Are you making a mistake

[Guffeyjon]

I'm new to the forum, and enjoy it so far, but worry that too many people on here view there home value as a part of their net worth. In my opinion the equity in your home or the value of your home should not be taken into account when determining your net worth; what happens if you wake up tomorrow and a large sink hole appears in your yard? What would your house be worth then?

If you have equity in your home at a low interest rate and wanted to pull it out and invest it hoping to make money on the difference that is an option, but it still will be reported in financial statement as debt on home and gain on investment. A homes value is nothing more then a place to live; if you downsize, then you move and get to add to your investments, but until you do that you can't report it.

home -27.8k@ 0% (family owned)
SL -15.6k @6.63%
Sl -8.2k @5.18%

investments 60k (made 10.19% this year)
NW 7.3k

9 months ago NW was -14.8k

[SunshineGirl]

Hi there,

I don't think everyone does count their home as net worth because it isn't liquid and you do need a place to live, etc. But many people also have in their heads, "If I sold today, I'd have X," and so for planning purposes, it's counted. I'm aware of my net-worth-counting-the-house and net-worth-not-counting-the-house, but since I just don't know if we'll ever sell it, I don't count it in my "will have to live on" money/net worth.

Welcome to the forums!

[UnleashHell]

No.
A house has worth and value. As long as you include any loans and liens against it then it absolutely should be in your net worth.
If you decided to sell everything and travel around the world then it has value. Its foolish not to include it in your overall net worth.

However I don’t include it in my liquid net worth (separate calculation) which is the one I’ll be using when calculating my retirement funds. Unless I rent the house out  then it is a non revenue producing asset and not one I can use as a source of funding for retirement.

[Grateful Stache]

I agree: I do not consider home equity as part of "net worth."

However, some folks do and that's OK. Sometimes you need a little boost to get you started in the right direction.

Cheers,

- Grateful

[horsepoor]

I actually don't see that here very much.  The difference between an income-generating asset and a house, which can reduce your income needs when paid off, is pretty clear.  I watch the value on our house because I'm hoping that before too long we'll have enough equity that we can sell it and purchase a smaller home for cash (some people would say just do that now, but we're still making improvements on it, and I want to enjoy the garden for a few years after putting so much effort into turning it from a weed lot into something nice).  Basically for us, the house represents a potential reduction in living expenses of about $12K/year once it's owned free and clear, regardless of its value.  Ironically, that's about 4% of its current value.

[Le Barbu]

I would say 50% here calculate home equity in NW and 50% dont.

Normal people (outside MMM comunity) ALL include home equity in NW and even add car equity and golf club set equity in NW. Because it's their only asset...

To me, if you make a conservative estimate of home value and consider the return of this asset to be between 0% and 2%, you are not wrong.

[iwasjustwondering]

I'm new to the forum, and enjoy it so far, but worry that too many people on here view there home value as a part of their net worth. In my opinion the equity in your home or the value of your home should not be taken into account when determining your net worth; what happens if you wake up tomorrow and a large sink hole appears in your yard? What would your house be worth then?

What would my Vanguard fund be worth if the stock market tanked, or if Vanguard tanked?  The fact that an asset is associated with risk doesn't make it less of an asset.

I absolutely count my home equity as part of my net worth.  If I pay off my house, I will be able to live rent-free.  If I sell and downsize my home, which I plan to do after my kids leave for college, that equity will become more liquid.  My home has increased in value by about $60,000 since I bought in 2010.  It's definitely an asset, especially when compared with renting.

[MrFancypants]

A sinkhole can develop in my front yard and the value of my house can plummet.
My debit card PIN could be compromised and my accounts could be emptied.
The stock market could crash and my Roth IRA could become worthless.

Minus those, how do I calculate my net worth?

[JLee]

I would say 50% here calculate home equity in NW and 50% dont.

Normal people (outside MMM comunity) ALL include home equity in NW and even add car equity and golf club set equity in NW. Because it's their only asset...

To me, if you make a conservative estimate of home value and consider the return of this asset to be between 0% and 2%, you are not wrong.

