With the current uncertain economy, there’s no better time to get your personal finances in check:
- How much emergency savings do I have?
- Is your lifestyle above your income?
- Are my investments a stud or a dud?
- I want to see all the debt that I got myself into.
In this article, I’ll share with you how I simplify and make sense of:
- What does Net Worth mean?
- Why even bother to know your own Net Worth?
- How to differentiate an asset from a liability.
- A how-to video on how to use my template.
Do note that I am sharing my personal simplification on this subject that made sense to me. I am by no means a financial expert.
What Does Net Worth Mean?
Net Worth is your cash and everything that you own that can be converted into cash (asset), minus all of your outstanding debt (liability).
If you’ve noticed, Net Worth in the above calculation has little to do with how much you make each month, but more of how much you’ve managed to save up and how much outstanding debt that you have.
Somebody who makes RM 10,000 a month, but spends everything and is in debt with a fancy car loan can have a smaller Net Worth than someone who only makes RM 3,000 a month but saves up 40% of his or her salary with no debt.
To me, a negative net worth means that you still owe money and need to continue working to pay that off.
Positive net worth means that you are debt-free and are no longer shackled to show up to a job, which is the aspiration for many, including myself.
Why Do You Need to Know Your Net Worth?
Most people will have some form of debt, and it’s totally ‘normal’ in a capitalist society to have a net worth in the negative. Some people never get out of it even after death.
The biggest debt trap, in my opinion, is our mortgage. Society tells us to go to school, get a job, get married, and buy a house. With a 30+ year mortgage signed off, we are locked in and forced to keep showing up to our jobs.
I fell for this mortgage trap myself, and I’m consistently worried about paying my bills on-time. I want to find a way to get out of debt as soon as possible.
Calculating your Net Worth is scary, and most people tend to sweep the idea under the rug, but ultimately is necessary because:
- You’ll get a birds-eye view of all the money that you owe and the financial mess that you’ve created yourself.
- It makes you more financially literate and would think twice before you add on yet another bad debt.
- It promotes you to save more.
- Track the performance of your investments and see which are a stud, and which are duds.
Now that you know what a Net Worth calculation is and why you need one, the next order of business is to differentiate between an asset and a liability:
What is an Asset?
I like Robert Kiyosaki’s definition of an asset, because its simple and make perfect sense:
An asset is anything that you own that puts money into your pocket.Source: Rich Dad, Poor Dad
I would like to also think of it as your purchasing power. Here are some examples:
- Cash in bank accounts.
- EPF (Retirement Fund).
- Fixed Deposit.
- A profitable business.
- Any Investment that you can sell back for cash.
*Investments are not always profitable. Therefore it could be both an asset or a liability depending on its financial performance.
What is a Liability?
Liabilities are all the debts that you have or anything that bleeds your monthly cash flow to own:
- Your car & it’s loan.
- Personal loans.
- Credit Card loans.
What Are Often Mixed Up?
- Property that you stay in.
- Investment property (that you rent out).
This is subjective, and everyone seems to have their definition. Here are my justifications based on Robert Kiyosaki’s definition:
[Liability]: Property That You Stay In
The property that you stay in is a liability. Here’s my reasoning:
Reason 1: Your home is not making you any money; in fact, it costs you your mortgage payment to stay in it each month. How about that kitchen cabinet renovation? Landscaping and furnishing? Your home is draining money from your pocket every month in one way or another.
Reason 2: If you bought your home in 2010 for RM 400,000 as an example, and you’re able to sell it in 2020 for RM 600,000, isn’t that an asset?
Assuming you only have that one property and you just sold it. You need to buy a new place to call home. Since your old home appreciated, guess what? So would your new home. Any other home that you would be interested in upgrading to would magically start at around RM 600,000—bringing you back to square one. Are you gaining anything with this?
Because of this logic, I conclude that the house that you stay in is not an asset if you think it through.
[Asset]: Investment Properties
INVESTMENT PROPERTY DEFINITION: Investment properties are properties that are purchased for capital gains. While waiting for the property prices to appreciate, the investor typically rents them out so that the tenants cover their mortgage.
Because you can always sell your investment property without affecting your own home that you stay in, the market value of the investment property can be considered an asset.
Even if you sell an investment property at a loss, the cash that you’d receive can be used to offset any remaining mortgage (liability). So to me, an investment property is an asset (non-performing asset).
PERSONAL EXPERIENCE: Here’s my story for my under-con property investment journey.
Download & How to Use My Net Worth Template
A Net Worth Calculation is useful to keep track of all of your investments and can help you make a sound decision for your next move.
Fill in the form below to have the template sent to your email. Save and download a copy for yourself. Update the contents of the Net Worth calculator however often you want, but a good rule of thumb is once a month:
Once you have the template with you, it should be self-explanatory. If you need help to understand more about it, read below or look at the video for a step-by-step guide on how to use the template.
Keying in Your Assets
Money in Bank Accounts: Some people have multiple bank accounts. Maybe salary goes in RHB, but Maybank is for personal for example. Key in the respective balance.
Fixed Deposits: Login to your ASNB account to retrieve your balance and key them in here.
EPF (KWSP): This is your retirement fund. You can retrieve this by logging into www.kwsp.gov.my.
Investment Insurance: I made ‘investment-linked insurance’ and it will provide me with a cash bonus after several years. Log in to your insurance portal to retrieve this value.
Tabung Haji: Muslims who save up for their Haj can log in to www.thijari.com.my to retrieve their balance.
Gold Investments: For those who invest in gold online, you can key in the current market value of your gold. Maybank gold prices can be found here.
Stock Portfolio: Key in the current market value of all the stocks that you own by logging into your stock trading account under ‘My Portfolio.’
Investment Property Market Value: You can find the market value of your property by looking at the average asking price of equivalent properties on propertyguru.com or iproperty.com. You can lower this value by 5 – 10% of the market value if you want your calculations to be conservative. Always better to overbudget than overbudget in my book.
Keying in Your Liabilities
Student Loans: Most of us millennials have student loans to repay. Key in your outstanding amount here.
Car Loan: Ah yes, the car that you bought to impress other people that quite honestly, don’t care. Log in to your bank account to see the outstanding amount. Here’s my Perodua Myvi loan:
Home Mortgage: For the home that you are staying in, log in to your bank portal or call your bank to see the current outstanding amount.
Investment Property Mortgage: The outstanding amount of your investment property.
Personal Loan: If you have made any personal loans, key in the outstanding amount here.
Financial Mistakes: For any other financial mistakes that one could’ve made (don’t worry, it happens to the best of us), key in the outstanding amount here.
Automatically Calculating Net Worth
With both of your assets and outstanding tables populated, your Net Worth will be automatically calculated in the box shown above.
There you go, a bird’s eye view of everything. Scary isn’t it? Now you can see which investment is taking too much of your time and which is making you a lot of money.
With this, you can make an informed decision for your next move.
In case you missed it, here’s the download link for the template again: