Basics 01: How our Net-Worth is calculated

Dear Readers,

Thank you for coming here.

As the 1st post of the "Basics" series, we will introduce how our Net-Worth is calculated.


Net-worth, by definition, is "Asset minus Liability". We, of course, follow this definition. What we might do a bit differently is that we divide our Net-Worth into different categories and we calculate "Asset minus Liability" for each category before integrating them all to get the total Net-Worth, instead of calculating the total Asset minus total Liability.

We think there are three advantages to our way of calculating the Net-Worth.

First, it makes it easier to account for all assets and liabilities.

When we look at category by category, the chance of missing out one or more components in that category is smaller, compared to when we try to think of all the assets and liabilities in one shot.

The challenge, if there has to be one, is that we need to ensure the categories are MECE (Mutually Exclusive, Collectively Exhaustive), a term frequently used in my previous job as a consultant.

• "Mutually Exclusive" means the categories cannot overlap with each other. Otherwise, you will double-count. 
• "Collectively Exhaustive" means the categories listed need to cover everything. 

How we did it was first list out all the categories we can, by braining-storming and going through all related channels, such as broker accounts, banking accounts etc. It was not as easy. It took us a few months to get all categories listed. For example, we only realized that we did not count the CDA (Child Development Account) balance until the 4th month of tracking.

Then, we examined all the categories listed and adjusted the calculation to make sure they do not overlap and double-count. For example, we cannot include dividend income in both our "Stock" category and the "Cash-equivalent" category.

Second, it makes the calculation easier.

In some cases, Liability and Asset are connected and it is easier to calculate them together. For example, the "would-be" fee of selling our stocks is dependent on the market value of our stock portfolio, once we have chosen the broker. Yes, we deduct the "would-be" selling fee from our stock portfolio when calculating Net-Worth.

Third, it enables us to get more clarity.

With everything split into categories, we can easily do analysis by category, tracking their percentage in our overall Net-Worth and changes month-over-month. We also split by region inside each category, which enables similar analysis over region as well (like SG and Overseas etc).


OK. So what are the categories we include in our Net-Worth?

1. Stock/bond portfolio - market value minus the "would-be" selling fee
2. Real Estate - conservative estimation of market value minus the remaining loan (I know I do not consider the interest expense on the loan here, because when you sell your property, the reaming loan is what you will pay back to the bank. We do not have the early-payment penalty problem)
3. "Fix-term" asset - this is like fix deposit. No liability here
4. CPF
5. Cash-equivalent - balance of bank/broker accounts minus credit card balance and other loans other than housing loan

We track both our investment portfolio and Net-worth in the same tracker we built ourselves, with investment portfolio numbers automatically transferred to the Net-Worth tracking. We update monthly, towards the end of the month, and take a snapshot to build the below graph




I hope this post helps you understand how we calculate our Net-Worth. If you are thinking of starting your own Net-worth tracking, hope the details above can help you get started and then you can refine your own model based on your own situation and needs.

Till the next time.