After our fun discussion about whether to pay off a mortgage or invest first, I thought a nice follow-up would be to chat about another topic with advocates on two sides.
So today I’d like to address the subject of how to calculate net worth.
Specifically here’s the question I’d like us to address (this is the summary — there are more questions at the end):
Do you include the value of your home/primary residence in the calculation?
There are many money-related terms where the definition seems to be a bit vague or at least in flux a bit (as we talked about when defining financial independence).
But one I have always thought of as being fixed was the definition of net worth. Apparently, I’m wrong. It’s either changing or I missed the fact that the term was up for debate in the first place.
Not Including Home Value
More and more I’m seeing people say something like:
“My net worth is $1.3 million not counting the value of my primary residence.”
Like this comment from millionaire 74:
I don’t count the value of our condominium or cars in the total.
Or this one from millionaire 51 who only counts investment accounts:
Our current investment portfolio is valued at $2.45m in taxable, retirement and cash accounts. This includes about $100k that each of the kids have in UTMA accounts, college savings plans and their Roth IRA’s.
Add to this what I read from other bloggers and even commenters on other sites and I know there’s a decent-sized group out there that leaves the value of their primary residence out of their net worth calculations.
Isn’t that like saying:
“I earn $75,000 a year not counting the $10,000 I get from my side hustle every year.”
In other words, why is there a caveat? Why is something excluded?
My Definition of Net Worth
I’m kind of an old-school guy so I like to go with the traditional definitions for most things.
That’s why I define net worth as simply:
Assets – Liabilities = Net Worth
This means (literally) adding up all the assets a person owns and subtracting all the liabilities they own.
It seems like a pretty simple formula and concept.
And BTW, it’s not just me. Google “net worth definition” and you’ll see that this is the generally accepted definition of the term.
Questions About Net Worth
Ok, so I’m leading the discussion a bit and I don’t like to do that on this kind of post. I prefer to lay the question(s) out there and let you have at it.
With that said, let me conclude with a few questions:
- Do you include the value of your home/primary residence in your net worth? Why or why not?
- If you do not include the value of your home, do you include the mortgage on that home? Why or why not?
- Are there any other “special” additions or subtractions to the traditional definition that you make when calculating your net worth? Why or why not?
Let the discussion begin!
I do, because I go by the usual definition of net worth. But we are also debt free so there are no liabilities to subtract.
We don’t include our precious metals – held those since the ’70’s & they are for the most dire economic situation facing us. Probably will never need them & we can leave them to the kids.
My homes are included but primary residence is not part of my retirement goal calculation given I never want to sell the home I am living in. I reduce the value of my homes given you never net full value after real estate and closing costs. I find most people over value homes in their net worth calculations.
Q.1 Do you include the value of your home/primary residence in your net worth? Why or why not?
A.1 Yes I do. Because its an asset and paid off and usually an appreciating asset.
Q.2 If you do not include the value of your home, do you include the mortgage on that home? Why or why not? N/A
Q.3 Are there any other “special” additions or subtractions to the traditional definition that you make when calculating your net worth? Why or why not?
A.3 Yes. I don’t count stuff such as autos, boats, campers etc. because they are depreciating assets. I also consider future taxes due on qualified, tax deferred funds as liabilities and subtract that estimated amount from total asset amount.
I include 90% of the estimated value of my homes to reduce error from selling costs or a high estimate.
I did not include my paid off home when determining whether I could retire or not because my home does not pay me. It costs me in terms of insurance, taxes, and maintenance. Whereas my other investments pay me as in dividends or growth. If I planned to move, then my home would be part of my worth equation. As I do not plan to move or downsize, it is in the liability column due to the aforementioned costs.
Merry Christmas!
Very good explanation. I agree, it does not contribute to you other than basic value appreciating.
I include the value of my home in net worth. The reason to include it or not is if you plan to downsize and move as part of your retirement plan.
We live in a high cost of living area, the same one as my mom. She is 69 and in her final year of work. Her home is ending up as a significant source of cash. She is going to be able to buy a home in a lower cost of living area near where she went to college 51 years ago. When she made this plan, her home was part of the calculation.
We plan on leaving this area when we have “enough” and selling our home will figure into those plans.
Greetings from Millionaire 65 in the series. This is a great question. We do include our primary residence in our calculation of net worth. Old school rules!
Having made that statement when we think about our financial assets we certainly do consider the home that we will live in as we FIRE a bit differently than other assets. We plan to leverage geoarbirage in the near future so that home, while a part of our net worth, is viewed a bit more conservatively since we have to live somewhere. We certainly do not plan to take 4% out of our residence every year to live!
There are a few assets that we do not include in our net worth are those that are specifically marked for a targeted purpose. The most significant examples are the funds saved for our son’s college educations. This we exclude as it is much more transitory. Almost like an ATM. Money in – Money out. We are very proud to have been able to have our sons graduate debt free but as a financial asset, we ignore these funds.
We also avoid counting everyday cash flow items like our checking account and depreciating assets such as our cars. These again seem transitory and largely minor anyway.
Hope this helps the discussion!
The real estate prices in our part of the country do not appreciate much, and obviously we have annual expenses associated with the house, like everyone else. We also will always need a roof over our heads, so I do not like to count our primary residence in our net worth.
The other item up for discussion, is our pension. It is not something we can pass on to our children obviously,(unless we save a part of it as it pays out monthly, no lump sum choice) but is has tremendous value to us. There are several bloggers and articles online that have various formulas to figure out its “worth”- but not sure if it should be included in net worth.
