Incorporating your home into networth calculation

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Topic Author
nakedbird226
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Incorporating your home into networth calculation

Post by nakedbird226 »

Hi All.
I have been keeping track of my net worth for about a year and a half now since discovering this forum and it has been great to see the progress that I have made so far. Having said that I finally decided to bite the bullet and buy my first place so that I no longer have to commute over an hour to work :D .

My question is do people incorporate their home into their net worth in anyway?....and if so how? I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. Thanks in advance.
cusetownusa
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Re: Incorporating your home into networth calculation

Post by cusetownusa »

Yes I include my house in my net worth calculation. I include all assets and liabilities in my net worth calculation...not sure why you would want to ignore some and not others.

Net Worth is simply your Assets minus your liabilities.

The value of the house is the Asset and the mortgage is the liability. You could simply use the price you paid for the house as the asset value.

Its as simple as that.
dsmil
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Re: Incorporating your home into networth calculation

Post by dsmil »

Yes, definitely include your house and mortgage into your net worth calculation. To be conservative, you could subtract 6% (closing costs) from your home value to get the true value if you had to sell.
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

nakedbird226 wrote:Hi All.
I have been keeping track of my net worth for about a year and a half now since discovering this forum and it has been great to see the progress that I have made so far. Having said that I finally decided to bite the bullet and buy my first place so that I no longer have to commute over an hour to work :D .

My question is do people incorporate their home into their net worth in anyway?....and if so how? I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. Thanks in advance.
nakedbird226,

I don't include my house into my net worth calculation. That includes the home equity. I treat the house as pure expense. In my opinion, it is not safe to include the house and the equity as part of net worth calculation. There are 3 reasons why I do that.

1) By not including the house into net worth, I will prevent myself for over-buying the house.

2) The house and the home equity is not accessible easily when I am unemployed in a recession. Hence, it cannot help me financially when I needed the money most.

3) I am only willing to buy a house that is 1/3 of my all other asset excluding the house. Hence, I do not need to include my house into my net worth calculation in order for me to feel good. See (1).

<< I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. >>

It is not safe. If you include the equity, you will be buying a lot more house. It is typical human behavior.

In a recession, the house could be underwater. Hence, your home equity could become zero or negative.

KlangFool
Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

Do a site search and you may well find 1000 posts to read.

The question has proven to be contentious.

I am in the camp that the value of your house goes on the balance sheet, as does the mortgage.

Others disagree.

You can find 1000 posts times 323.6 words per post = 323,600 word covering the various details of why people feel the way they do.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
letsgobobby
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Re: Incorporating your home into networth calculation

Post by letsgobobby »

"net worth" has one definition. Just one.

All assets - all liabilities.

You can argue whether future income streams, inheritances, etc are assets now or not.

But there is no argument that your home is an asset, and your mortgage is a liability. Therefore you must include them in your 'net worth' as the term is commonly defined in the English language.

If you want to create a new metric, say, "net worth without home", then do that. Or "net worth excluding my car", then do that. Maybe you mean "investable net worth" or "net worth that I can compare to others in surveys of high net worth individuals, which excludes their primary residence': fine.

I do calculate my net worth but it isn't a helpful figure because I can't spend my home or car and I always need a place to live and a thing to drive.

The most useful metric for me is, "investable retirement assets." This excludes my bank accounts, my cars, my house, my college savings, my furniture, my computer, etc. It's just money in retirement accounts and taxable savings including I bonds, EE bonds, paper municipal bonds, etc. This is what I refer to as "my portfolio" or "my retirement portfolio."
niceguy7376
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Re: Incorporating your home into networth calculation

Post by niceguy7376 »

KlangFool wrote: It is not safe. If you include the equity, you will be buying a lot more house. It is typical human behavior.
In a recession, the house could be underwater. Hence, your home equity could become zero or negative.
Why would I buy a bigger house just because I have good equity in my current house?
In a recession, just as our investment value goes down, the home equity will also go down (if your home value is going down).
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lthenderson
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Re: Incorporating your home into networth calculation

Post by lthenderson »

nakedbird226 wrote:My question is do people incorporate their home into their net worth in anyway?....and if so how?
My question to you is why do you track your net worth? If you use your net worth to calculate retirement date, then adding the house value into your calculation can be dangerous.

