Expenses ratio

Two households can earn the same and be in completely different financial health. The difference is what they spend, and the expenses ratio is the single number that captures it.

It is the savings ratio read from the other end. If a household saves 10% of income, it spends 90%, and both statements describe the same household. Advisers compute both because clients react differently to the two framings: "you save a tenth of what you earn" and "nine-tenths of everything you earn is already gone" land very differently.

The word "recurring" is doing real work. One-off costs are deliberately excluded, because the point of the ratio is to describe the household's normal running rate.

The rule the workbook applies to every expense is: does this happen every year?

• A one-time medical expense of Rs 50,000 in a year is excluded.
• But if the family spends on average Rs 30,000 every year on healthcare, beyond any reimbursement from employers or insurers, that is included.
• A foreign holiday every three years costing Rs 6,00,000 is not excluded either — its annual equivalent of Rs 2,00,000 goes in.

Within the total, expenses split two ways. Mandatory expenses are taxes, rent, EMIs on loans and the necessities of living. Discretionary expenses are the items that are not essential — and the workbook is explicit that most of the reduction and rationalisation that improves the savings ratio happens here, because the mandatory half is largely fixed.

Expenses Ratio = Annual Recurring Expenses / Annual Income

Expenses Ratio = 1 - Savings Ratio
Savings Ratio  = 1 - Expenses Ratio

The workbook's own case. ABC earns Rs 6,00,000 a year and saves Rs 60,000.

Savings ratio  = 60,000 / 6,00,000  = 10%
Expenses       = 6,00,000 - 60,000  = Rs 5,40,000
Expenses ratio = 5,40,000 / 6,00,000 = 90%

Now test the classification rules on ABC's actual year:

If ABC wants to move the savings ratio from 10% to 20%, another Rs 60,000 a year has to come out of expenses. It will not come from rent or school fees. It comes from the Rs 90,000 of discretionary spend and the Rs 2,00,000 holiday accrual — which is precisely why the workbook says rationalisation happens on the discretionary side.

Chapter 3 (Cash Flow Management and Budgeting), section 3.9.1, which pairs the savings ratio and the expenses ratio, and section 3.9 more broadly on evaluating a client's financial position. The paper's case-style questions hand you a household's income and a list of expenses and ask you to judge whether the ratio is high — the model answer in the workbook's own sample paper reads "the expense ratio at 88% is high".

• This is not the mutual fund expense ratio. Same two words, completely different animal — the fund's total expense ratio is a charge levied on scheme assets. Read which chapter the question came from.
• Non-recurring out, recurring in — including lumpy items at their annual equivalent. The three-yearly holiday is the classic trap: candidates either drop it entirely or count the whole Rs 6,00,000.
• Income means all income, not just salary — interest, dividend, rent and business income all belong in the denominator.
• Expenses ratio and savings ratio must sum to 1. If your two answers do not, one of them has used a different denominator.
• A high expenses ratio is not automatically bad at every age. A young household servicing a home loan will show a high ratio; the workbook's concern is the trend as income rises.
• Do not confuse it with the savings to income ratio, which compares accumulated savings to annual income (a suitable level in the early 40s is at least 3 times annual income). That is a stock measure; this is a flow measure.