I do calculate the value of my home. I use the very low end of what it could sell for just to be conservative. What I do not count is any other assets like art, car, jewelry, etc.
We keep two numbers in mind ‘fluid net worth’ and ‘total net worth’. Fluid net worth is the number we refer to most often and only includes investments. Total net worth, which we rarely discuss, includes our properties.
Fluid net worth is a better indicator of progress because it’s money we could easily gain access to. I figure we need to live somewhere so even if we sold our home we’d most likely buy another one. The value of our home is all tied up and not easily accessible. I also don’t include our rental home at the beach, because I never intend to sell it.
529s aren’t included either, because they are earmarked for our children. If they don’t need the money for college then we would recalculate once the money was moved elsewhere.
Our properties are one third of our net worth so the difference between fluid net worth and total net worth is quite significant.
Oh and we do include the mortgages in our net worth. We have to account for those debts and figure we would liquidate investments if necessary to pay them off.
Q1. “Net worth” is an accounting concept, so I use the accounting definition. Home value included.
Q2. Mortgage (when we had one) was thus included as well.
Q3. See Q1. All (and only all) of our assets; all (and only all) of our liabilities.
I’m with millionaire-51: pay attention to his wording. It’s not “net worth” but “invested portfolio”. The former contains the latter. That’s wise, since the “value” of a car or a house at any given time might be difficult to determine, or even to choose how to determine. Is it purchase-price, some declining fraction of purchase, the same as recent comparables, zero? (FYI the field of accounting has been dealing with such issues for centuries; why not draw on the expertise?)
I see many folks using “net worth” as a gauge of their progress towards FI. It’s good, but not enough — am I ready for FI with $40k annual expenses and a $2 million dollar net-worth, all in a primary residence? Net worth says “possibly”; investment income of zero says “not yet”. So, I track my progress towards FI by investment income from a portfolio I dedicate to that purpose. Last month, for instance, I made no progress towards FI (unchanged income), though that portfolio’s value rose $2500 from contributions and price changes.
Net Worth is tiotal assets minus liabilities. Net Investments is assets that generate income and/or accessible capital gain minus liabilities. Net worth can include the house and primary mortgage, but in general sense a residence is not a typical investment as it doesn’t generate income, it instead removes the cost of renting on the expenses column. Of course the downsizing option may be important for some peoples circumstances and thus the capital gain minus the cost of new property purchased may be included in net investments if there Is line of sight to making the sale and realizing the gains. IndumIn summary:
Q1. Include in Net Worth, exclude in Net Investments. The latter is the key for FI. Having paid off the home really helps with removing rent or mortgage expenses in retirement, partially offset by maintenance costs of owning.
Q2. Include mortgage in Net Worth. Can iexclude primary residence mortgage from net Investments, but I include to focus on reducing it. Always include all other debt.
Q3. I exclude cars and personal belongings which are typically depreciating items with no income generation
Let the debate roll on !
We don’t include our home. I might be tempted to include it is we had negative equity.
But otherwise I view that I can’t sell my home to pay bills without incurring the additional bill of rent. Rent and the value of other homes move in correlation to my home when ignoring geography. So if my home appreciates it doesn’t really benefit me. The value of my home is in reducing the yearly expense side of the equation. You can’t count the impact twice as that would be double counting.
While on the topic of networth – it would be an interesting exercise to get periodic updates from millionaires that have posted and see how they fluctuate up or down. Maybe a good topic for a whole blog posting…”Millionaire Networth Health Checkup”.
I will be doing updates, but they will be a few years from the original posts, which means they are still a couple years out even for the first millionaires interviewed.
If the updates are sooner than that, there won’t be much new news IMO.
I have lots to update…:-)
If you are calculating your net worth in order to determine how much is needed to retire and you do not plan to sell your home then it should not be included. Your primary home will not be included in your net worth calculations by banks or financial institutions for that very same reason.
I include our home in Networth but when calculating our retirement income I do not. Then If our plan ever falls short we have the equity in our home as a plan B.
I actually am a hybrid of both lines of thinking.
I keep track of net worth on a spread sheet and break it down into two components.
The first one is the one I feel is the most important and that is the net worth of my invested assets. I call this my “Retirement Portfolio”. I even subdivide this into 2 components:
1) Non-retirement Assets: I do this to get an idea of what I have available when I retire early and before my retirement accounts are accessible. Not only do I get the net worth value, but I also have an idea of the passive income streams generated from this.
2) Total investable Assets including retirement. This will give me an idea of what I will be able to consume when I hit traditional retirement age so basically #1 above plus the passive income streams and value of the retirement assets added.
The next is the “Total Net Worth” Calculation. In addition to the above components I know add into the equation my estimated home value (fully paid off house) and my child’s 529 accounts. This is more like a bragging rights value (such as the one I have put in Rockstar Finance networth) but I still don’t include values of car, jewelery, etc because it really is a tiny percentage of my net worth and it’s hard to get a true value.
I am with the author. Net Worth is a simple formula: everything you own that can be converted to cash minus every debt, expense and future liability you owe. The future liability comes in as someone above stated, you know certain expenses will be incurred (house selling costs being one) so I deduct those since I will not ever have those dollars in my hand.
The very fact that they feel the need to put in the clarifying statement “not counting the primary residence” pretty much confirms that primary residence naturally part of the net worth calculation. They just choose not to due to some idiosyncrasies, so they need to clarify its not included because otherwise common sense assumes that it would be.
I think there’s your answer.
