3 Jul 2021
As a working person, it is important to understand your assets, liabilities, and equity (i.e., A=LE). Let us look at the following examples.
We start of with this asset.
Your qualification/skill is your intangible asset. It allows you to earn revenue via service contract with your boss, i.e., through job or freelancing. To be relevant, it is important to continue your education (aka lifelong learning). That way, you don’t make your intangible asset ‘obsolete’.
However, invest in education should be decided based on the cost-benefit analysis (CBA). Benefit should outweigh the cost. Select relevant and value-added courses that will help you to improve your intangible assets. It MUST NOT be a ‘trophy qualification’.
Real property is a good asset in Singapore. It is subjected to capital appreciation (i.e., value increase/decrease by market demand).
If the asset is bought by a home loan (i.e., mortgage or debt), then the asset is a mix of liabilities + equity (L+E). The bank co-owns the property. As you repay the loan, you reclaim more equity over your property.
The expenses that you pay for your property are the property tax, bank interest on loan, conservancy charges or monthly maintenance fees.
In comparison to rent, paying a housing loan is an ‘investment’ (plus expense/interest). You pay for the ‘equity’ over time. In contrast, if you pay rent, it is entirely your expenses (without return). In countries where the property market is constantly in over-supply, property is considered a risky investment.
The challenges to buy a property are the significant down-payment, one-time transaction costs, renovation/furnishing costs, and securing loan.
Car is not an asset, unless it brings revenue, e.g., when you are ‘moonlighting’ as a Grab driver. There is no capital appreciation (increase in value), except depreciation. The depreciation value can be above $10k per year. Other expenses involved in owning a car are interest, petrol, maintenance, parts replacement, etc.
Loans are derived from Education, Property, and Car purchases.
Property loan can help to grow your asset (dependent on its capital appreciation). It can be a loss if there is a glut (i.e., over-supply) that caused depreciated value.
Education loan helps improve your intangible asset and allow you to generate revenue (i.e., salary/service fees).
Car loan can be used to generate revenue (or ‘cost recovery’) if you use it in gig economy of ‘shared rides’. Else, it depreciates rapidly.
As you repay your mortgage, you start to increase your equity over that property. The final asset value depends on market demand. If there is uptrend, you earn profit from its capital appreciation.
The above is an example of your assets, liabilities and equity. Everyone starts off with intangible assets and sometimes liabilities such as education loan. But over time, you should be able to reduce your liabilities and improve your equity. The more asset you accumulate, the higher their values appreciate, the more you keep your equity.
Other assets that I did not mention are in share-holding (i.e., equity market), starting your own business, other investments, and insurance that protects your asset/health. Insurance is a liability if it is short-term, but some are structured to have lower expenses/premium over longer-term commitment. It is important to start your insurance policy early, especially if you want to start a family and have several liabilities under your belt.
Advice from other gurus
- Grow your asset
- intangible asset (i.e., your qualification/skill)
- invest part of your salary
- knowledge acquisition, e.g., books, courses
- share-holding or investments that has at least 1% p.a. return (e.g., saving bonds, insurance savings plan)
- once you have sum for down-payment, invest in property
- assets to consider
- intangible assets (yourself)
- Reduce your liabilities
- get into loans that have better benefits/returns, e.g., property or continuous education
- avoid loans that don’t add value. If you must own a car, wait until your asset grow and you can afford to draw out from your growing equity.
- Manage your expenses
- it is good to spend money to improve your well-being. This is considered as maintaining your ‘intangible asset’ (or mental health), but don’t overspend and accrue credit card debts.
- understand your recurring expenses. If there are ways/alternatives to reduce these expenses, do it.
- consider implementing ‘cost-recovery’ if your expenses are too high, e.g., car debt repayment can be offset by moonlighting as grab driver to earn revenue. If this is property repayment, consider renting out a room to a colleague to offset the monthly home loan repayment.