Personally I keep track of all my retirement assets (house, cars, etc. are not part of this) and subtract liabilities (which includes the home loan) which tells me how much I have to retire with, a much more useful figure than net worth. The only reason for keeping track of your net worth in my opinion is to boost your ego or get in a 'who's richer' pissing match with someone.
Topic Author
nakedbird226
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Re: Incorporating your home into networth calculation

Post by nakedbird226 »

lthenderson wrote:
nakedbird226 wrote:My question is do people incorporate their home into their net worth in anyway?....and if so how?
My question to you is why do you track your net worth? If you use your net worth to calculate retirement date, then adding the house value into your calculation can be dangerous.

Personally I keep track of all my retirement assets (house, cars, etc. are not part of this) and subtract liabilities (which includes the home loan) which tells me how much I have to retire with, a much more useful figure than net worth. The only reason for keeping track of your net worth in my opinion is to boost your ego or get in a 'who's richer' pissing match with someone.
Honestly for me keeping track of my net worth was useful for getting out of debt, and just made me feel good in general to know that I was heading in the right direction financially. I like to think I am pretty humble about stuff like that and I plan on keeping that information to myself.
cusetownusa
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Re: Incorporating your home into networth calculation

Post by cusetownusa »

KlangFool wrote:
nakedbird226 wrote:Hi All.
I have been keeping track of my net worth for about a year and a half now since discovering this forum and it has been great to see the progress that I have made so far. Having said that I finally decided to bite the bullet and buy my first place so that I no longer have to commute over an hour to work :D .

My question is do people incorporate their home into their net worth in anyway?....and if so how? I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. Thanks in advance.
nakedbird226,

I don't include my house into my net worth calculation. That includes the home equity. I treat the house as pure expense. In my opinion, it is not safe to include the house and the equity as part of net worth calculation. There are 3 reasons why I do that.

1) By not including the house into net worth, I will prevent myself for over-buying the house.

2) The house and the home equity is not accessible easily when I am unemployed in a recession. Hence, it cannot help me financially when I needed the money most.

3) I am only willing to buy a house that is 1/3 of my all other asset excluding the house. Hence, I do not need to include my house into my net worth calculation in order for me to feel good. See (1).

<< I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. >>

It is not safe. If you include the equity, you will be buying a lot more house. It is typical human behavior.

In a recession, the house could be underwater. Hence, your home equity could become zero or negative.

KlangFool
By leaving out your house you aren't really calculating your net worth then. Net worth is simply your assets minus your liabilities..a snapshot in time...not a way for you to feel good. By this logic why include anything into your net worth, including retirement savings?
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goingup
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Re: Incorporating your home into networth calculation

Post by goingup »

nakedbird226 wrote:Hi All.
My question is do people incorporate their home into their net worth in anyway?....and if so how? I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. Thanks in advance.
Net Worth = Assets minus Liabilities

Your home is included in your Net Worth. For many people it is the single biggest component of the calculation. It is simply:
Your home value (if you were to sell it today) minus your mortgage

I have never found it particularly useful to keep track of Net Worth other than a broad idea of it.
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HomerJ
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Re: Incorporating your home into networth calculation

Post by HomerJ »

I put our home equity in my net worth calculation to make me feel good (our house is paid off, and it's a sizable part of our wealth).

But money in my house doesn't really help my retirement numbers. I guess if I plan to downsize in retirement (and many of us do!), I'd be able to get at some of that money, but it's unlikely that I'm going to be able to touch most of my home equity in retirement.

Here's what I mean. I figure I want $60,000 a year to live in retirement (assuming a paid off house in the Mid-west)... So using the 4% rule, I need $1.5 million in investable assets. That's the number that matters, not my net worth.

If I have $1 million in investments, and a $500,000 house, I'm not going to be able to easily generate $60,000 a year from that.

So, in my head, I'm shooting for $1.5 million and a paid-off house. If I downsize someday to a $300,000 house, then yes, I'll be able to access some of that equity and get to $1.5 million and a paid-off house faster.

But I'm always going to need a place to live, so cashing it all out doesn't really help that much, since then suddenly I have to pay rent, and my $60,000 a year expenses in retirement may jump to $80,000 a year.