I calculate 2 key numbers. Annually I do a Net Worth (Assets – Liabilities). All assets and liabilities are included. But the KEY number for me which I review monthly is Retirement Assets. These are assets that provide my FI. Retirement Assets are monies/investments that I use to determine my degree of FI and part of a retirement withdrawal strategy (commonly known as 4 % rule). My Retirement Assets do not include my home ($800k), my second home ($300k), my fun travel accounts ($125k), HSA ($16k), life insurance cash value ($8k), time share ($15k), pension payments, or such things as cars, household goods or jewelry. I do not include the mortgages in this calculation, but I do included the expenses in my retirement expense projection needs.
Retirement Assets are my taxable and tax deferred accounts, as well as deferred annuities, I bonds, and rental property. These are the assets which I expect to cover part of my retirement expenses and part of a withdrawal strategy. I am retired and receive pensions, wife SS, spousal SS and supplement my retirement expenses with withdrawal of dividends from taxable accounts, and net rental income. I consider all dividend payments and net rental income that is not reinvested to be withdrawals. For the past 3 years I have then withdrawn about 1.5% of Retirement Assets, which is below the 4% Rule, thus will need to bump up my spending, especially when RMD starts in over a year from now.
Everyone has to determine what works best for them. .
Thank you.
Question: Do people count SS (self and spouse) as part of net worth (e.g., using the 4% rule to ascertain the “principal”)?
I do not count SS as part of net worth or of 4% withdrawal rule. It is income like a pension. Retirement Assets supplement my retirement income.
Thanks once more.
Yes, self and spouse. We’re in it for life…
You are absolutely correct. But I get why people sometimes exclude house equity. If you have two people with one million $ net worths and one is renting and has no debt and $1million in savings and investments but the other has $500,000 in equity in a $1 million house, owes $90,000 on two new cars(that aren’t underwater)and has $500,000 in savings and investments they are not at all financially equal. One has virtually no risk while the other has a lot of money tied up in assets that are illiquid and in the case of the cars is depreciating. That is why an accredited investor in the US has to have a net worth on $1million , excluding home equity.
My opinion and those I have been reading and listening to all these years is that Net worth = Total Assets – Total Liabilities. Period. Pull stop. From https://www.investopedia.com/terms/n/networth.asp
“An individual’s net worth is simply the value that is left after s/he subtracts her debt from her assets. Examples of debt includes mortgages, credit card balances, student loans, car loans, etc. An individual’s assets include checking and savings account balances, value of securities such as stocks or bonds, value of his or her home, market value of automobile, etc. In other words, whatever is left after selling all assets and paying off personal debt is the net worth.”
’nuff said =)
Great question!
I do not include the value of my home in my net worth. The problem with a home is it is part asset and part liability; its a hybrid like a Mermaid.
The problem with Mermaids is when you want a fish you have a person and when you want a person you have fish.
Tricking yourself into seeing a home as an asset can lead to poor financial decisions, ie ”I will upgrade the kitchen since it will add value to the home.” The very second those upgrades are complete the value decays, worse than buying a new car in fact. Ironically, no one in the PF space considers a new car an asset.
Excluding my home from my valuations does not mean that I am negative or begrudge hone ownership. Instead, I exclude it in the same way I only assume 7% a year asset on my investments.
It’s much easier to forecast low growth rates, and save more now, than it is to use too high of a growth rate and have to play catch up in the future.
Until, someone makes me an offer ”I cannot refuse” to buy my house, my home will stay off the balance sheet and be considered a liability.
Yes, include the value of the home less the mortgage as home equity in the net worth calculation. The bottom line is that two otherwise identical people where one has $250k in home equity but the other doesn’t, are not in the same financial position.
I count everything, including the value of our home and rental properties, which I only update when we get an official appraisal of any of them.
I believe this is important because I build our household financial strategy around the question “what grows our net worth fastest?”
Strategic decisions about how to pay down our debts (some at the standard rate, some accelerated) figure into our rate of Net Worth growth as much as do our saving and investment, so taking the full picture of our finances matters to have a fully informed strategy.
I hear ya. There is 2 calculations I’ll use; one that will include the house – because when I pass, all assets will be provided to the beneficiaries minus the debt of the estate..
but for my personal ability to free myself from a high stress job, I only count what I have invested (money only)… I can extract money to buy groceries, pay insurance, day to day living, but I can’t break a piece of my house off and head to the grocery store.
So, different calculations for different reasons, if I want to retire – my house is an expense, if I pass away – my house is an asset that needs to also pass on.
Thoughts?
Do you include the value of your home/primary residence in your net worth? Why or why not?
– I include the value of my home (minus mortgage) because it is also a multi-family property that earns over $30K per year in rental income. Also, I own a weekend home that will ultimately become my retirement residence, and a share in a condo, and include that too, because these are in resort areas where I could get a high seasonal rental income if I chose to do so. On the muti-family property I could also choose to develop it into condos or use it as a 100% income property that would either generate a substantial profit or very substantial rental income. These properties offer me a lot of flexibility above and beyond a typical home.
Are there any other “special” additions or subtractions to the traditional definition that you make when calculating your net worth? Why or why not?
– I run my NW two different ways. The simplest is Assets – Debt = NW which I like because its a quick & dirty way to keep score. But when it comes to retirement planning, I make a lot of special adjustments. I will subtract the estimated cost of liquidating my assets, including capital gains taxes, transfer taxes, sale commissions, legal expenses, haircuts to valuation (for example liquidating business inventory, etc.). These are what I call the “friction costs”. That then gives me a more precise picture of what I would have to live on in retirement. I’m happy to say that even after all the adjustments, the retirement picture is looking pretty good, though plan to keep working for the next few years until I get fed up enough.