I would say to some extent, car equity counts. I have two (cash paid) Toyota trucks that have pretty much hit the bottom of their depreciation curve, and both would sell for more than I paid for them.

[MooseOutFront]

I count mine in my net worth, but not in my "stache" of income generating investments.  Tossing it in with a 4% SWR calculation would be a problem, but keeping it on your balance sheet is not.

[CommonCents]

If a sinkhole developed, my house burned down from lightning, or an earthquake destroyed it, I'd get the insurance proceeds.  There's no similar insurance my investments will stay the same or go up.

I calculate my house value minus the mortgage in my net worth because it is an asset.  I don't use a strict figure for it (I recognize the market changes month to month, and it may be up or down slightly, plus I'd likely have broker fees and closing costs), but hells to the yes I'm not going to ignore the $400k+ we have in there.  That's ridiculous.  If we needed to, we could sell it.  And once the mortgage is gone, it will reduce the income money we need in retirement.  But I don't count it as income producing either, when I'm calculating how much I need in income producing assets to have 4% spin off each year, because I won't be selling off 4% of the house each year. 

[MrFancypants]

I would say to some extent, car equity counts. I have two (cash paid) Toyota trucks that have pretty much hit the bottom of their depreciation curve, and both would sell for more than I paid for them.

I've always included vehicles in my net worth calculations.  My understanding was that net worth was basically a snapshot of how much money you would have if you chose to sell everything you own right this second.

[Prairie Stash]

Absolutely include assets. A former coworker sold her house, at least $400k, and moved to Mexico to live in a fully furnished house for $100k. With the price difference she retired many years early.

If you have the opposite situation, low house prices, it should be easier to amass money in accounts. I would also include land holdings; farmland around here has appreciated by 5-8% for the last decade, artwork, gold and any other asset.

Don't be prejudiced against other peoples assets. ;)

[shotgunwilly]

I think it's just silly to count your mortgage against your net worth, and not count the equity.

Now, the house shouldn't be included in the investment figure that you are planning a retirement safe withdrawal rate on, obviously.

[iris lily]

Our net worth statement, calculated annually, includes all assets we have. I look at if from the point of view: If we died tomorrow, how much is our estate that will need to be distributed? So that number for "value of our estate" includes estimates on real estate as well as cars, household goods, etc.

But I also always know the figure representing investable assets, and that is even different from liquid assets. All numbers are important. My own hierarchy is:

1. Total assets (our net worth)

2. Investable assets - includes real estate we do not live in and that could be jettisoned if we chose

3. Liquid assets - includes only financial instruments, relatively easy to sell at a moment's notice -- for us, this category is the income generator

[Zikoris]

I don't own, but if I did I would probably keep it separate in calculations. I think less about net worth and more about income-producing assets anyways.

But it shouldn't really affect the calculation if you do include it. $300,000 tied up in a house (eliminating the housing expense) vs $300,000 in investments producing income to pay rent with. Close enough.

[Dicey]

When I was younger and has less in my 'stache, I did count home equity in my net worth. Seeing a higher number was encouraging when I needed it most. Now that I'm FI, I do not include it. Well, mentally I still do, but not on paper.

As to the house disappearing, buy the right insurance and you will sleep better at night.

[thenextguy]

what happens if you wake up tomorrow and a large sink hole appears in your yard?

I start charging $10 to come see the giant sink hole in my yard!

[gnomemom]

My house is a liability while we live in it.  We don't count it whatsoever.  Of course, we don't really sit around counting up our net worth much, either.  We check the balances in our retirement/investment/savings accounts and call that good. 

We bought in 2006, peak of the market.  Fixer upper.  We've got a gross amount of money invested in this house that we'll never get back.  I'll never look at real estate the same way again.

[gnomemom]

what happens if you wake up tomorrow and a large sink hole appears in your yard?

I start charging $10 to come see the giant sink hole in my yard!

LOL!  +1

[slugline]

I see no reason to stop including home as an asset in my net worth calculation, especially knowing what the going rental rates are like in my neighborhood. It's hard to put an exact dollar figure on it, but the "imputed rent" effect is real to me and my monthly cashflow. I suppose if I lived in a place where the buy-versus-rent calculations tipped the other way, I might feel differently.

