Personal Finance Part 16 – The Measurement of Wealth

Traditional methods for measuring wealth are to look at the absolute amount of assets which a person has, and compare this to other well-endowed people, in order to arrive at some basis for comparison and benchmarking. Interestingly, Singapore happens to be the country which generated the highest number of new millionaires, and everywhere one goes, we see beautiful luxury cars and people carrying branded goods. All these serve to reinforce the notion that Singapore is a country filled with rich and wealthy people who are ready to flaunt their assets. But how rich are we in actual fact? This post intends to poke some holes in the theory of “wealth” (note the quotation marks) and how it is generally perceived; and to suggest some measures of my own!

The first quirk of being wealthy is the often quoted “Asset Rich, but Cash Poor” syndrome. Essentially, this refers to a person owning many assets (most often, real estate), but having very little cash savings. Such people often plough a significant chunk of their funds into real estate or other assets, leaving them with very little cash buffer. Others purchase such assets using leverage, and thus have high monthly capital commitments to service. On the surface, these people would be classified as “rich”, but then again they do not really “own” the property or properties as these are all on loan. Eventually, one has to liquidate in order to justify the investment, but lack of liquidity can severely stymie a person’s ability to get cash fast. In the interim, one may suffer from a serious lack of working capital if they do not manage their cash flows well. Thus, this definition of “wealthy” is contingent upon a person being able to manage his cash flows very well, while at the same time juggling a (highly) leveraged Balance Sheet. Risky, admittedly; but sometimes that is the price to pay for being able to tag on a label “Wealthy”; however ephemeral that may be.

Let’s face it: what most people in this world seek is material comforts and financial abundance. Money can buy one many items which can enhance one’s quality of life, and in industrialized, capitalistic countries like Singapore, materialism has gone on hyperdrive. Ask any young person these days on how he measures one’s wealth and he will not hesitate to quote a number, usually in the six to seven-digit range. But the pursuit of absolute wealth is meaningless unless we have an idea of how that wealth is able to sustain us in times of emergency, or in a downturn when we lose our jobs. Therefore, I propose an alternative method of measuring wealth. By the way, this method is not new and has been mentioned on some personal finance websites; however it has generally not been widely acknowledged and recognized because of its difficulty to measure. Wealth should be defined as a function of how long your current savings can last you assuming you lose your income-generation capability.

Sounds harsh? Not really. Let me illustrate with a simple example. Person A has $50,000 worth of savings and his monthly expenses come up to $2,000; while Person B has $200,000 and his monthly expenses comes up to $10,000. Using my definition above (in bold), Person A can last for 25 months without income ($50,000 divided by $2,000) but Person B can only last 20 months ($200,000 divided by $10,000). Hence, Person A is “wealthier” than Person B even though the absolute value of his savings is 66% less than Person B. I am sure we have seen this in real life – people who own many nice cars and gadgets and have a high “maintenance” cost, so in reality they are “poorer” than people who have lesser savings but correspondingly much lower fixed monthly expenses. So, going by this definition, how well do you fare?

Another definition of wealth is that it is an amalgamation of more than just material goods and money. This is a more holistic definition of wealth and seeks to separate it from merely being “rich”, which implies materialistic possessions. Being wealthy in life means having rich and loving relationships, people who love you; as well as fun and laughter every day. In a way, this translates into true happiness – having more than just money and material goods; but also love and life which transcends the cold, grey loneliness of money. Where money is cold (coins), relationships are warm. And this is where we should strive towards.

I guess this sounds extremely clichéd, but I have to say it anyway. Use a different definition of wealth from the rest of the world, and one will always feel rich and successful.