P.S. For the absence of doubt, wanted to clarify that I fall squarely in favor of including one’s home in the NW calculation.
It is a significant and valuable asset for most people, and offers tangible benefits and financial flexibility, such as the ability to borrow against it, monetize it such as in a reverse mortgage, or sell it and move to a lower cost situation. While I view conventional homes as a consumable (i.e. you have to spend to maintain it), I still believe it is a critical storehouse of value.
Furthermore, I also include the following:
(1) all income-property, whether residential or commercial
(2) a conservative estimate of the liquidation value of our family business and associated inventory. I
(3) estimated value of collectibles, such as art, antiques, jewelry, for which I keep very detailed records on anything worth more than $2500. My general guideline is that if it would be valuable enough to insure/appraise, it would likely have some liquidation value, though somewhat haircut from the appraised value.
(4) balance in pension plans and retirement accounts
(5) vehicles, though these are depreciating assets, but this is pretty much a rounding error so i don’t worry about deciding to include vs exclude
I love boats, don’t have one right now, but don’t think I would include it (nor motorcycles, ATV’s, campers, and the like) if I had one, as I’ve experienced just how hard they can be to sell and much they can depreciate – which is to say a lot! Expensive, discretionary toys are not generally value storehouses unless they are antiques or collectibles.
Like I said before, I run two calc’s. I guess I’d call the one a “Net Worth” calc, and call the adjusted figure a “liquidation analysis” so as to avoid confusion.
The question is Net Worth… not FI ability, or investment value, or spendable/liquid this or that. The way I look at it is if I were to pass away tomorrow (heaven forbid), what are all my possessions worth minus what is owed on them.
Net Worth in my mind is a transient number but it has a snapshot value each and every day. So yes, if and when asked, I add everything (conservatively); house, cars, boats, jewelry, everything, period. No qualifiers, no buts, that’s it. But not sure what it’s really good for other than that final death score unless of course you’re negative… which would be really bad 😉
I include all assets including a house, so I can be part of your millionaire series sooner 🙂
Seriously though, a house is a substantial asset for many and at some stage it will be turned into cash. That is why I include it. Ways to turn your house equity into cash include downsizing, selling and renting, a reverse mortgage, and moving to a cheaper area. I plan to do a combination of these and that is why I include it.
Millionaire 84 here – I use old school rules and include our home and any mortgage (none now) in calculating net worth. I guess it falls under the old marketing phrase used for liquidations, “SALE – Everything Must Go!”
However, I really like the adjustments many of the readers have shared for retirement -ready calculations. Thanks for sharing so I can give my calculator and spreadsheet some exercise!
I’m solidly in the category of those who include my home’s value along with my loan. I do not include the cars though. We do not plan on living in our home in retirement, and we do have the ability to take a loan out against it in an emergency. This is logical to me, and why it’s an asset. Now considering what is going on in the market, it’s not an appreciating asset, but hey, at least I own more of it each month. 7 years after moving in, my home is worth about 2% more than the purchase price. I don’t see my home as the investment that others may do with theirs. I hope for inflation adjustment over the time we are living here.
Assets – Liabilities = Net Worth. End of discussion !
Asset is something that has value or can be sold imo. House is an asset absolutely. Net worth would include all assets imo. The only reason I could see someone not including it is because it’s not super liquid… but neither is my 401k right now!
For those that say they live in their house- so what? You can still sell it and rent going forward. Should you include furniture? I think you could but I and I’m guessing most don’t as the value is likely very low relative to everything else.
I think the liquidity of an asset is very important but the value of an asset is what matters for NW. If I was worth $1M because and all I has was a $1M house paid off I wouldn’t be excited as much as if I had $750k in the bank and a $250k house but that’s just me.
I firmly believe that the major reason the financial advisors and the media that loves them encourage people to exclude their home is that they only make fees off of investible assets 🙂
So you could be worth a gazillion dollars in real estate and have no securities, and you’d be pretty worthless to a financial advisor.
Interesting conversation and like you I am fairly conventional in my Networth calculation although the only assets included are my house (firesale valuation) and cars (bluebook value). I dont including my Charitable Trust (105K) and Kids 529 Plans (20K ….stopped contributing as didn’t like investment options) as on both of the above in my mind they are not my $.
Millionaire73
https://esimoney.com/millionaire-interview-73/
Same here. One could argue the 529 is part of your net worth since you can reassign it back to yourself, but I consider the 529 as a gift that is already given.
Great question. I am old-fashioned as well, yet I also track what I care about.
As a result, we track several things: (1) Our investments/total productive assets, (2) our liquid net worth (assets plus cash equivalents), and (3) our total net worth. Of those, total net worth is the least important.
When I think of “net worth,” I know that concept represents our total value on paper, but I find it far more helpful to think about and track the value of our productive investments. Thus, we don’t include our home in our productive investments. Nor do we include cars. (They’re more like a really expensive hamburger: on their way to $0 in value.) Nor do we include funds being saved for a particular purpose.
We would include our home only if we intended to sell it someday and downsize, but we’re planning to stay here indefinitely.
I probably watch our investments the most, followed by liquid net worth. Our total net worth – the flashy figure on paper – is what I care least about. It really only matters once we’re dead.
I do track our total net worth – including our house and mortgage – but we don’t ever use it. (I do not, however, include our cars or the value of personal effects in it, even then, since those are diminishing in value, easy to overvalue, and tedious to bother with.)
