Archives for posts with tag: Net Worth

For some reason, if you go over to thefinance.sg, you’ll see a collection of posts from many Singaporean bloggers on their net worth. I find it kind of amusing that so many people would want to publish their net worth so openly. I guess it’s inspirational for others who may be around a similar age group but it’s probably also #humblebrag.

My point today is not so much about a person’s net worth in Singapore but how it’s calculated. On the site, I’ve seen a few people in their late 20s or 30s with a self-reported net worth or portfolio of investments in the 600K-700K range. It’s not that the numbers are impossible but it’s just that I find it quite rare to have so many people report similar numbers.

That’s when I realised that many people have different ways of calculating their Net Worth. Some only include their excess cash and investments (stocks, property etc.) while some include money in their CPF accounts, and some even include the share of their home equity (i.e. the value of their primary residence minus outstanding mortgage).

In my opinion, there are only two approaches we should be using and I’ll go through each of them and what they mean.

Approach #1: Comprehensive a.k.a What the Government does

Singapore Household Balance Sheet

How the government measures household net worth. Source: Singapore Department of Statistics

From the table above, you can clearly see that the government’s version includes everything one owns minus everything one owes. This includes all forms of property, be it your primary residence or your CPF monies.

I call this the “comprehensive approach” as it measures all your assets net of your liabilities. Some people may argue that CPF monies are highly restrictive in their use and your primary residence should not be included because you actually “consume” housing when you live in it instead of being able to rent it out and gain some rental income.

The counterargument to both those claims is that money is fungible. One could always migrate overseas and the monies in your CPF accounts would be released. The argument for your primary residence is that we cannot confuse cash flow with investment gains. One may not be able to rent out one’s house while staying in it but there is still the chance of capital gain if one chooses to sell the house.

Anyhow, if you choose to use this approach to measure your net worth, this is the most comprehensive approach. MoneySense provides a nice calculator for you to measure this.

Approach #2: Conservative a.k.a What Bankers Do

HNWIs are defined as those having investable assets of US$1million or more, excluding primary residence, collectibles, consumables, and consumer durables

Alternatively, if you aspire to join the ranks of the wealthy, then it makes sense to measure yourself like one. Banks also classify clients by Net Worth but their calculations are slightly different. They use a benchmark called “investible assets” which doesn’t include the place you stay in or other assets that may not be so liquid (i.e. not so easily converted to cash). In this case, I don’t think the monies in your CPF account counts.

Since this approach only counts what can be converted to cash without economic tradeoffs (your primary residence doesn’t count because if you sell your house, you still need to spend some cash finding another place to live in), this is probably the best measure of how wealthy you are.

In other words, this approach actually measures how much you would be able to freely spend on goods and services.

Conclusion

Doing both calculations, I find that the first approach gives me a much higher number than the second approach. This is because a substantial amount of my assets are in my CPF accounts and home equity.

I suspect that most Singaporeans will find themselves in the same shoes as me and if I were the government, I would be really worried about the ratio of approach 2 to approach 1. The more wealth that is tied up in CPF accounts and home equity, the more people may think of moving overseas to unlock the assets that are essentially trapped in their homes and CPF accounts. After all, what’s the point of having so much money that you can’t use because most of it is locked away in the form of a house or in an account that drip feeds you the money?

I recently read a friend’s facebook status that went something along the lines like:

“Car, Check. House, Check. Happy family, check. But little cash… I suppose this is what the life of a young couple is like.”

That got me thinking. Should a young person’s life really be like that? After all, it’s highly likely that most young people’s life would be like that. After all, most graduates fresh out of school earn something in the range of 2.5K-3K. Those that get married and start a family immediately incur out-of-pocket expenses such as renovation of a new home, care and support of young children etc. This would be on top of wedding and honeymoon expenses (which may or may not be covered by the gifts received) and the likes in the not-too-recent past. Add to that a car (which really adds much more to travel expenses in exchange for time savings and comfort) and it’s no wonder young couples find it hard to save at all.

However, should things really be like that?

I won’t go into posturing whether a car is a necessary or unnecessary expense- most people should be mature enough to know that by buying a car, you are incurring much higher transport expense compared to taking public transport. In exchange, you get comfort (rather than time savings in my opinion).

What I’ll do is link you to this calculator! It calculates your Net Worth and benchmarks it by using a formula that was described in The Millionaire Next Door. The good thing about the formula is that it factors one’s age and current income to get a benchmark Net Worth figure. Anything below that and you have under-accumulated wealth, anything over and you’re a Prodigious Accumulator of Wealth (PAW).