Estimating your future net worth

Recently, I’ve been thinking a lot about my net worth in next 10 or 20 years. But sorry, I’m not going to share my net worth with you. What I’m going to share here is the way you can estimate your net worth. Most of my net worth is kept as investment in properties. For simplicity in estimating my net worth, I’ll ignore other (much) smaller investments such as fixed deposit, EPF and investment linked insurance.

I’m NOT going to build a complex financial model here to impress you. What I’m going to share here is a simplified method to estimate your future net worth; especially if you are property investor like me. Before you can start estimating your future net worth, you need to understand a basic principle call time value of money. Value of your money (or net worth) will grow if you invest in right instrument. The rate your money grows is appreciation or returns. On the other hand, value of your money will depreciate in future due to inflation.

There are 2 rules of thumb that you can use in estimating your net worth if most of your money is kept in properties like me.

1.       Property value will DOUBLE every ten years  (assume  appreciation of 8% / annum)

2.       Value to money will be HALF in 20 years  (assume inflation of 3.5% / annum)

To understand underlying principle for rule #1 above, you need to understand how long does it take for your property to double its value? – Based on my experience and research, most of the times; property value will double in 7 years to 12 years. I did a simple excel simulation to validate this. From table below, you can see property value double in 16 years if the appreciation rate is 5% / annum. If the appreciate rate is 12% / annum, property value will double in 7 years. For simplicity and fairness, I like this rule of thumb à property value should double every 10 years – provided you bought properties at correct location, location, location. I personally feel this rule of thumb is a fair rule of thumb although we can see many properties double in value in less than 5 years due property boom in last few years. For property value to double in 10 years, you need to find properties with appreciate rate of about 8% / annum which is always possible as long as you invest in right property type and right location.



To validate rule #2, I simulate how value of money depreciate with inflation. From table below, you can see value of money will be half in 35 years in the inflation rate is 2.0%. On the other extreme, value of money will be half in just 14 years if the inflation rate is 5.0%. Base on releases from Bank Negara (BNM), inflation rate in Malaysia is hovering between 2% to 3%. However, this figure is always debatable, especially if you are living in Klang Valley. For simplicity let assume inflation rate of 3.5%, your value of money will be half in 20 years. 

With these rules of thumb, you can easily estimate your future net worth.

Case 1: If total value of your property is RM 1mil currently (and assuming your rental can cover bank installment for balance of 20 years mortgage)

Property value in 20 years = RM 4mil, Value in today’s currency = RM 4mil x 50% = RM 2.0 mil

Case 2: If total value of your property is RM 2.5mil currently (and assuming your rental can cover bank installment for balance of 20 years mortgage)

Property value in 20 years = RM 10mil, Value in today’s currency = RM 10mil x 50% = RM 5.0 mil

Case 3: If you purchase a shoplot in PJ for RM2.5 mil with down payment of 30%, your down payment is RM750k. With rental yield of 6%, your rental should be able to cover your monthly installment for 20 years. So your RM750k will become RM10 mil in 20 years (today value of RM 5mil). This is the beauty of property investment – you will grow rich slowly but surely.