Managing my money
Managing my money

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Managing my money

6.3.3 Your household balance sheet – gearing

Another important balance sheet ratio is gearing, which is usually worked out as a percentage and is simply:

Gearing = Total liabilities / Total assets × 100

You may have heard a lot in the news about whether government debt levels are too high and need to come down. In the same way, household debt levels can be too high as well. Why does it matter?

Consider the two household balance sheets. Use the formula to work out the gearing for each household. Then assume that house prices fall by 20%. Adjust the balance sheets for the new lower property values and comment on how each household has weathered this shock.

Table 2 The Sterling family's balance sheet

LIQUID ASSETS£30,200
OTHER ASSETS
Home£435,000
Other£132,000
TOTAL ASSETS£597,200
SHORT-TERM LIABILITIES£5400
OTHER LIABILITIES
Mortgage£62,000
3-year car loan£6500
TOTAL LIABILITIES£73,900

Table 3 The Penny family's balance sheet

LIQUID ASSETS£2050
OTHER ASSETS
Home£180,000
Other£30,000
TOTAL ASSETS£212,050
SHORT-TERM LIABILITIES£3800
OTHER LIABILITIES
Student loans£9400
Mortgage£164,000
TOTAL LIABILITIES£177,200

Looking at your own household balance sheet, you can now have a go at calculating your gearing using the guidance set out above.

Why do you think measuring gearing can provide an insight into how exposed to risk your household balance sheet is?

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