FOIR

Good morning! (It’s 06:35 here) I happened to pick up a book about personal finance and read through a few pages of it in the past hour.

I have always felt to be lacking in knowledge about money. So, this is just my attempt at getting better at it a little bit.

My limited knowledge on personal finance is mostly by reading a few chapters in Zerodha Varsity (amazing resource, thanks to the people creating it). This time, I have picked up this book called Let’s talk money. I picked it mostly because I somehow got this book recommendation from a trusted source and the book deals with money in INR (Indian rupee) - makes sure that things discussed in the book are applicable in India.

So what is this blog post about?

well, I am planning to note down one or two things that I find interesting about personal finance here. So, in the attempt of that - I will start.

I learned something that I am going to describe below just by reading the preface of the book. LOL, the book is starting to pay off already?

It is this concept called FOIR. It stands for Fixed Obligations to Income Ratio.

I think this is a very good place to start evaluating how we are doing financially. Fixed obligation - is the fixed installments of money that you must be paying every month. Example: EMIs of bank loans. If we ratio that to the monthly income, then boom! we have a number that could tell how a person is doing financially now.

Let’s take the math-y approach and start with the formula.

FOIR = total monthly EMIs / monthly income

If a person is earning 1,00,000 INR per month and they are just paying an EMI of 30,000 INR, then their FOIR is 30%

The book’s author says that a FOIR of 30% is healthy for an individual.

Something interesting happened while I googled FOIR to copy-paste the full form of FOIR (haha, I don’t want to be embarrassed for spelling “obligations” wrongly)

Ok, here is the interesting fact: FOIR is being used by banks to decide loan eligibility for an individual.

So, it seems like the banks expect a FOIR of less than 50% for a person to be eligible for a loan. (as simple as it is!)