Anyway, yes I like to think to myself, "Wow, our net worth is $X + $House. We're doing so well!". But when doing the hard numbers for retirement planning, currently I ignore my house equity.
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

cusetownusa wrote:
By leaving out your house you aren't really calculating your net worth then. Net worth is simply your assets minus your liabilities..a snapshot in time...not a way for you to feel good. By this logic why include anything into your net worth, including retirement savings?
cusetownusa,

1) That is your opinion which I do not agree with.

<<Net worth is simply your assets minus your liabilities..a snapshot in time...not a way for you to feel good. >>

2) Really? If that is true, why do we find that people that count the house will spend more money to buy their houses?

<<By this logic why include anything into your net worth,>>

3) Human beings are not logical when it comes to buying a house.

KlangFool
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HomerJ
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Re: Incorporating your home into networth calculation

Post by HomerJ »

HomerJ wrote:But money in my house doesn't really help my retirement numbers.
I do need to revise this by saying that paying off the house does directly help my retirement numbers, because then my expenses are much lower in retirement, which makes my required investable assets lower.

It all matters. It's just a numbers game in your head.

The trick is not to double-dip. Don't think "My house is paid off, so I only need THIS much a month to live!", and then think "Hey, my house is worth THIS much, so I can include that number in my retirement planning"
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

goingup wrote:
nakedbird226 wrote:Hi All.
My question is do people incorporate their home into their net worth in anyway?....and if so how? I am guessing that it is somewhat safe to include the equity that you have built up, but I would like to hear others takes on this. Thanks in advance.
Net Worth = Assets minus Liabilities

Your home is included in your Net Worth. For many people it is the single biggest component of the calculation. It is simply:
Your home value (if you were to sell it today) minus your mortgage

I have never found it particularly useful to keep track of Net Worth other than a broad idea of it.
goingup,

<<For many people it is the single biggest component of the calculation.>>

Which proves my point. For many people, they buy too much house. Hence, it matters. If they do not count, they would had spent a lot less.

KlangFool
Last edited by KlangFool on Tue Jan 05, 2016 10:22 am, edited 1 time in total.
barnaclebob
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Re: Incorporating your home into networth calculation

Post by barnaclebob »

I include it using the formula of 90% of the zillow value - mortgage balance = home equity.

If you aren't including your house in your net worth then you aren't calculating your net worth, you are likely calculating your investible assets.
Sconie
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Re: Incorporating your home into networth calculation

Post by Sconie »

I don't include it, however, that is just my specific preference----I don't see where it does all that much good or is otherwise something that I can actively and regularly manage, rebalance and the like------provided, of course, that one is not in a "negative" situation.

In a similar vein, I don't see much benefit in calculating the worth of one's "human capital," yet----for many----that asset, including the ability to earn money is far and away much, much, much more important that the value of one's residence. Don't believe it? Ask someone like EmergDoc or the participants over at White Coat Investor what the value of their skills are relative to the value of their present abode. Just sayin'. :-)
I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant. - Alan Greenspan
barnaclebob
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Re: Incorporating your home into networth calculation

Post by barnaclebob »

KlangFool wrote:
goingup,

<<For many people it is the single biggest component of the calculation.>>

Which proves my point. For many people, they buy too much house. Hence, it matters. If they do not count, they would had spent a lot less.

KlangFool
Too much house usually means too much mortgage which negates the increased value of the house they purchased...
chisey
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Re: Incorporating your home into networth calculation

Post by chisey »

I include it in net worth. It is an asset and my mortgage is a liability, and I include all such items in my NW. I assume no appreciation in value after I purchased it and subtract a realtor fee of 5% so that it's a realistic/conservative estimate of equity. I also only count half of it as I'm on the mortgage with my partner and we keep separate finances.

BUT I also calculate two other quantities that exclude the home:

Net Investible Assets (NIA): This basically excludes property (cars, houses, etc.) and the debt associated with it. This leaves you with the value of your "portfolio" including cash, taxable investments, tax-advantaged investments, consumer debt, etc.

Net Liquid Assets (NLA): This takes NIA and removes tax-advantaged accounts. This leaves you with liquid funds quickly available without penalty.

All three of those have a particular meaning and a particular use. Rather than redefining terms by excluding home from NW, I just use different metrics for different purposes.
Johno
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Re: Incorporating your home into networth calculation

Post by Johno »

This question has an obvious objective answer: your house is an asset, you mortgage is a liability, therefore it's part of your net worth, which is assets minus liabilities. This is not a matter of opinion but a fact based on standard definitions.

