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PN
12-04-09, 14:42
Many visited this forum daily and has invested or intend to buy one for own stay/investment. Have you wonder how this will change your financial position and looking for a way to measure, benchmark your wealth or investment. I personally have been wondering what a good reference is. I did some research & found this information. I think using Net Worth could be a good gauge.

"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 are of equal net worth."

But how you calculate their Net Worth? This is the formula based on a book "The Millionaire Next Door".
Your Net Worth = Sum of Assets - Sum of Liabilities

Target Net Worth (TNW)
If your net worth equals (or exceeds) your age times your annual income divided by 10, then you are a “wealth accumulator”. This is your target net worth.
TNW = Annual Income/10 * Age

Assets
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.

Liabilities
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.

Here's an example based on a fictitious 35yrs old individual earning 140k annually. Using the formula above, his target Net Worth is 490k. But then what is the real meaning of this? Look at this example here.
http://img12.imageshack.us/img12/379/networth35yrse.jpg
Assuming he fully paid his HDB flat today, his total assets is 570k. He has other outstanding loans of 60k. Thus he has a net worth of 510k which is 20k above his target net worth of 490k.

However things changes immediately if he sold his HDB and purchase a 800k condo. Even if he has made some profits from the sales of the HDB & has a balance of 140k of cash, his net worth drops to 461.4k which is lower than the target net worth by 28.6k. Refer to (2)-(1) in table.

So what does this means? The goal is to maintain a positive figure above the TNW. After buying a condo, he need to work hard & aim to change this -ve value into +ve value. That is aim to be a "wealth accumulator". If he continue to reduce his loan payment, save & make profit in other investments; he will reach +ve eventually. Make sense? On the other hand, if the property price drop by 20%, (2)-(1) goes down to -150k. This is obviously bad position to be in.

What was also interesting is that the Target Net Worth takes into consideration both the salary & age of a person. A 35yrs vs 45yrs earning the same salary & buy the same 800k condo has a different Target Net Worth. To reach there, the debt/Asset ratio has to be lower for the older age person.

Age35: Target Net Worth is 490k & debt to Assets ratio is 0.59.
Age45: Target Net Worth is 630k & debt to Assets ratio is 0.53.

Why this is important to know? I personally feel that you need to have a target in life. It’s similar to having a quota in a sales job. If you are below your target, you need to work harder to correct it. It helps to motivate you to work towards your TNW if you’re still far from it. Besides that it may also help to ensure that you do not overstretch yourself in property investment.

If you know of better means or other good reference/benchmark, please share with me.

firec
12-04-09, 23:39
"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 are of equal net worth."
Your Net Worth = Sum of Assets - Sum of Liabilities
If your net worth equals (or exceeds) your age times your annual income divided by 10, then you are a “wealth accumulator”. This is your target net worth.

Your source: http://www.salary.sg/2007/calculate-net-worth-and-benchmark-it/

PN
13-04-09, 13:25
Your source: http://www.salary.sg/2007/calculate-net-worth-and-benchmark-it/

Yes. A good source of inspiration for me.

jonleelk
18-04-09, 18:26
*sob sob* haven't buy my firsy private property, already still short of TNW.

Buy already more jialat...?

PN
20-04-09, 16:59
*sob sob* haven't buy my firsy private property, already still short of TNW.

Buy already more jialat...?

Depends on how -ve is -ve. If only below by 10 to 20k, I believe you can easily catch up in a few years if you are good at saving monthly or other investments. Also I understood you will be using your CPF for progressive payment to buy an U/C condo. By the time it reaches TOP, you should be at TNW or +ve.

However, if you're already below by 100k & still buy a condo, it can only get more -ve. To reach TNW will takes you a longer time. You need to think carefully where you're at financially.

In the original example, the debt/assets ratio jumps from 0.11 to 0.59 when he sign on the dotted line.
If your position is worst than this example, I guess you will reach 0.7 in debt/assets ratio if you buy one.
It's a huge commitment getting a condo.

If you ask a property agent, he'll ask you to buy.
If you ask a bank financial consultant, he may/may not ask you to buy.

If you ask me, I'll advise you to take out a calculator or open up a spreadsheet & compute carefully what it'll looks like at least for the next 5 years after you buy a condo.

If it keeps getting more & more -ve year by year, please think carefully. It's could be an indications of not being able to keep up with the loan & your bank savings is getting smaller & smaller.

If it's getting less & less -ve by a few thousands, you may be doing just ok.

If it is getting less -ve by 20-30k every year, I'd say you're moving in the right direction. In another words, your debt/assets ratio should decrease every year. It's a good indications of your savings + other investment are growing yearly & your debt is decreasing.

Above is just my personal opinion.
You're the best person who know your financially position & make decision accordingly. Good luck.

jonleelk
20-04-09, 19:38
PN, in ur example, when the guy purchased the condo, how much loan he took? Not 80% correct?

The condo loan is 640k, which should include interest. Once a person purchase a new propery, his net worth will be reduced by the total loan interest of the new property. For the example, the total interest of the property is only about $48.6k, which looks far too low.

Or u are assuming the 300k HDB was sold for higher that 300k? I thought we should use the market value of the asset to derive the total asset? Thus a 300k HDB will translate to a sum of 300k in cpf+cash onced sold...thus nett nett no change to the net worth.

PN
20-04-09, 20:18
PN, in ur example, when the guy purchased the condo, how much loan he took? Not 80% correct?

The condo loan is 640k, which should include interest. Once a person purchase a new propery, his net worth will be reduced by the total loan interest of the new property.

Before buy condo, cash+CPF+HDB= 520k
After selling, cash+CPF+ condo stamp fee paid + agent fee 2% for hdb sale + 20% for condo = 520k.

Do note that when you sell your HDB at 300k market price, the accrued interest goes back to your cpf. The cash you get back will be lower.

The formula is based on the outstanding loan at that particular point in time. Interest is not considered in the computation. When you buy 800k property & took 80% loan, the outstanding loan is 640k at that instance.

You use the outstanding loan at the end of each year to check where you are yearly.

When the you pay total loan installment of 15k in the first year and 5000 is bank interest, the outstanding loan becomes 630k.
If you pay 20k for whole of 2nd yr and 6000 is interest, the outstanding loan becomes 616k. If you make additional partial repayment of 50k in 2nd yr, the outstanding loan further reduce 566k.
The same computation applies for 3rd, 4th yrs, ...

jonleelk
20-04-09, 20:57
Before buy condo, cash+CPF+HDB= 520k
After selling, cash+CPF+ condo stamp fee paid + agent fee 2% for hdb sale + 20% for condo = 520k.

Do note that when you sell your HDB at 300k market price, the accrued interest goes back to your cpf. The cash you get back will be lower.

The formula is based on the outstanding loan at that particular point in time. Interest is not considered in the computation. When you buy 800k property & took 80% loan, the outstanding loan is 640k at that instance.

You use the outstanding loan at the end of each year to check where you are yearly.

When the you pay total loan installment of 15k in the first year and 5000 is bank interest, the outstanding loan becomes 630k.
If you pay 20k for whole of 2nd yr and 6000 is interest, the outstanding loan becomes 616k. If you make additional partial repayment of 50k in 2nd yr, the outstanding loan further reduce 566k.
The same computation applies for 3rd, 4th yrs, ...

okie...exclude interest then not too bad. :D Got chance to reach my TNW when condo TOP in 3 yr time.

firec
21-04-09, 12:52
Hi all,

How much % of your spare cash would you use for the down payment for the condo you're eyeing?