So I guess we include most things in our actual net worth, but because of that, we find it to be the least useful figure we track. Instead, we focus on the value of our investments.
This discussion distills into:
Net Worth vs. Net Investable Assets
People can chose whichever number or methodology they feel best represents them. Although not specifically stated as “net worth” or “net investable assets”, enough information was provided in the interviews.
I find that people are encouraged when their maximum assets numbers are large and growing, so if adding all assets helps, do it. But, generally, after attaining a certain level, it doesn’t make much sense to do so.
Assets – Liabilities = Net Worth
Just reading the title, this is what immediately popped into my mind. As you’ve mentioned, this is the most basic and perhaps “classic” definition.
That said, as comments above and in the post mention, what one considers an asset and liability often receives more debate.
I don’t see the debate. Another way to consider your NW is: When you have left this planet and all debt is settled what is left? That’s NW. Anything else is something else. Lol. I think we all understand liquidity, etc. I certainly consider my NW, liquid assets, taxable assets, IRA/401k, etc as important but different.
For those that don’t consider cars because they depreciate- that doesn’t make sense. There is a present value of these assets just like a property. If you don’t maintain that property that asset can depreciate as well. If you buy a $75k car and it’s depreciated $25k it’s still worth something isn’t it? Most assets don’t have a fixed value.
Like many others above, I’m a hybrid.
I use our home equity value for net worth purposes, but do NOT include it in retirement calculations.
It’s also interesting that others don’t include pension amounts in their net worth, I include the current lump sum value. Since there is still time to go until retirement, if anything where to happen, beneficiaries would receive the lump sum amount.
I include my home in mine, but keep an asterisked number without it as my “more liquid” net worth.
I do add it becaue I believe in the real definition but also want to put my mortgage against something because if I don’t count the house as an asset I would think I would still count the mortgage as a liability. I think people that leave it out mean to calculate only useable net worth. You also had a few interviews where people left out the values of their businesses because they would never sell it. I think one couple in the Scale interview series had inherited a ranch worth a few million but left it out of their calculation because they had no plans to sell. So really they’re worth a few million dollars but for some reason don’t want to count assets?
I personally believe this is all a little complex, just calculate it for what it is.
It’s not really complex. If it’s something of value and can be sold it’s an asset. Just because they don’t ‘want to’ sell it doesn’t make it any less of an asset. How they manage those assets and what buckets ‘they’ put things into is up to them.
Consider this.
Millionaire #1 owns home worth $1M free and clear. But nothing else.
Millionaire #2 owns home worth 500k free and clear. Owns $500k in cash account.
Clearly they are different but NW is the same! I’d rather be #2 but that’s just me.
With all the comments, i am now leaning to include my home in my NW… i see peoples point, if things happen – i can sell the home and keep that tax free money along with my taxable account to live or move to a lower cost of living… the interesting point for me is – while reading all the comments, I have less anxiety about my financial picture now.
I don’t count my primary residence for a number of reasons. To count towards your net worth, an asset should be fungible. When you sell your 1000 shares of Apple, you get your $150,000 of the sale proceeds. When you sell your primary residence, you saddle yourself with new living expenses. You either have to move into a rental or buy another house. For that reason, the two assets are fundamentally different.
There is also a timing issue and a transaction cost. When you sell stocks, you can have the whole transaction completed in 3 business days. When you sell your house, you have prep the house, list the house, wait to receive offers, then select an offer and then go through escrow (30 days typically). Unlike selling stock, the buy offers can have all kinds of contingencies in them. It is slow and expensive to sell a house.
I choose to leave it out for two reasons:
1. You have to live somewhere so counting the difference between a mythical number (your home’s value isn’t factually determined until the day you sell. Zillow will not be your buyer and your county assessor isn’t valuing your home for sale but rather for their own profit) and your liabilities can lead to an inflated sense of wealth.
2. The legal definition for an accredited investor requires you to discount your primary home value to determine your eligibility.
Wow great point Hillary! I love the accredited investor mention….
But now I flounder again! I didnt include home, then I did, now I dont again!
I sent a request for millionaire interview because i was not in the high income bracket, thought that may be interesting based on some readers comments – but even though I would love a chance at interview, I would not do it unless my investable assets where beyond 1M.
Thank you to everyone for the discussion
I agree, it is more fun to count the equity, especially if your property has done some solid appreciation, and it is 100% correct as others have identified.
However, I think all readers of FI and FIRE blogs will likely have a common objective of having a net worth large enough that your home equity is a minority player in the value. Another argument for leaving it out I suppose.
I guess if I want a higher NW I shouldn’t pay off my home mortgage. Damn. 🙂 Good discussion. Whether you count it or not probably doesn’t mean a heck of a lot either way in most cases.
My net worth is my value at death and liquidation. That number doesn’t mean much while I am alive since my home is an asset, but not an investment. So I use the basic asset and liability formula for net worth, and then ignore it. Our income from all sources keep us us alive.
Regarding including one’s home in the NW calc, I’d point out that while a home is not a very liquid asset, neither are certain other types of other assets are typically included in NW.
For example, many of the original Millionaire Next Door book examples were people whose primary NW was derived from small businesses, either currently owned or having sold a business to create a retirement nest egg. Sure, it could take a year or two to sell a business, outside of a fire sale, or maybe one may never sell and pass it along to next generation, but that doesn’t mean it isn’t a meaningful component of retirement planning. Furthermore, you don’t necessarily have sell a business in order to extract value – it may be possible to borrow against those assets or bring in new investors or partners.