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

[Le Barbu]

I see no reason to stop including home as an asset in my net worth calculation, especially knowing what the going rental rates are like in my neighborhood. It's hard to put an exact dollar figure on it, but the "imputed rent" effect is real to me and my monthly cashflow. I suppose if I lived in a place where the buy-versus-rent calculations tipped the other way, I might feel differently.

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

especialy when taxes are their #1 expense!

[sheepstache]

I can see why you would include it but I don't.

Presumably mortgage payments are factored into your number to cover your expenses already. And the increasing equity in the house doesn't give you a greater ability to pay off the mortgage each month. I suppose people ought to calculate their number based on the mortgage pay off date. E.g., It's okay if you withdraw more than 4% each year until year 20xx when the mortgage is paid off, expecting that at that point you can stick to 4% of the remaining amount going forward.

I see that people want to include the mortgage as debt in their net worth but consider a hypothetical example where you have .5 mil in investments but owe .5 on the house and at 4% of the investments you have enough to retire including mortgage payments in the expenses.  Saying you have zero net worth therefore you can retire isn't a useful way of thinking of it.

On the other hand, I totally see the point of including your expected profit from it if you're planning to downsize to a cheaper place when you retire.

My current place is so cheap I know I'll use the whole amount it sells for to purchase my next place. But I do think about its value when allocating my portfolio. It's a special property that goes up in value by a fixed rate so I think of it as a CD-esque investment and therefore invest more aggressively, with less of an allocation for bonds. That probably doesn't make much sense considering I can't sell off partial bits of the place when I re-balance each year.

[Frankies Girl]

I don't really think of my house as a liquid asset since I have to live somewhere.

But then I'm also one of the few folks on here that owns a house that is worth less than 100K due to it being a working class neighborhood in a low COL area.

In other words, my house is only a small percentage of my total net worth, so whether I count it or not doesn't really hurt my calculations.

I only really pay attention to my investments and liquid assets, but it's fun to me to look at Mint's total net worth anyway.

[Guffeyjon]

I was very surprised to see all the replies in such a short time. Seems like the group was evenly divided, and I wonder if the division is made by how each of us was raise. My family bought very little and never resold anything we were basically raised to buy and use items until there was absolutely no way of reviving them (my fathers cars got so old they no longer needed the key to start). Because of this I don't normally look around my house at items and associate a dollar value with them. It made me cringe to see people talk about cars, and paintings as assets. I do understand the need for motivation when starting, and can understand why someone would do that.

Home value just doesn't really fit into the retirement model; a place to stay (relatively free -Taxes), and $600k in invested assets that can produce an average return of 4%.

I guess if your house is more expensive you can have the security of knowing you can always downsize. Still wouldn't add it to my net worth.

Does anyone see themselves buying a larger house in the future to have this security?

[babysnowbyrd]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

Do you mean fed/state income taxes? When I budget, I use take-home pay as my basis.

[Le Barbu]

I guess if your house is more expensive you can have the security of knowing you can always downsize. Still wouldn't add it to my net worth.

Does anyone see themselves buying a larger house in the future to have this security?

I think the mood arround here is mostly to downsize housing, car and stuff needs. I own a 350k house that will be paid off in about 4 years and for me it definetly worth something. I plan to downsize someday but on my own schedule.

[slugline]

Home value just doesn't really fit into the retirement model; a place to stay (relatively free -Taxes), and $600k in invested assets that can produce an average return of 4%.

Wait a minute -- is "income generating" a requirement for something to be considered an asset around here? If so, then $100,000 doing nothing in a checking account isn't an asset either, right?

[Le Barbu]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

Do you mean fed/state income taxes? When I budget, I use take-home pay as my basis.

When I budget, I consider fed/state income taxes. As any other expense, I try my best to reduce, avoid (legaly) or delay the taxes. Same for purchase taxes and any other taxes.

[Zikoris]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

[yandz]

I count mine in my net worth, but not in my "stache" of income generating investments.  Tossing it in with a 4% SWR calculation would be a problem, but keeping it on your balance sheet is not.

