This is rubbish. How can a person at 30 earning 5 laksh gross ever have a net worth of 15 L. Such a person would typically have started earning at 22 with a salary of around 1.5L. Assuming 20% (which is very high) increase every year, the total money earned would be only about 24.74L. Mind you, 24.74 is the gross - take away all deductions, you are left with about 20L. Take out expenses for 7 years @ 10,000 per month (excluding any loans). Take out a couple of laksh for any additional purchases - you are left with less than 10L.
the net worth thumb rule assumes that you earn 5 lakhs ever since you were born, which is hilarious (30 * 5 in that example). Second, in todays scenario,where an individual has a liability of housing, car loans and other liabilities on his head, debt to net ratio of over 1 is absolutely impossible. Even the biggest company of the world don keep a Debt to net ratio of 1.
If a person is to follow what is written in this article he will need to beg when he retires. These ratios are fine for a company, not an individual e.g. a debt to assets ratio should never exceed 0.3. If it goes higher it could lead to a situation where there is more to pay off than one can afford. A debt trap (something like what the govt. of India is now facing)
Re: Ratios
by K Prasanna on Feb 24, 2010 11:20 AM
Very Scary !! Look at the "Total Debt to Net worth Ratio" it says 5% But 50,86,900/10,15,100 = 5 or 500% not 5%.
If a person is to follow what is written in this article he will need to beg when he retires. These ratios are fine for a company, not an individual e.g. a debt to assets ratio should never exceed 0.3. If it goes higher it could lead to a situation where there is more to pay off than one can afford. A debt trap (something like what the govt. of India is now facing)
I m a professor in personal finance. The list is pretty much more, more comprehensive and practical. I have developed many on my own and discussed with students and have taught them.