I have had the oppty in the past to work alongside several Ultra-High NW individuals who are in business for themselves. Their assets were universally comprised of actively managed business and real estate interests, not passive securities. These UHNW folks were shocking devoid of cash & passive securities – preferring instead to double-down on a sure bet – their own skills and talents. Maybe inherited wealth would be a different matter with goal of wealth preservation vs wealth accumulation.
But, as I’m fond of saying, I have never met anyone that became seriously wealthy via a balanced portfolio of stocks & bonds. Yes, you can become well off thru saving and investing in the market, as all the ESI millionaires have so aptly demonstrated, but if you’re looking for an eight, nine digit NW, I have not yet seen it.
While a primary residence does not usually generate cash flow and cannot be easily subdivided, there are nonetheless ways to monetize it while you live in it via conventional or reverse mortgage. And towards the end of one’s life that equity in your home could ultimately be used to fund your eldercare if you’ve burned thru your nest-egg. Even with the best laid plans, sometimes assisted living is a better option than aging in place. Lastly, if you age in place, the value ultimately passes along to your heirs and/or beneficiaries.
As previously noted, I run my numbers two different ways. Assets (including anything and everything that would have a liquidation value) minus liabilities is a useful tool. So, is a liquidation analysis accounting for all the taxes, commissions, fees, penalties, haircuts, etc. it would take to sell everything. That too is a very valuable tool.
For purposes of retirement I do not include primary residence, but for terms of telling someone my net worth, I might include it. The reality is I live in the Bay Area and my house is worth over a million dollars. If I moved I would be able to buy two or three houses which would add to my countable net worth, and which I may do some day, but for now pri,art residence is not included
If someone owns a Primary Residence worth 2 million dollars with no mortgage, and has another 1 million of investments, what would their “Net Worth” be? Of course it should be considered in Net Worth. “Net Worth” is not the same as money you will use to fund retirement, or your liquid assets.
This is an easy one for me. I always include my house in net worth questions. Net worth as a financial tool is designed to show how much a business (in this case, your household) is worth. It is not a FI tool, that is Income, Operating Expenses, and Cashflow from an accounting perspective. If someone asks about FIRE and you respond with Net Worth, it is the same as responding by saying “Hammer”. Yes it is a tool, but the wrong one.
The question I have about net worth, that I never see answered is pre-paid life insurance. So my parents purchased a life insurance policy, which is pre-paid (so no ongoing expenses), and is paid when they both die. My siblings and I are the beneficiaries. Technically the insurance policy is in my name, it has a surrender value, and I could cash it in tomorrow if I wanted (but would have pissed off my parents and siblings). But the insurance policy has a sizable number which is mine, when both parents die, and there is no if’s, or’s, or but’s about it, and no ongoing expenses (so it cannot go away). Do I count this as an asset in the net worth discussion?
I would say it’s up to you. I would probably count some of it, maybe at the surrender value level, knowing it will be worth much more in the long run.
I generally don’t include my homes value when estimating my net worth for two reasons: 1) It’s difficult to put an accurate number on the value, and 2) I’m more interested in the change of my net worth over time, so if I assign a fixed value to my house for comparison (in the case of not including it, that fixed value is $0) I’ll still get a decent idea of the change in my net worth over time.
I do put the purchase price of the home on my NetWorthShare.com account as the value of the home, but the actual value of the house, as far as I can tell from county tax assessment and sites such as Zillow, has gone up.
Do you include the value of your home/primary residence in your net worth? Why or why not?
I do the calculations both ways. But, I need someplace to live, so I primarily rely on the calculation without including the house. As to why (besides needing to have a place to live), a few reasons. 1) I don’t think I can do a really good job estimating my home equity, so even if I am conservative, how accurate is the number. 2) we have about 65-70% equity in the house, so I’m comfortable in the case of an extreme downside situation the house isn’t a drag on the net worth and 3) it is so illiquid that I can’t tap that money in the case of an emergency.
If you do not include the value of your home, do you include the mortgage on that home? Why or why not?
As mentioned above, we have significant equity, so there really is no downside to not including the mortgage balance
Are there any other “special” additions or subtractions to the traditional definition that you make when calculating your net worth? Why or why not? I tend to not include the value of unvested stock grants through my employer until their vesting is imminent given the fluctuation in value of the stock and the fact that I could always be laid off (although the likelihood is quite remote).
Net worth without your home as an asset isn’t net worth IMO- maybe you can call the assets less your home value- “liquid assets”.
As far as the value of your home- not all assets have clearly defined values. If you are concerned you can use a conservative number for these assets. You can even update the valuations quarterly if needed. Plenty of people include rental properties as assets included in NW so it can be done. 🙂
If you include valuable collectables in NW you will have the same challenges defining the asset value too right? But what if you have an original Van Gough? It might worth more than your house so how can you ignore that?
Daveso –
I personally put anything in the house in a separate category of assets, which I affectionately call “Stuff”. If I owned a Van Gough, or my piddly coin collection, or my 16 computers, that is all stuff that I attribute an asset value to. Furniture, paintings, appliances, electronics, CD/DVD/Blu-Ray collections are all stuff. I also use the fair market value for items (like my king bed was purchased for $1200 but I could probably get $100 for it now). Again net worth is all about what you would get if you sold it off now, like if you died and no one in the family wanted it. Replacement is a separate list, for insurance purposes.
Makes sense to me. At the end of the day how you categorize your “wealth” doesn’t really change it… but it’s important when communicating.