+1  This exactly.  All assets - all liabilities = net worth.  Net worth -/= income generating 'stache

[Bill76]

I think that the textbook definition of "net worth" would definitely include home equity.

net worth = assets - liabilities

When thinking about FIRE, we're really more worried about how the income generated by our assets compares to our expenses.  So the value of your home is only relevant if you're planning to sell it and add the proceeds to your 'stache.  The mortgage payment, property taxes, and insurance are just expenses to include in the budget.  Similar to rent for those who aren't homeowners.

[Le Barbu]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

same as budgeting for food and utilities. The reason it is deducted from the paycheck dont disqualify taxes? Neither because it is difficult to manage to reduce them. Do you have a property taxes category? A school taxes category? I dont get the point why we should occult income taxes...

[slugline]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

It's a more complete accounting, plain and simple. and a good reminder of the impact that our life choices make on our finances. We laugh at the people that treat cable TV like a mandatory monthly bill, right? But taxes -- sometimes we can fall in the trap of thinking they're fixed. However, in the United States we can affect the amount of taxes we pay by moving to different city or state or making decisions like getting married, having children . . . or not. But it's easy to forget about this if you don't look outside take-home pay.

What's the point in participating in tax-advantaged accounts if you're not trying to affect the amount of tax paid?

[BlueMR2]

I agree: I do not consider home equity as part of "net worth."

Same here.  It's in the same class as all my toys/cars/etc.  Money owed on it would be debt, but it's not net worth to me as it's not actively generating income.  Actually it's worse, it's a liability, sucking down more money (yeah, I just sent off my 6 month property tax check today).

[Le Barbu]

I agree: I do not consider home equity as part of "net worth."

Same here.  It's in the same class as all my toys/cars/etc.  Money owed on it would be debt, but it's not net worth to me as it's not actively generating income.  Actually it's worse, it's a liability, sucking down more money (yeah, I just sent off my 6 month property tax check today).

would you be willing to sell for 1$ since it is more than what it worth? in this case, do you think the buyer would be fooled because of all the expenses of that liability?

[Chuck]

I include it in my NW because it is property with intrinsic value that can be fairly accurately estimated. For the same reason I include my car in my NW.

That said, I do NOT include home equity towards my FIRE number. That is the distinction I think many people make around here, and it's a good one.

[kpd905]

My debit card PIN could be compromised and my accounts could be emptied.

This is the main reason to never use a debit card.  But, back to the topic.

The only net worth number I really care about is for safe withdrawal rates, so I would not include house equity if I had any. 

[Zikoris]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

It's a more complete accounting, plain and simple. and a good reminder of the impact that our life choices make on our finances. We laugh at the people that treat cable TV like a mandatory monthly bill, right? But taxes -- sometimes we can fall in the trap of thinking they're fixed. However, in the United States we can affect the amount of taxes we pay by moving to different city or state or making decisions like getting married, having children . . . or not. But it's easy to forget about this if you don't look outside take-home pay.

What's the point in participating in tax-advantaged accounts if you're not trying to affect the amount of tax paid?

Under that logic, wouldn't it make sense to break your spending down further by separating out sales tax from any goods or services purchased? After all, it's easy to forget how much sales tax we pay if you don't look outside the receipt total. Yet nobody does this (because it serves no practical purpose).

[MoneyCat]

Of course I consider my house as part of my net worth.  When it comes time to retire, that house is getting sold and I'm moving to a low-cost Southern state where there are no state income taxes and the property taxes are really low because nobody cares about educating their children.  That house is going to earn me a mint.

[Le Barbu]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

It's a more complete accounting, plain and simple. and a good reminder of the impact that our life choices make on our finances. We laugh at the people that treat cable TV like a mandatory monthly bill, right? But taxes -- sometimes we can fall in the trap of thinking they're fixed. However, in the United States we can affect the amount of taxes we pay by moving to different city or state or making decisions like getting married, having children . . . or not. But it's easy to forget about this if you don't look outside take-home pay.

