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.
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.