So how do you know if you have good financial health?

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IF you are looking to gain insight into your financial health, understanding net worth is a must. Net worth is essentially your personal balance sheet, not dissimilar to a company’s financial statement’s balance sheet.

In short, net worth answers the question “how am I doing financially” and helps assess whether you are on track in tackling debts and meeting wealth-building goals.

Net worth is the total value of your financial assets minus your liabilities or debts. In other words, your net worth equals what you own minus what you owe. Debts may be a mortgage, hire purchase (car loan) and personal loans or credit cards. Regardless of the classification of “good debt” or “bad debt” – a debt is still a debt.

Note that net worth growth does not always directly correlate with increases in cash flow. For example, someone’s net worth can still increase from one year to another when they do not have a significant inflow of cash by living frugally and by reducing expenses.

Don’t ignore liquidity

However, net worth may not always be the most accurate representation of wealth. In this example, liquidity or how much money you have readily available is also an important angle to consider when measuring financial health.

Liquidity is also your emergency funds that have been stashed away, usually calculated in the ratio of emergency cash divided by one’s monthly expenses and liability commitments.

Let me share some tricky scenarios which can arise when calculating net worth:

  • Typically financial planners consider a family’s own-stay property as an asset in-hand. Its value should not be considered as an asset that can be liquidated to fund a goal like retirement or kids’ tertiary education planning. Nevertheless, living arrangements are known to change over time like down-sizing once the kids have all moved out and are married.
  • Investment assets such as property may also experience a downward trend in its value arising from many reasons – from undesirable choice of location, poor tenant demographic profiles in the area or even poor developer workmanship. In the longer run (about 10 to 20 years), factors such as a condo’s maintenance will also impact property value. Some properties may even experience an invisible price ceiling and should be monitored.
  • Property cannot be considered liquid assets unlike mutual funds, stocks or bonds. Transacting in properties – whether buying or selling at one’s target price – can take a long time. Therefore, liquidity risk for property investors must be managed. Having a clear strategy, stable cash flow not reliant on the rental on the property as well as a clear exit plan is vital for one to benefit from the merits of property investing.

Tricky property ownership situation

Rozanna Rashid

The reason for highlighting the impact on property investing on one’s net worth is because properties often make up a large chunk of one’s net worth. For only up to 10% down payment, one is typically able to acquire an asset 10 times that amount funded by a mortgage.

I recently spoke to a client whereby one of his properties is a currently a drag on his net worth. The recently transacted purchase prices of similar sized unit in the same condo is well below his outstanding mortgage amount.

His predicament is further exacerbated by the monthly net negative cash flows between his rental income and mortgage payments. The option to try and sell at this time is undesirable and he is forced to bite the bullet by holding on and allocating funds to accommodate the negative cash flow (and also deal with hidden costs of property upkeep and wear & tear).

Will the property see an increase in value and internal rate of return (IRR) over time? We will have to wait and see.

Yes, properties are a popular tool of investment among Malaysians but please remember to exercise due diligence by checking your financial affordability and risk appetite before embarking in a long term substantial financial acquisition.

Our story on this client of mine does not end there though. Over the past few years, the client has been disciplined enough to live frugally and bring down his expenses including paring down his short-term debts and was able to save and invest in liquid assets which have grown and offset the paper loss on his investment property.

This has helped him increase his net worth.

The lesson learnt here is to have a diversified portfolio of investments spread across multiple asset classes and products such as Private Retirement Schemes (PRS) and Employees Provident Fund (EPF) to mitigate risks of your net worth being eroded.

Making smart financial and investment choices and keeping it simple by living below your means are basics in attaining a clean bill of financial health. – July 3, 2022


Rozanna Rashid, CFP, IFP is a director and licensed financial planner with Alpine Advisory Sdn Bhd.

Published by Rozanna Rashid


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