Why Knowing Your Net Worth Is Important?

Do you know what is your net worth? If your answer is no and you want to learn how to calculate it then look no further because this article will help you with that. Once you’re done calculating your net worth, you can start setting your financial goals for your future.

Many people consider their net worth just a bunch of numbers and they only realize the importance of their net worth when it’s too late. One’s net worth serves as a reminder to help you in achieving your life goals by identifying your financial status.

What Is Net Worth?

One’s net worth is not just what you have in your bank or the liquid assets you hold. It's essentially the total sum of all your assets, deducting off all the outstanding debts that you currently owe. If you were to liquidate all your assets and pay off all your debts, then the cash you have leftover is your net worth. Your net worth is positive if you have more assets than debts and will be negative if you have more debts than assets. It is a new way to stay financially fit without stressing your mind.

How To Calculate Your Net Worth?

1. Add up all your assets such as bank accounts, real estate, investments, etc.

2. Add up all your liabilities such as debt, loans, etc.

3. Subtract the value of your liabilities from your assets

What you have leftover, is your current net worth!

Now that you have a rough idea of where you stand financially, here are some reasons as to why you should calculate your net worth often!

Self-Motivation

You can review your net worth from time to time to determine where you stand financially and compare it with where you were last year. It will serve as a great form of motivation for you to work harder and pay off all your outstanding debts to move towards a positive net worth.

Calculating your net worth also gives you a reality check, helping you to focus on finding ways to get where you want to reach be it a certain benchmark or attaining FIRE by a certain age.

Understand and Reduce Your Debt

It isn’t always about money or what assets you have but rather, your debts matter the most as you have to repay them one day. The average working adult will have some form of debt such as student loans or credit card loans. It is best to always pay off all of these debts before you start building assets such as starting a business or investing in the stock market.

Here is a very famous method, promoted by Dave Ramsay, on how to pay off your debt, especially if you have multiple outstanding ones.

Snowball Method

1. List your debts from smallest to largest regardless of the interest rate

2. Make the minimum payment on all your debts except the smallest one

3. Pay as much as possible on your smallest debt

4. Repeat until each debt is paid in full

This method is one of the best as you reduce your debts fast because you clear off the smallest ones first. It also motivates you to pay off your debt because you start to see lesser and lesser debt being owed.

Alternatively, you could also list your debt from lowest to highest, in terms of the interest rate. You then pay off the largest one first, so that you can pay the least in terms of interest.

Average Net Worth By Age

Unfortunately, there isn't any collective data with regards to the average net worth for Singaporeans but there is one for Americans so I'll be using that as a benchmark!

Ages 35 and Under = $76,200

Ages 35 - 44 = $288,700

Ages 45 - 54 = $727,500

Ages 55 - 64 = $1,167,400

Ages 65 - 74 = $1,066,000

Ages 75 and Up = $1,067,000

For those who are under 35, I've come up with a realistic benchmark as well based on the average Singaporean's journey through life!

Ages 26 and Under = -$28,000

Most Singaporeans would have finished their university by this age and will start their adult life with some student debt. If you graduated without any student loans or debt, you're already ahead of your peers!

Ages 27 - 31 = $20,000

Based on data from MOM, the average monthly income in 2020 excluding Employer CPF comes up to about $4,000, which comes up to an annual income of $48,000. Fast forward 4-5 years after joining the workforce, your debt should be more or less cleared off and you can start building your net worth up with assets! Don't forget, whatever’s in your CPF also counts towards your net worth.

Adults around this age tend to have a huge variance in terms of net worth because of the decisions they make. Some would have gotten married by now, some might have started a business while others might have stumbled upon financial hurdles such as Hospitalization, etc. There is no clear answer as to what’s the benchmark here so don’t beat yourself up too hard if you fall below the benchmark.

Final Thoughts

I enjoy tracking my net worth because it gives me a very good sense of where I stand and how far I've come. 2 years ago, I just started investing in the stock market, putting $2,000 into my portfolio. 2 years later, my portfolio stands at well over $20,000! To the average working adult, this might seem like a very small sum but for someone like me, who was a student and only had part-time work from time to time, I'm proud of what I've achieved.

I hope that after reading this, you’re much clearer on where you stand based on your net worth, and hopefully, it’ll motivate you towards reaching your financial goal!