There are sometimes arguments though to not recognize objective financial reality but some modified personalized subjective reality because recognizing objective reality would, it's claimed, lead to counter productive behavior. This is seen with 'house isn't an asset' as well as 'you haven't lost anything till you sell' among fallacies sometimes promoted on this forum. But the key is to recognize that these are personal mental techniques, not to argue either that they are objective reality, or to argue that objective reality is a matter of opinion. The matter of opinion is to adopt an objectively false financial concept in the belief that will lead to a better outcome. Because people are not strictly rational, it might work out that way.

But it might not. For example in case of the 'my house isn't an asset' fallacy, that's fine if the person down to the deepest level is not counting on the house as a source of funds. But in some cases 'my house isn't an asset' can in fact be putting one's head in the sand to the risk of house price decline as a significant % of assets, when in fact they might eventually have to look to the house as a source of funds (via reverse mortgage, sale to fund assisted living, etc). And just because one doesn't plan to do this doesn't mean one couldn't ever be forced to.

I think it's better to stick with objective reality. An owned home is an asset, the mortgage if any a liability, components of net worth which equals assets minus liabilities.
Last edited by Johno on Tue Jan 05, 2016 10:39 am, edited 1 time in total.
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PaddyMac
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Re: Incorporating your home into networth calculation

Post by PaddyMac »

I include it Net Worth, but I don't care too much about net worth at the end of the day. It's just a number.

What's important to me is how much retirement savings we have and when we can retire. The equity in the home is not relevant as we don't plan to move. (I think of it as an emergency backup in case we need a reverse mortgage for medical expenses in old age.)
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Aptenodytes
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Re: Incorporating your home into networth calculation

Post by Aptenodytes »

nakedbird226 wrote:
Honestly for me keeping track of my net worth was useful for getting out of debt, and just made me feel good in general to know that I was heading in the right direction financially. I like to think I am pretty humble about stuff like that and I plan on keeping that information to myself.
In this circumstance omit the house value because you cannot control that. No need to feel bad about things you couldn't have prevented.

If you are prone to take out too much home equity then you want to include home equity liabilities (mortgage, heloc) because you can control that and you do want to feel bad if let it go up.
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goingup
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Re: Incorporating your home into networth calculation

Post by goingup »

barnaclebob wrote:
KlangFool wrote:
goingup,

<<For many people it is the single biggest component of the calculation.>>

Which proves my point. For many people, they buy too much house. Hence, it matters. If they do not count, they would had spent a lot less.

KlangFool
Too much house usually means too much mortgage which negates the increased value of the house they purchased...
Net Worth includes the value of your home as an asset. Net worth also includes your mortgage as a liability. That's a fact.

If folks want to brew their own definitions to thwart potential bad behavior that's great, but it's not the recognized definition of Net Worth.
sesq
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Re: Incorporating your home into networth calculation

Post by sesq »

I include it. I am in the words have meaning camp and net worth is all assets less all liabilities (including deferred taxes). I also track personal financial assets (NW-home equity, cars and 529 plans) and do my asset allocations based on that.

You asked how - I just use zillow. My house has had a fair bit remodelling (not all of which will be recovered in a sale, but some will) so the zillow number is a bit low, but I figure my selling costs are about what I gained from improvements. After all, IT IS JUST AN ESTIMATE.

I use KBB for the cars. Mint will give you both numbers if you want it to. I have to update the mileage on the cars.

Since I mentioned it, I use a blended 30% rate to estimate the tax liability on my tax deferred retirement accounts. I don't have a material amount of unrealized gains in my taxable account, if I did I'd use the capital gains rate plus state taxes for that portion. I think a 15% or 20% rate could also make sense for my retirement accounts if I were to retire early and/or move to a state without an income tax. I view 30% as a conservative estimate.

I don't bother tracking the liquidation value of my personal assets (furniture / jewelry / clothes / tools) since I think its not material. I do include the 529 accounts in my net worth since I still own the account. I don't book a liability for future tuition since I don't owe anything. I suppose if I got divorced and there was a court order compelling me to fund college I would make an estimate. I don't calculate human capital or an NPV of social security.
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Ice-9
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Re: Incorporating your home into networth calculation

Post by Ice-9 »

I keep up with my net worth using an account aggregator. From about 2006 to 2013, I used Yodlee Moneycenter, and since then I've used Personal Capital. (Both free, but with Personal Capital, you have to let them call you twice a year so you can tell them you're still not interested in their advisor services.)