As far as categorizing “stuff” I don’t really do that though- I have some assets that are worthy of assigning a value to- like my old comic book collection. I know I can sell it wholesale tomorrow for $20K (and it’s insured). On the other hand I don’t bother counting up my furniture and misc electronic gizmos… just not with it IMO. That all said- they are assets!
You’re always going to need a place to live, so why would you include the value of your home when calculating net worth? At least, that’s how the conventional wisdom I was taught goes.
To a large degree that makes sense. Of course, it depends on why you’re calculating your net worth. If you’re trying to sum up what the size of your estate is that you are going to leave to heirs, then including your home (less any outstanding mortgage) makes sense. On the other hand, if you’re calculating NW so you can figure out whether you have enough to declare financial independence, then it may not make sense.
You have to live somewhere, so including your home for many people would end up being a “wash” – even if they’re planning on moving. The exception, of course, would be for those who are planning on downsizing and have more equity in their home than they are going to end up using when they downsize. For people in high-cost real estate markets (San Francisco, Boston, NYC), the additional funds can be significant, so it would make sense to factor them in.
For the rest of people, probably not a good idea, because you gotta live somewhere!
Not sure why I’m so drawn to this thread. 🙂 But here’s what Wiki says about NW below. Not sure why everyone is messing up the meaning to NOT include a house just because you live there. LOL. NW has nothing to do with liquidity or whether you live at your “asset” or drive it. Determining if you are FI requires a lot more than just NW as a consideration as many have pointed out.
“Individuals
For individuals, net worth or wealth refers to an individual’s net economic position, the value of the individual’s assets minus liabilities. Examples of assets that an individual would factor into their net worth include retirement accounts, other investments, home(s), and vehicles. Liabilities include both secured debt (such as a home mortgage) and unsecured debt (such as consumer debt or personal loans). Typically intangible assets such as educational degrees are not factored into net worth, even though such assets positively contribute to one’s overall financial position.”
Why is this even up for debate? Net worth is the simple formula you eluded to, assets-liabilities. If you are not using that formula, then you are calculating something else, which is not net worth. If course, it’s your prerogative to calculate any formula you’d like, but you still have to call a spade a spade.
I agree with Ben and Daveso. Net worth is net worth. It’s not complicated. Assets-liabilities. What’s the value of what you own? How much do you owe? If you died tomorrow, what is your entire estate worth after everything is sold and every debt is paid? That’s your net worth.
Liquidity, Retirement Income, the roof over your head… all irrelevant to the net worth figure. People are muddling up their retirement savings, passive income, liquidity, goals and income with NET worth. They are different items and those of us who hang out in the financial independence part of the web should at least get it straight.
For myself, I don’t add stuff like vintage cars or jewelry. Partially because it’s too hard to keep track of those, and partially because overall, even if 200K ish in value, they have no relevance to my retirement and income plan, and thus are annoying to include or update. They literally just sit there and we enjoy them with no plans to cash in on any of it. When my NW was lower, though, I enjoyed including them because heck, I was trying to reach a goal and every penny counted.
On another note, I think I can safely say that most American homeowners have a large portion of their net worth tied up their personal residence. For most of the elderly in my family, and among my friends parents and grandparents, the house is pretty much it for NW. These are just average people with no FIRE goals, but they own the house they live in and, thank goodness, because it turns out to be their best retirement lifeline. They down size and cash out.
From theFederal Reserve’s Survey of Consumer Finances:
The median net worth of the average U.S. household is $97,300.
From 2013 to 2016:
The median net worth of homeowners ($231,400) increased 15%.
Renters or other nonhomeowners –median net worth decreased by 5% to $5,200.
I should have clarified that I don’t use personal items such as cars in my TRACKER of net worth, and my retirement calculator, although I fully agree and understand that they are, indeed part of my net worth.
I’d edit my post for clarity, but I don’t see a way to do that.
I do include my home value in my net worth, else I wouldn’t be a millionaire. I also consider it income… when you sell for $200,000+ profit. Everyone one is different, but I do still have a goal of $1,000,000 not counting my home when I retire.
I include it in my “net worth” number but it is not part of my retirement planning number. I think it is important to use the real cash value after the transaction net of fees and taxes. In my case my home’s value is roughly $2.5M mortgage free, I use a conservative $1.9-$2M after realtor fees and cap gains. The home was purchased at the height of panic and despair during the last economic crisis for cash when blood was running in the streets because I knew it was a good long term buy. The previous owners had a $3M mortgage and had spent $4M on it in total building it…I purchased for $1M and homes on the lakefront street today sell for in the range of $1M for a teardown to $6M.
So yes in my case it has an investment component because at the time of purchase I knew it was a great deal, wasn’t my forever home, is a good hedge against inflation, and a ridiculously awesome waterfront place to enjoy sunsets and boat rides from the backyard. My quality of life absolutely increased because of my home without a shadow of a doubt. Ten years later it makes up a small percentage of my net worth compared to my liquid assets so it feels like a good utilization of funds. If/when I sell it, there will be no change/increase in lifestyle spending if anything costs will go down and there are just more units sitting in an account I won’t spend. First world problems : )
We do not include our primary residence in our net worth calculations. My simple rule is that if your asset pays you or can be converted to cash, same day, without effecting its spot market value, you have an asset. I view our home as quality of life asset, not a financial asset. Quality of life assets deliver intangible, phycological “income”.
I do include it in my net worth calculations but I use an adjusted net worth value for planning purposes. The adjustment subtracts house & automobile values. I make this adjustment for two main reasons.
