For the longest time, I have been wondering what my net worth is, how to calculate it, and how it has grown or shrunk. It does not help that different sites or financial advisors have different takes on it as well – what do we include or exclude? CPF savings? OA only or SA too? Our live-in property? Surrender values of insurance policies? etc.
For me, when in doubt on financial terms, I tend to go to Investopedia, where they even split between tangible (those that can be physically held or converted to cash) and intangible net worth. But I thought I should share how I go about doing my own calculation, which I do about once every two months.
Step 1: Indicate the day that you are doing this calculation.
To me, it is key to be aware that our net worth changes almost all the time, and definitely so on a day-to-day basis. This is because our net worth is based on our liabilities such as a home loan, which incurs interest daily, and our assets, which if it is related to the stock market, will fluctuate as well. So it is important to highlight that the calculation that we are doing is only valid as of that day. Related to this is also which day of the month you are doing this. For instance, you may prefer to do this at the end of the month after settling your credit card bills and other monthly charges or at the start of the month before all these have been paid off. Consistency is key.
Step 2: List down your assets and their value.
If you’re doing this for the first time, you may want to also indicate the methodology for obtaining this value whether you are reading it off your broker’s website or your bank account. It helps to be consistent each time you take these measurements, so that you can then perform reliable analysis on your net worth, such as determining the annual growth rate, etc. This matters even more if you have holdings in various currencies and you want to be clear that your aggregated portfolio records which may use a different exchange from your broker is not the reason why you see certain spikes in your portfolio.
Take a stand on what you want to count as your assets. Like I mentioned above, some do not include their CPF whereas others do. I think your net worth is entirely personal and you make the call. For me, I do not include it into my computation because it is not something tangible in the sense that it has limited use. It also forces me to think harder about how I can build up my cash and investment components and helps to de-link the thinking that CPF is my money and I should be able to withdraw it any point, because that deviates from the point of CPF being a retirement fund.
Step 3: List down your liabilities and their value.
Action and rationale are similar to that in Step 2.
But just to take note, if your mortgage payments are done via CPF, it may mean that your net worth computation is unaffected by your mortgage, which may also lead to a perverse understanding of your net worth. That does not really affect me because I pay by GIRO rather than CPF because I force myself to set aside more than that amount each month. It also means that I can arbitrage between the CPF OA interest rate of 2.5% and my home loan of ~2% and not incur accrued interest unnecessarily (but that is another topic for another day).
Step 4: Net Worth = Assets – Liabilities
The fun is not so much in finding out what your net worth is for the day but more in the trend of your net worth over a period of time. It will give you a good reflection of whether you are pumping or bleeding money and whether there is a need to make either lifestyle adjustments or figure out a way to earn more money by putting in more hours or being more efficient.
After this computation, the other more interesting thing that some people like to do is to compare. I will say however, that comparison between two individuals is meaningless even if you are aware of their methodology. And perhaps more importantly, starting points of individuals matter too. So any comparison should not make you feel like you are less worthy just because your net worth is lower.
But I came across this ‘wealth number’ or ‘net worth number’ table that allowed me to compare across groups of individuals, which was enlightening to me how privileged I am compared to people worldwide.
I reckon the broad middle (which I am a part of as well) are somewhere between 5 and 6, especially if we are looking into investments or business opportunities. But it also lets you see how the majority of world actually is nowhere near what we have, even as we aim towards having a larger net worth number.
By the way, for the mathematically geeky, the table uses a logarithmic scale and if you remember your secondary school A Math, all you have to do to get your number is to take the log of your net worth. In other words, net worth number of 5 is because there are 5 zeroes in $100,000.
Another interesting comparison will be to look at the mean and median wealth of adults in each country worldwide. For Singapore, that is US$96,967 (13th in the world) and US$297,873 (8th) in 2019 respectively. That will also give you a good sense of where you stand in your country.
So it’s honestly not too difficult to compute your net worth. But just bear in mind that your net worth is not the only indicator of your financial health – we will discuss this in another post!