Both of the aggregators include mortgage and an online home value estimator's estimate of my house's value. Personal Capital uses Zillow. Yodlee used to use Zillow, but I noticed recently (because I didn't abandon the Yodlee account when I switched) that they have switched to another estimator, Zip Realty I think.

If I were seriously thinking of selling my home, I wouldn't trust the online estimators. I'd probably study recently sold comps in that situation and come up with a better number. However, I just want to keep general, ongoing track of my net worth, and have a general idea of my progress toward the retirement "number." For this, an estimator's home value is fine. Zillow is actually estimating my home's value CONSIDERABLY lower than all other online estimators I've seen, including the one Yodlee uses, so I just use the Net Worth estimate I get on Personal Capital to be on the safe side. Also helps that it's calculated for me every time I log in. :D Easy peasy lemon squeezy.
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

barnaclebob wrote:
KlangFool wrote:
goingup,

<<For many people it is the single biggest component of the calculation.>>

Which proves my point. For many people, they buy too much house. Hence, it matters. If they do not count, they would had spent a lot less.

KlangFool
Too much house usually means too much mortgage which negates the increased value of the house they purchased...
barnaclebob,

Many people in a housing bubble believe that they are rich until they are not.

KlangFool
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

Folks,

My goal is to be financially independent. So, counting the house as part of the net worth does not help me. Hence, I do not count that.

KlangFool
Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

I guess I find the behavioral reasoning to not consider house value in networth kind of odd. Kind of like I find it odd when people set their alarm clock off 10 minutes because it helps them get to work on time. Or I find it odd that ostriches (supposedly) put their head in the sand. But if it works for you, all is good.

I don't see how it is dangerous if one is rational, but then if one is not it is good to know that.

I personally think honest and complete answers are more useful than pretend answers.

Different people are in different places. For me, while I have no immediate desire to sell my house, if I needed the money I could certainly downsize to a lower cost house and free up cash. That is good to know for example for contingency planning say for forced earlier retirement. Or for future planning for things like moving into assisted living (which happens more than many like to believe).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
corysold
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Re: Incorporating your home into networth calculation

Post by corysold »

KlangFool wrote:
barnaclebob wrote:
KlangFool wrote:
goingup,

<<For many people it is the single biggest component of the calculation.>>

Which proves my point. For many people, they buy too much house. Hence, it matters. If they do not count, they would had spent a lot less.

KlangFool
Too much house usually means too much mortgage which negates the increased value of the house they purchased...
barnaclebob,

Many people in a housing bubble believe that they are rich until they are not.

KlangFool
But isn't that true of many people in a stock bubble as well?
barnaclebob
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Re: Incorporating your home into networth calculation

Post by barnaclebob »

KlangFool wrote:Folks,

My goal is to be financially independent. So, counting the house as part of the net worth does not help me. Hence, I do not count that.

KlangFool
Then you aren't calculating net worth, you are calculating "Klangfool's economic health indicator".
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HomerJ
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Re: Incorporating your home into networth calculation

Post by HomerJ »

Rodc wrote:I personally think honest and complete answers are more useful than pretend answers.
I don't think anyone here is trying to change the meaning of net worth. Nor do I think we being irrational, or denying "objective reality".

What we are saying is that net worth, which does indeed include one's home equity, is not the most useful metric to use for retirement planning.

A simple metric for me is "I need $2 million with a paid off house in order to retire". Very easy to measure how I'm doing towards my goal.

Now, I could just say "I need a net worth of $2.5 million" instead (because my house is worth $500,000). But that's not really true. If my house goes up or down in value (and therefore my net worth), my net worth goal will change.

For instance, say there is a housing boom, and my house is now worth $800,000... Can I retire with just $1.7 million in investments? No, my expenses stay the same (actually probably go up with property tax increase). Sure it's possible to account for that. I just change my goal to $2.8 million in net worth. Hate to constantly change my goal though.

It's easier to just keep track of the real goal of $2 million in investments that throw off cash or that can be liquidated for cash.

Yes, I could sell the house, and get some of the money out. That is always an option. It's an option I don't want to take. If I need the money in my house, then my retirement plan failed.

