Your net worth is a measure of how wealthy you are.
A person may be cash rich, while another may be cash poor. But because the cash poor person owns a property, both of them could have equal net worth.
And do you know there’s a rule of thumb for telling whether your net worth is up to scratch?
According to the book The Millionaire Next Door if your net worth equals (or exceeds) your age times your annual income divided by 10, then you are a “wealth accumulator”. I suppose that means it’s good. This is your target net worth.
So if you are 30 years old and make $60,000 a year, you’ll be called a wealth accumulator if you have an actual net worth of $180,000 or more.
To calculate your actual net worth, you simply add up all your assets, and subtract from that sum all your liabilities.
Er, exactly how?
For assets, add up all your cash savings, CPF balances, insurance cash value (you may want to take the surrender value of all your policies). Then add the market values of all your shares, unit trusts and properties. The result is the sum of all your assets.
For liabilities, add up your mortgage balance (how much you still owe the bank or HDB), credit card balance, renovation loan balance, and car loan balance. Add other sums of money you still owe banks, financial institutions, CPF, HDB, relatives and friends, and you’ll get the sum of all your liabilities.
Then apply this simple formula:
Your Net Worth = Sum of Assets – Sum of Liabilities
And compare it with your target net worth.
To save you time, here’s a tool to help you calculate and benchmark your net worth: