Calculating Net Worth: Does Home Value Belong There?
Ever since I started tracking my net worth I've had the value of our home in there. I've often considered tweaking it and coming up with better methods of calculating it, but the concept of taking OUT your home (or cars for that matter) 100% boggles me. After all, the definition of "net worth" is the total of all your assets minus the total of all your liabilities, right? At least that's what I subscribe to.So why do I bring this up? Because the main man himself Trent, from The Simple Dollar, recently decided to take out his mortgages AND cars from the equation. But interestingly enough, he left the mortgage on it. Huh?! You'll have to read his article for all the dirty details, but he basically feels that he can't just cash out his house & cars as he'll always need them to live - thus, they shouldn't be calculated into his net worth. And I suppose the mortgage on it is a liability no matter how you slice it, so he's def. still keeping that in there (although at that point, wouldn't it be more like "rent"?)
I find this interesting in a number of ways, but mainly that there are SO MANY different methods one can go about calculating this stuff. So out of curiosity I thought I'd play around with our most recent net worth and see what it would look like after playing with this house variable.
Our Net Worth (w/out home value): -$186,789.11
Damn, I'm not liking that too much. In theory I like the idea of not counting on the value of your home, but the optimistic part of me says that it WILL sell one day, it's just a matter of when and at what price. Needless to say, I'm not crazy/smart/comfortable with taking out my home value anytime soon - it's still an integral part of the "big picture".(for all not familiar with our house's value, we calculate it @ $300k - the price our realtor set it at a couple months back. He's the master in our particular neighborhood, and has been selling (and living in) in our area for 20+ years. I also keep an eye out on Zillow & Redfin.com, but sometimes they fluctuate a bit too much for my taste.)
Our Net Worth (w/out home value & mortgages): $163,179.59
I'm liking this number a bit more ;) But while I'd love to sell our underwater house more than anything and break even, it's just not going to happen. Because of this, I still need to include our mortgages in there to keep things more realistic.Current Net Worth: $113,210.89
For me, this number still works. It gives us a pretty accurate snapshot of our overall finances, and includes all real estate and autos. It's not as sexy as taking out the house situation altogether, or as hardcore as wiping out the value of our house, but it keeps me on track and motivated.There really isn't ANY "right" way to calculate your net worth, you just have to do what works for YOU (kinda like most other financial situations, eh?). I do, however, give Trent mad credit for standing up and sharing his opinion. He knew he'd get slammed for it (which he did), but he also brought a fresh new way to consider tracking our financial snapshots.
How do you guys feel about it? Ready to nix your biggest assets? ;)
Labels: home ownership, mortgages, net worth, personal finance
posted by J. Money at
10:58 AM
21 Comments:
It doesnt make a lot of sense to take out your home value from your networth and leave the mortgage in there. If you want to be very conservative I would just calculate the original value of my home and not the appreciation (if any). You have a negative networth mainly due to the mortgage, you have this debt because you purchased an asset (your home) it only makes sense to keep them both together. And as you said Networth = Asset- Liabilities.
J,
If you could take back the decision of purchasing your home today, would you? Or are you a firm believer in real estate creating wealth?
Hollar baller. I don't own a home so I can't say whether or not I will include it into my net worth when the time comes. I don't include my cars because if I did sell it, I would just have to go buy another one. It's a paper gain for me and will never become a realized gain. I recently wrote about how I refuse to let my home be an investment and hit on some of the same points that both you and Trent blogged about. At the end of the day it's got to be a personal decision, but I agree $113K looks a hell of a lot better than negative $186K.
@Denis M - In all honesty, I would - but only if I could keep everything I learned from it ;) Not because we are underwater or it's a bad investment or anything, but more because my personality doesn't fit with owning a home (something I pushed to the back of my mind when we bought, and something you should really ask yourself first.)
I come from a military family so I'm used to moving every 2-3 years, and for the first time in my life I can't. Right now it's driving me crazy, but the wifey says I just need to get used to it and that when we have a family and all I can't keep that lifestyle up any more ;) she may have a point, and owning this house will certainly help with that, but in a perfect world I'd still be renting and banking away even more money. I like having the option to move at any moment whether I take it or not (and whether it makes financial sense or not).