It's still there... and I love the fact that I have a cushion there just in case things do go bad, but the goal is to never have to touch it. If I'm dipping into my retirement home equity (well, besides maybe a one-time downsize just because we don't need as much house), it means our finances are in downward spiral.

Yes, you have to account for it. It's real money. It's important. It's part of your net worth.

But I don't think it's irrational to treat home equity differently in your financial plan.
letsgobobby
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Re: Incorporating your home into networth calculation

Post by letsgobobby »

HomerJ wrote:
But I don't think it's irrational to treat home equity differently in your financial plan.
It's only irrational if you keep calling it net worth, but it isn't.
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Artsdoctor
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Re: Incorporating your home into networth calculation

Post by Artsdoctor »

It is amazing how contentious this topic is.

The definition of net worth is All Assets minus All Liabilities. It's difficult to argue with that.

There are two questions, though. One: how are you going to assess the value of your house accurately? Two: is this really actionable?

If you're going to rely on Zillow, you have to appreciate that the accuracy is zip code dependent. I can't believe our house is worth what Zillow says it is. And if you're going to use Redfin, it's also zip code dependent when it comes to accuracy. I'd LOVE to get what Redfin says my house is worth but the value is over 30% higher than Zillow!

As far as actionable, you do have to ask yourself what you're hoping to accomplish with this information. Is it for estate planning purposes? And if you're going to include your house, why wouldn't include cars and art as well (which can easily exceed many people's home values). If it's just to make you feel good, fine. But realize that it's probably not going to influence your investment decisions.

One thing that is extremely important, though, is to keep track of your cost basis. If you're living in an extremely expensive market, you want to have a general ballpark of potential capital gains. It can also help with remodeling decisions.
Last edited by Artsdoctor on Tue Jan 05, 2016 2:24 pm, edited 1 time in total.
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HomerJ
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Re: Incorporating your home into networth calculation

Post by HomerJ »

I was just thinking that maybe people in the expensive East and West Coast states view this differently from those of us in lower-cost-of-living states.

If I sell my house and move, I'm going to have to buy a similarly priced house (or pay the equivalent in rent). Yes, I could (and probably will) buy a smaller house, but I don't see me getting much cash out of my housing equity when I retire. I already live in LCOL area.

Someone from California, on the other hand, has the opportunity to pull significant equity out of their homes if they are willing to move to LCOL area. So it makes sense that their home equity may be a much bigger part of their retirement planning.
Last edited by HomerJ on Tue Jan 05, 2016 2:25 pm, edited 1 time in total.
ktd
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Re: Incorporating your home into networth calculation

Post by ktd »

Everyone here knows net worth = assets - liabilities.

However, the people who bought a lot of house calculate equity to make them feel good.

The people who have lots or higher in investable assets don't care about the equity of their house.
joebh
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Re: Incorporating your home into networth calculation

Post by joebh »

It makes sense to include your home in your net worth calculation, but it has limitations.

How much is your home worth is somewhat more difficult to assess than some of your other assets.

Is it worth more or less than what you paid for it? Is it worth what Zillow says? Is it worth what your tax assessment says? Or do you plan to have a professional come and assess your property?

In reality, a home is only worth what someone else is willing to pay for it at the time you decide to sell it. So until your sale time comes, you are just guessing.

So yes, use it in your calculation. But be aware that your estimate may not be very accurate.
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Watty
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Re: Incorporating your home into networth calculation

Post by Watty »

letsgobobby wrote:"net worth" has one definition. Just one.

All assets - all liabilities.
+1

Not including it would be very misleading since three neighbors with identical houses could have these situations;

1) A paid off house.
2) Someone rents the house next door.
3) Someone else bought the house next door at the housing peak and still owes $50K more on it than it is worth.

I just did my annual update of a simple excel spreadsheet of my net worth as of January 1st and I even have the current value of my cars which I get off of edmunds.com. That also makes sense so that my net worth does not change a lot in years when I buy a car.

One thing to keep in mind though is that looking at something like a safe withdrawal rate you use the totals of investments excluding the house you live in.
KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

corysold wrote:
But isn't that true of many people in a stock bubble as well?
corysold,

There is a significant difference. We know the price of our stock at any time. And, we can sell our stock at almost any time immediately. It is not the same with the house. It is lumpy and not liquid.

