Wednesday, February 09, 2011

Usable Personal Net Worth

Mr Wang's blog entry on Calculating Your Personal Net Worth reminded me to review mine as well. I would prefer the term "Personal Monetary Net Worth", after all one is worth more than one's financial assets. Nevertheless, following the standard the financial terminology, "Personal Net Worth" (PNW) shall be used.

Mr Wang's version is a fairly standard method used by financial advisors to calculate net worth. However, being conservative, I would prefer to make some deductions from the usual personal net worth calculations.

Step 1. List fixed assets at their current market value. Follow as instructed. Then deduct the estimated costs of converting these large-ticket fixed assets into liquid assets. E.g. Deduct from the market value of one's property the property agent's fees, the stamp duties [a.k.a. tax] and the cost of valuation report.

Step 2. List financial assets. Follow as instructed. Then deduct any sum that you do not have full control of OR cannot access immediately. To put it colloquially, "Money that you can see but cannot touch". E.g. CPF* monies, CPF* related investments, any monies held in-trust for you.

Step 3. List possessions which is re-saleable to raise funds. My preference: Count only the value of one's bullion coins, net weight of 24K (.9999) gold or 22K (.9166) gold in other gold items.
  • Unless one has exceptional jewelery items like The Hope Diamond, I would exclude from listing any jewelery items or, at most, quote the precious stones at wholesale or pawn shop prices. E.g. A high-grade 0.1-carat, round cut, F colour, VVS1 clarity, GIA certified diamond pendant has very little resale value (maybe only SGD 190), but its retail price may be 5 times of its resale value. IMHO, that is why gemstones should be avoided as an investment to store value.
    FYI: If one really want to buy a diamond to store value, then consider a Round cut, 1-carat or above, D/E/F colour, IF/VVS1/VVS2 clarity, well-proportioned, GIA-certified diamond. Be prepared to pay the price mark-up at retail outlets [i.e. making a loss upon purchase].
  • Similarly, if including the value of any "Collector's Items" or works of art into one's personal net worth, a realistic value is what one can obtain assuming one sells it immediately, and not its quoted market value. Sometimes the gap can be minimal, but sometimes it can be significant because individuals are generally not the market maker.
Step 4. Add 1-3 together for total assets. Follow as instructed.

Step 5. List liabilities (debts) and subtract from total assets. Follow as instructed. Then also subtract any potential fees or other sums that would be out of one's control. E.g. Any bank charge for early mortgage redemption, assuming immediate redemption. E.g. Any amount that one has to return into one's CPF* account after the property sale.

The result is the "Usable Personal Net Worth". [Note: this term is coined by me, it is not a standard financial term]. That is, wealth under one's control. I think that the difference between my modified calculation and the standard PNW calculation methods may partly explain why some Singaporeans seem to be wealthy on paper but they do not feel it [See Danny's comment on October 10th, 2010 at 12:04 pm in the article].
"My wife, myself and many of our friends, all of us true blue Singaporeans (gotta say this nowadays), are in the top 1% in the world by net wealth (each of us has more than 800k net wealth), but we surely don’t feel like we’re that wealthy. I agree with John that perhaps it due very much to having too many assets and too little cash to enjoy life as it should be enjoyed. We appear wealthy on paper but we are certainly not enjoying the wealth like the others in other countries. Then maybe one day we’ll wake up from our dreams and realize what’s the point of having so much paper wealth…"
- Danny's comment extracted from
*Note: For those not familiar with Singapore, CPF is "Central Provident Fund". It is the Singapore government-controlled and mandatory pension contribution held in each individual's account. Thus, it pushes the PNW of a Singapore resident up, but the resident has very limited control over how the bulk of the money is invested/spent. More importantly, the government-controlled interest rates on CPF accounts is unable to match Singapore's inflation rate, and the resident cannot access the money until the official retirement age (currently 65). Even upon reaching the official retirement age, the resident cannot access the full sum, i.e. there is a minimum sum (currently SGD123K or around CAD94K) that is mandatory to be retained with the CPF. Thus, residents are making a real loss on the bulk of their CPF yearly but their hands are tied.

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