I’m probably having what you may call the “mid-life crisis”. Screw that, probably this really is it — it is when you often sit down at the coffee shop with a cup of Kopi-O and think about all the things in life like family, kids, parents, property, car, debt, money… MONEY! The bane of human existence.

Anyway, I’ve been thinking long and hard about money (I’m sure most of us do) and it really isn’t an easy topic to get my head around. I’m willing to bet even billionaires have problem with money. Well, not knowing where to spend it is a problem.

Tracked your expenses yet?

Most people start off with basic financial management by tracking their income and expenses, i.e. cash flow. That’s a good start, and if you haven’t done so I’d urge you to start right away! Ever since the proliferation of smart phones this has never been easier.

I use a relatively simple app on the iPhone to accomplish this. It doesn’t have to be too complicated – I’d stay away from those double-entry type apps because they take quite some work to set up (unless you are familiar with accounting).

Now that we have started to track our expenses and subsequently started to see some savings, i.e. positive cash flow, it is not uncommon for us to wonder what we want to do with that money in our bank. Should we place them in a fixed deposit, or buy some insurance policies, or buy some shares, or simply just spend some of it?

I may not be entirely correct, but I’d like to share what I think: the next step is to know and track our net worth.

What is net worth?

A person’s net worth is the sum of all his assets less his liabilities. In layman speak it is all his money and things that are worth selling for money (e.g. property, car, jewelery) minus loans.

Why is net worth important?

I think net worth is extremely important because it takes into account of debts! It is almost impossible to escape debt in our (1st world) society. Most of us are in debt the moment we step out into the workforce with an education loan, thus it is normal for fresh graduates to start with a negative net worth.

How to calculate net worth?

There are lots of articles for this. Here’s one article I found useful.

Exclude your residential property from the calculation

If you purchased a property several years ago, you’d probably end up with a really big net worth figure. However, I suggest that the primary residential property be removed from the calculation because a residence is a basic need. Otherwise my kidneys in the black market would add a million dollars to my net worth. You get the drift.

Be careful with fixed assets

Don’t be overzealous with pricing out fixed assets. They are usually worth less than we think. When we need to liquidate them it would usually be in times of crisis where these assets may be literally worthless. One good example is not to take the list prices off sgCarMart for your vehicle! Discount at least 20% off that list price.

Tracking net worth over time

Knowing our net worth today is not enough because there are assets, investments and debts involved. Even if no new assets, investments or debts were acquired, these numbers may be affected by fluctuating interests rates or other market forces. We should aim for a positive net worth growth over time and weed out any bad assets or investments.

In times of war, wouldn’t I be pauper?

Duh! Even money becomes “banana money“. But worry not, if there is a next world war, Bill Gates’s net worth would have fallen too. It’s all relative.

Debt free vs positive net worth

While some people may advocate being debt-free, I do think that some debts are healthy because without leverage most of us would be sleeping on the streets (unfortunately). The big difference between having no debt and a positive net worth is that a positive net worth encourages leveraging with a positive advantage.

However net worth is not to be used as the only measure of our financial situation. Cash flow must also be taken into account! A negative cash flow leads to a declining net worth! One example is buying a property with a monthly repayment that we are unable to fulfill.

So I know my net worth, now what?

The figure tells a lot about how you should make your next financial decision.

For example, a person with negative net worth will need to cut down on spending or increase her income. A person with a $3K net worth should not buy a brand new Prada handbag on a credit card.

In summary, one who is financially sound should have positive cash flow and positive net worth.

But don’t be overly obsessed with saving up piles of cash. The old saying goes — you can’t bring money with you to the grave. If you have to spend, go ahead and spend some money. Spending is actually one way to beat inflation. But if you have to spend, spend on healthcare and life experiences, not on things.