If a person has to sell their house, the person is at a very bad financial shape. And, the person will sell at low price for their house.

KlangFool
Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

What we are saying is that net worth, which does indeed include one's home equity, is not the most useful metric to use for retirement planning.
That is what you are saying. And I agree.

Others are indeed saying something else:
My goal is to be financially independent. So, counting the house as part of the net worth does not help me. Hence, I do not count that.
That is only one. There are others.

I do not see the value in trying to redefine a perfectly well known and precise term to be something it is not. If one want something other than networth by all means use something else, but use correct terms.
Last edited by Rodc on Tue Jan 05, 2016 2:40 pm, edited 2 times in total.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
The Wizard
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Re: Incorporating your home into networth calculation

Post by The Wizard »

letsgobobby wrote:"net worth" has one definition. Just one.

All assets - all liabilities...
Correct.
Primary use of net worth numbers, I think, are for situations involving estate liquidation, such as after death or divorce.
Net worth has pretty close to zero connection to retirement planning, which should be focused on cash flow streams...
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KlangFool
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Re: Incorporating your home into networth calculation

Post by KlangFool »

Watty wrote:
letsgobobby wrote:"net worth" has one definition. Just one.

All assets - all liabilities.
+1

Not including it would be very misleading since three neighbors with identical houses could have these situations;

1) A paid off house.
2) Someone rents the house next door.
3) Someone else bought the house next door at the housing peak and still owes $50K more on it than it is worth.

I just did my annual update of a simple excel spreadsheet of my net worth as of January 1st and I even have the current value of my cars which I get off of edmunds.com. That also makes sense so that my net worth does not change a lot in years when I buy a car.

One thing to keep in mind though is that looking at something like a safe withdrawal rate you use the totals of investments excluding the house you live in.
Watty,

<< 1) A paid off house.
2) Someone rents the house next door.
3) Someone else bought the house next door at the housing peak and still owes $50K more on it than it is worth.>>

Misleading to who??

It is very simple and the same in all 3 cases.

The annual expense = X. When their net worth (excluding the house) is equal to 25 times X, they are financially independent. In fact, it simplifies everything.

I would argue that counting the other way is a lot more complicated. And, it is dependent on the market value of the house at any moment.

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Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

The annual expense = X. When their net worth (excluding the house) is equal to 25 times X, they are financially independent. In fact, it simplifies everything.
A) has $10M house, paid for, no savings, then gets laid off at age 59 and cannot find a job
B) has a $1M house paid for, $100K in savings, then gets laid off at age 59 and cannot find a job
C) rents, $200K in savings, then gets laid off at age 59 and cannot find a job.

Which one would you prefer to be and why?

By your accounting which appears to in the best shape?
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
TravelGeek
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Re: Incorporating your home into networth calculation

Post by TravelGeek »

I have a million dollars in cash. I go buy a house for $500k.

Did my net worth just drop by 50% on closing day? Don't think so.

But I think it is important to keep in mind what HomerJ said above. I personally am mostly interested in the value of my invested assets. I don't call it net worth. And if someone asked me what my net worth is, I wouldn't tell them anyway :)
cusetownusa
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Re: Incorporating your home into networth calculation

Post by cusetownusa »

Simply amazing that there is even a debate about how to calculate net worth...The definition of net worth is about as clear as any definition can be, its a very simple definition, and the math is just very basic algebra. :oops:
Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

Rodc wrote:Do a site search and you may well find 1000 posts to read.

The question has proven to be contentious.

I am in the camp that the value of your house goes on the balance sheet, as does the mortgage.

Others disagree.

You can find 1000 posts times 323.6 words per post = 323,600 word covering the various details of why people feel the way they do.
10043 and counting!

Told you. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
keystone
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Re: Incorporating your home into networth calculation

Post by keystone »

cusetownusa wrote:Simply amazing that there is even a debate about how to calculate net worth...The definition of net worth is about as clear as any definition can be, its a very simple definition, and the math is just very basic algebra. :oops:
I'm with you 100%, however I saw a thread a couple of months ago where it was being debated/interpreted. I was amazed.

On the topic of home equity, it certainly matters to me. I know with 100% certainty that I could sell my house and move to many parts of the country where I can buy a house that's twice the size for half the price. I would be a fool not to take that into consideration when it comes to my family's financial picture.
Rodc
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Re: Incorporating your home into networth calculation

Post by Rodc »

Here are two real world examples.

