000 = 18.75%
Savings Ratio: ₹35,000 / ₹80,000 = 43.75%
Net Worth = ₹7 lakhs (assets) – ₹10.2 lakhs (liabilities) = -₹3.2 lakhs
Though Ramesh has good income and investments, his net worth is negative due to high loan obligations. His focus should be on debt reduction and building assets.
Role of Financial Advisors
A certified financial advisor helps:
- Create customized financial plans
- Evaluate risk tolerance
- Recommend suitable investments
- Monitor credit rating
- Plan taxes and retirement
Impact of Financial Discipline
Financial discipline—consistent savings, low debt, and responsible credit use—leads to:
- Better credit score
- Financial security
- Investment growth
- Reduced stress during emergencies
Common Mistakes in Personal Financial Management
- Ignoring credit score
- Spending beyond means
- Not investing early
- Not maintaining emergency funds
- Over-relying on credit
Government and RBI Guidelines on Credit
- RBI mandates that individuals can access one free credit report annually.
- Credit bureaus are regulated to ensure accurate and fair reporting.
- Financial literacy campaigns are encouraged to help individuals manage their finances better.
Conclusion
Financial analysis of an individual is a powerful process that provides deep insights into financial strengths, weaknesses, and opportunities. Coupled with credit rating awareness, it enables smarter financial decisions, better access to credit, and overall financial well-being.
Understanding where you stand today is the first step toward where you want to be tomorrow—financially secure and creditworthy.
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