I dont agree with his reasoning. Yea he will still need a place to live, but in a pinch (Im talking REAL pinch) he could sell his home and rent, or buy a cheaper home, or move in with his parents.
Home and vehicles are still part of net worth. I would say if you remove the asset side of the home, at least remove the liability side as well.
Very interesting. I just ran the numbers. Last month my net worth with the house and mortgage was $61,684.89. Without the house, including mortgage was $-86,915.11. Take the the mortgage and it was $49,114.32. Not too bad since it's still a positive amount, but not too great either since it's about 80% less that it should be.
I wrote about this before, there is no right or wrong way to go about it. The most important part is to be consisten month to month so you can see what direction you are headed in. I'm horribly underwater, so I conveniently leave out both the value and mortgage balance! I'm taking the net investable assets approach, which wouldn't include the house you live in but does include any rental property etc. Whatever works for you.
I agree there is no wrong or right way. That's the problem with net worth in my opinion - there is no defined formula so its pretty much whatever you want it to be.
I don’t include my home or mortgage in my net worth calculation for the following reasons. First off the only time you can get an accurate value of your home is when you sell it. The price can go up and down a fair amount and you are just taking a wild guess as to what your home’s value is. I’ll always need a place to live and yes homes do appreciate, but so do all the other homes you want to move into. My theory is if my house went up in value 20% in the time I lived in it and I want to sell it and move somewhere else – my new house is probably going to cost 20% or more than it would have when I purchased my last house so my net gain is $0 (I’d actually say it’s probably going to be a loss when the home selling fees are added up). Only time your house pays dividends is when you downgrade. So in my humble opinion your primary residence has no place in your net worth statement until you are retirement age and plan to downgrade your residence and even then you can only count the difference between the place you will be moving into and your current residence.
Again just my reasoning on it. Most people I do believe include their mortgage and even their cars. To me those are standard living expenses and should not be included.
I feel you should definately include the mortgage and the house in the equation.
1. You need to payoff that mortgage regardless of any situation.
2. You will be able to sell the house at any point in time.
It is an asset and a liability and there should be part of your net worth.
Longterm you will payoff your mortgage and so it will be an expense you no longer have. Even longer term you may move house and therefore sell the asset and realise your gains. A mortgage is a forced way to save money, you have to pay it otherwise the bank will take where you live. You keep paying off the mortgage and eventually pay it off and own your home to someday sell and retire to somewhere.
I say include both for sure.
@MFJ - Interesting...so you consider your house more like "an expense" than an actual asset & liability? I feel like it's similar to renting in that regard - you pay for your shelter just like food, bills, etc, so I can totally see that. Guess the problem would come when, let's say, you've paid 1/2 of it off or more (or even the entire thing) and you're not counting it towards anything. In that case, even if you buy a similar house and not upgrade, you'd pay fees of course but you'd still be owning this valuable piece of property/house worth $X thousands of dollars.
It's pretty cool to hear everyone's thoughts on this as it's something that'll never be cut & paste :) So thanks all for sharing! You're def. getting my wheels turning...
Great post, J. Money. I too agree with you on the definition of a net worth. Trent is talking about liquidity and banks do not care about that.
Myself, I have a car lease and an apartment that I rent. These are expenses I have to pay as they do not contribute to my net worth. I am not the owner of either property. It's like saying I live in an apartment worth 122K and should include it in my net worth. That's plain silly.
Net worth refers to every asset and liability that you own in your name. The value of the home is a reflection of your asset. However, the value of the mortgage is a reflection of your liability and it is a fixed liability. (Unless you have an ARM mortgage).
I am happy to say my net worth is positive even though I do not own a home. I would imagine my net worth would be a hell of a lot more if I did purchase a home but only under two conditions, I make the mortgage payments (which contributes towards the principle I hold in the property) and the property goes up in value.
Cars are considered an asset, even if cars depreciate every year. However, since I lease it, I do not own a depreciating asset that I can count towards my net worth.
You gave me some food for thought that I will have to think about for a while.
I would say that your net-worth would include your non-liquid assets as well. Your house and cars have a value to them whether or not you think you plan on selling them or not. I think it's okay to calculate both your "Net worth" and your "liquid net worth."