I live in a high cost of housing area. Property tax is fairly high, though there are places that are worse. We have a number of elderly residents on fixed incomes, and over time property tax (and medical costs) has gone up faster than any COLA adjustments. They get very pinched, and for various psychological reasons can't fathom considering their home values as part of their net worth. They feel like they cannot travel or eat out etc. They are stressed about making ends meet. We have Elder Services run by the town, but many just will not consider the value of their homes as something that can be used and live diminished lives as a result (they are not happy about their situations, unlike some with no money who are ok with that). I have worked in the past to help the town set up things like tax deferral where taxes get paid when the person or estate eventually sells so no costs like a reserve mortgage and people still won't do it.

But they that have paid off homes that are far larger than they need worth ballpark $1M. Even a very modest tax deferral or reverse mortgage would change their situations drastically for the better. If you are 85 and living on a few thousand dollars per year of discretionary income, even taking out $10,000 a year of value would make a huge difference in lifestyle. Do that from age 85 to age 95 and even if the value of the house does not go up you have only reduced what you leave your kids by $100,000 out of $1,000,000.

But because they count the house value as somehow being some other kind of money than regular money they can't see this. It is frankly a tragedy for some of these folks.

This is what comes from irrational thinking.

A related example that happened to many of my past neighbors who bought back in the 1950s, who said they would never sell, ended up needing assisted living and did not have the savings or income and did sell their houses to make the move. If it were not for the value of their homes they would be in state run bottom of the line assisted living situations. But instead they are in upper level care facilities. The value of a house can be very important and if that is not recognized proper understanding of options is lost.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Twins Fan
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Re: Incorporating your home into networth calculation

Post by Twins Fan »

Yet another net worth thread to show there are hundreds of ways to check it.

Yes, net worth is simply assets minus liabilities. Include your home and mortgage.

The other way people like to track it is simply tracking account balances.

Whatever makes on feel good I suppose.
Johno
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Re: Incorporating your home into networth calculation

Post by Johno »

It seems on this thread there is some recognition of how indefensible it is to say net worth doesn't include housing assets/liabilities. This is seen in posts sort of criticizing those who have stated the reality of the standard definition, but at the same time 'subtlely' changing the subject from the title 'incorporating your home into net worth calculation' to instead arguing that net worth isn't a be and end all measure...which nobody said it was. Or to saying some assets might be treated differently in planning than others...which nobody said they shouldn't be. I also view my CD's and FDIC insured cash differently in my planning than my stocks. A large % of the latter could go 'poof' and takes decades to recover if at all within my lifetime, much less likely with the former. It doesn't mean stocks are excluded from net worth, which is the stated topic.

And that relates to the way in which it can outright dangerous to say 'house doesn't count'. Those in favor of the personal mental accounting (whether or not they insist on wrongly calling it 'net worth') of assets not including house tend to focus on their virtue in avoiding the siren song of an 'inflated' view of their financial situation. What they neglect is that if you remove house's value from the picture, you're also removing the risk of its decline from the picture. And that could in fact affect you if other things don't work out and you're eventually forced to sell or reverse mortgage. And that risk *is* partly actionable. As discussed in a recent thread, an undrawn reverse mortgage line of credit acts essentially like a govt insured put on the value of your home. The available line will increase according to a formula which could outrun the value of the house, likely so if the house value declines. It depends on costs and doesn't work for expensive houses (above the limits for reverse mortgage size, iirc in the $600k's) but the mental gymnastics of calculating a non-net worth net worth excluding housing assets could divert one's attention from addressing such a risk management issue at all.
Non7WoodUser
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Re: Incorporating your home into networth calculation

Post by Non7WoodUser »

Rodc wrote:
The annual expense = X. When their net worth (excluding the house) is equal to 25 times X, they are financially independent. In fact, it simplifies everything.
A) has $10M house, paid for, no savings, then gets laid off at age 59 and cannot find a job
B) has a $1M house paid for, $100K in savings, then gets laid off at age 59 and cannot find a job
C) rents, $200K in savings, then gets laid off at age 59 and cannot find a job.

Which one would you prefer to be and why?

By your accounting which appears to in the best shape?

C) Cash is king.
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