1) Unlike other assets, I have to replace the house if I sell it. I need to live somewhere so if I sell the house, I need to buy another house or increase my expenses via rent payments. The same can be said for the car. If I sell it, I have to buy another car or my public transit/rideshare/taxi expenses increase.
2) Houses & cars are not as liquid and fungible as my other assets. I can extract the cash value of my stocks, mutual funds, bonds & ETFs within 1-3 business days. A house has to go through escrow which adds 30 to 60 days. Also, price transparency is an issue. Your realtor or appraiser may value the house at any level. You can slap any asking price on the house or car. Ultimately, the final sales price is what matters. You don’t know what that is until the sale is finalized. Even if you take a 2nd mortgage or HELOC, you have to essentially pay interest to access the equity in your house. Compare that with stocks. You know the final sales price at the moment you transact.
I do use the house value for one planning scenario – my worst case scenario. This is where I have exhausted all my assets and assume I sell the house to live in a studio apartment. Under most generous expense scenarios, I can live to age 90 with 95% certainty of not running out of money. I have a few stress case scenarios where I reduce spending to extend the number to ~95 to 100 with 95% scenario. The studio apartment scenario is the worst of the worst case scenarios. In that scenario, I can live past 100 with 95% certainty. Albeit, that would be a squalid way to finish out my life. Only 0.03% of the US population is projected to live to age 100 so I doubt I will have to worry about that. I don’t know what percent live to be 90. My father lived to be 91 so I decided make 90 “my targeted end date.”
I actually read an article on this several years ago and it resonated with me. Living to 100 – very low probability, but 90+ left a different impression.
Here is an article that may help. It says plan for 95. The concept isn’t when will you die, but what is the collective probability that you and your spouse make it to 90+.
https://www.usatoday.com/story/money/columnist/powell/2016/10/05/life-expectancy-actuaries-live-die-retire-retirement/89407296/
As you mentioned, from a definition point of view, net worth does include assets, and a house is an asset, so I include it.
I think the question to include the house or not in the net wealth is rather a vocabulary issue. From what I understood, the logic behind not including house into the net worth is not to count the most illiquid assets as Steveark explained. When looking at corporate finance and accounting vocabulary, there are already names for measures that account for this “liquid versus illiquid assets” problem such as the working capital and the acid-test ratio. I believe that this debate about including or not the house in the net worth could be resolved by simply finding equivalent terms for personal finance 😊
So what about including 401K funds when you are 50? It’s not really liquid either.. I suppose it is with a fine. I notice some people that own businesses include value of their businesses too- not always very liquid.
IMO keep it simple. Include all assets and just articulate what part is illiquid. Not a big deal really as in most cases it’s clarified in the story where the ‘ful’l net worth comes from.
Oh Miguel, You smart 🍪!!
I include the equity of my primary residence in my net worth. My current plan is to retire to a lower cost of living area and at this point I could sell it and buy a house in cash with the equity I already have. By the time I’m ready to retire I could possibly buy 2 houses, one to live in and one as a rental with the equity I should have in my house simply because I live in a HCOL area currently.
-Mike
Yes! I include the estimated Fair Market Value of the house in my Net Worth and also discount the FMV due to estimated transaction fees associated with selling/liquidating the asset.
The question I have and struggle coming to terms with is my tax-deferred IRA’s. Do I count the full account balance or do I discount the balance due to future tax liabilities which will eventually need to be reconciled some time down the road? Technically, I believe I should using anticipated future tax-load but I don’t due to psychological reasons. (Currently tax-deferred IRA’s make up almost half of my NW. I’ve been making conversions to Roth to knock that number down). So, as of now I don’t but I also remind myself when looking at the number that the number isn’t “real.”
I find this thread strangely interesting because everyone seems to want to adjust their NW numbers differently. LOL
Mike- to your point- it would be torture to discount all you assets based on future taxes/expenses. I’m sure lots of us have taxable accounts with unrealized gains- should we adjust for that too? Uggg.
Anticipated future tax-load?? I’m sure you can make estimates but who really knows what it will be?
Then there are others that want to calculate present value of annuities which in many cases is worse IMO.
I say keep is simple. To each their own. But it sure makes things difficult when everyone interprets it differently.
I a have similar thought process with regards tax liabilities. I own stock in a company which has appreciated massively but is yielding a dividend of a fraction of a percent. To sell up and crystallize this gain will attract a CGT rate of 33% (Ireland) so do I include the pre sale (theoretical value) or post sale (actual accessible funds) value in my net figure?
Interesting article, and I have thought about this a bit myself, and I land on net worth is the basic asset-liabilities equation to me and I think that’s how it’s actually defined. Where I think people get tripped up is trying to use it to guide their decisions and realizing they need to live somewhere so they can’t just use a number. In the end people are simply trying to understand where they are and why they need to take the next step (whatever that may be).
So, I use net worth overall, but honestly I have decoupled it from my retirement analysis. For that I have asked myself – what is standing in the way of me retiring and it seems to come down to 5- basic categories. 1) post-retirement funds ( ie when I can access retirement accounts). 2) funds until I’m 60 (when I can access retirement accounts). 3) housing. 4) healthcare expenses 5) children’s college funds.
Splitting into these categories gives me a tangible way to monitor my progress, and if one variable changes I can update the total picture.
So, while the concept of net worth is important we need to remember why people started tracking it to begin with. At one point someone decided it was important, and others agreed so it became popular. In the world there are so many different drivers for individuals and more complex variables that it’s probably easier to manage 5 simple categories than one complex calculation.