What's the point in participating in tax-advantaged accounts if you're not trying to affect the amount of tax paid?

Under that logic, wouldn't it make sense to break your spending down further by separating out sales tax from any goods or services purchased? After all, it's easy to forget how much sales tax we pay if you don't look outside the receipt total. Yet nobody does this (because it serves no practical purpose).

If you do this, you realise buying on Craiglist worth more than most think. I dont buy new car or new electronics or new furniture exactly because I ran the calculations.

[biscuitwhomper]

What I find more disagreeable is when people leave out taxes as a spending category when they account for where.their paycheck goes.

I budget with take home pay. What benefit would there be to budgeting using gross and having a taxes category?

Taxes are an expense, and like any other expense, can be minimized (within the extent of the law).   That being said, most governmental organizations prefer your method!

[Le Barbu]

I dont include bonds in my NW because they just keep up with inflation rate like housing so, no real return, no worth!

Just kidding, I dont own any bonds ;)

[Cassie]

Our house is paid for & we include it. We did downsize almost 3 years ago.  The only other downsizing would be if we get really old & decide we want to live in a condo then we could pay cash & have $ left over.  We live in a low property tax state & as one poster pointed out that is because people don't care about schools.

[slugline]

Under that logic, wouldn't it make sense to break your spending down further by separating out sales tax from any goods or services purchased? After all, it's easy to forget how much sales tax we pay if you don't look outside the receipt total. Yet nobody does this (because it serves no practical purpose).

If the recordkeeping wasn't such a hassle, I would be tracking sales tax . :)

Because of the personal finance software I use, it's actually more straightforward to record the income tax transactions than it would be to ignore them.

[viper155]

I'm new to the forum, and enjoy it so far, but worry that too many people on here view there home value as a part of their net worth. In my opinion the equity in your home or the value of your home should not be taken into account when determining your net worth; what happens if you wake up tomorrow and a large sink hole appears in your yard? What would your house be worth then?

What would my Vanguard fund be worth if the stock market tanked, or if Vanguard tanked?  The fact that an asset is associated with risk doesn't make it less of an asset.

I absolutely count my home equity as part of my net worth.  If I pay off my house, I will be able to live rent-free.  If I sell and downsize my home, which I plan to do after my kids leave for college, that equity will become more liquid.  My home has increased in value by about $60,000 since I bought in 2010.  It's definitely an asset, especially when compared with renting.

I, too, wanted to sell and downsize after the kids left for college. But guess what? The little dears still need a place to call home on holidays and summertime. I was wondering if you considered this? Both of mine are driving up the utilities bill as we speak!

[Le Barbu]

Being my own parents kid, I really dont care the size of my parents house, when I visit once or twice a year, we usualy sleep 4/room (wife+kids). If house would be smaller, the closest hôtel.

[Darrell]

I have always included the equity in my home when calculating my net worth, but I look at homes as having characteristics of being both an asset and a liability. Years ago, when I was a CPA, I would have argued that of course your home is an asset and not a liability. A while back, the first time I heard someone argue that your home is a liability because it does not produce income, I think I felt something in my brain snap as that was contrary to everything I had learned. I now see both characteristics in a home. When I see a nice modest house that is easy to maintain, is relatively energy efficient, and really meets the needs of the people living there I think it is a great asset. When I see a large home with unused space, requires a lot to maintain, and has high utility costs, I think about what a liability it is due to all the extra money and time they keep having to throw at it as long as they own it.

[Le Barbu]

Darrell, you rock as a first time poster!

[Roland of Gilead]

Net worth should include everything that you own, from your shoes to your house.  Assign a realistic value after deducting sales fees and any taxes.

If you owned a Van Gogh but used it as an art decoration in your home, you would not include its value in your net worth?

Invested assets are an entirely different beast, although some people do buy a home as an investment, right or wrong.

What happens if a sink hole opens in your backyard?

Well, what happens if your country's currency declines 20% in a day (ruble anyone?)  Or the stock market drops 40%?

Cars can be sold on craigslist in about an hour.   Homes can be sold in a couple of months if priced a bit under market.