@J. Money - I agree that if you have say half or even all of your house paid off that you could count some of that towards your net worth. I guess maybe because I am really only keeping track of retirement assets I still would not include it because yes the house is paid off - thats great I reduced my expenses by not having to pay a mortgage, but the ONLY way I can get that money out is by selling the property and renting or downgrading and then I only get the difference between the old property and the new property out in cold hard cash that I can use for stuff. I generally think people greatly over estimate the value or cash equivalent in their house and I choose not to include it at all for that reason - though I always tend to be ultraconservative with my calculations.
Again nothing wrong with someone including it in their networth calculation as I think most people tend to do that. I just think when you add up selling&moving costs and then tack on the cost of the new residence (you'll always need a place to live) it won't leave you with a significant amount of cash unless your property appreciated at a much faster rate than the property you will be moving into (ex: moving from LA to South Dakota).
"Net worth refers to every asset and liability that you own in your name." I like that, haven't heard the "in your name" part before but it certainly makes it cut & dry ;)
As long as people KNOW why they're including an item in their net worth or not, I think it's fine (and great) that we have different opinions. To be honest, I'm not even sure I'd like one definitive way to do things as it wouldn't be "personal" anymore!
The more we stimulate our brains and ask ourselves what we're trying to get out of these calculations the better. I track my version of a net worth to have a general snapshot of my finances - one look at any graph tells me if I'm on track or lost in the gallows. So as long as it continues to tell me that, I'm stickin' with what I got - and so should you if it works.
I've never been comfortable with including items I'm using in my net worth calculation. Although I'm not married to the idea of owning a car, what's the point of including it in my net worth if it's something I can't or won't sell? (Which I could and would if it came down to it.)
The same goes for a house. You still need a place to live. In a pinch, you probably could sell it and live with a relative. Even then, I'd only include the fire sale price of the home in my net worth. If times are so hard you're forced to sell your home, then it's unlikely you'll get retail price for it. Oh, and let's not forget to factor in selling costs.
On the other hand, it doesn't seem logical to exclude the value of the house if you're going to count the mortgage. Assuming you have enough insurance to cover the mortgage in the event your house is destroyed or damaged, then I wouldn't include the mortgage without including the fair market value of the home.
What really grinds my gears is when people include furniture in their net worth. I guess you can go through the trouble of including everything you own, but I think it's a very aggressive way of calculating your net worth. It almost feels like cheating.
I actually don't like seeing that either - you might as well just do an inventory of all your stuff at that point I feel like. On the other hand, I give mad props to anyone who DOES track all this stuff as it's great for a) insurance purposes and b) for KNOWING what you have and approx. what it's worth. Having the personality to do all that usually carries over to their finances and overall organization - both of which are awesome :) but when it comes to "net worth", I personally prefer to leave furniture and that stuff out.
I really don't think the home should be included in your calculation. If so, I'd be suddenly $400,000 richer over the past 3 months according appraisers and Zillow. Illiquid assets are all an illusion.
Feel free to read "Real Time Proof Why Net Worth Is Rubbish
BTW, Trent probably makes like $50,000/month from his site, so he can afford to not include stuff like a home :)
I'll agree Zillow goes all over the place, but then do you not include all your debts in your net worth? If you have a $300k mortgage I can't imagine just ignoring that.
Hi
I have been reading various finance blogs for a while and am completely perplexed by how people account for the value of their home vs the mortgage they owe. It seems to completely skew the net worth number. I am still perplexed and I think most people value their homes much too high......I think many of us are underwater in value and that means the mortgage may look us broke on paper......I am still not sure how to account for this in my networth profile.....thanks for the interesting blog.
Oh yeah, we all do it a bit differently :) Some are more conservative than others, but I say you have to go with what feels the best for you. Ask yourself what you want to get out of tracking your net worth. For example, do you want to see a list of ALL financial assets and liabilities on there? Are you more concerned with more liquid assets? Do you want a rough inventory of all you own (some people list all belongings like tvs, furniture, etc), or just financial accounts?
There are a ton of different ways you can work it as you already know, but since it's only YOU that should care about what your Net Worth reflects, best to go w/ what feels right to ya.
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