Incorporating your home into networth calculation

[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?

C) Cash is king.

Always a joker in every crowd!

I'll take A and sell the house in a couple of days for $5M-$8M and buy the $1M house from B and have $4M-$7M left over in cash, B will have $950K or so after the sale and rent your apartment you can no long afford on the $40K or so yearly income* they can generate, since $200K will generate about $8k of yearly income for you and you will be out on the street..

(actually they could take more income since they only need to cover a few years before SS kicks in)

[Ninnie]

You die tomorrow. Your estate's net worth = assets - liabilities. That includes the house.

Or let's try this. You get divorced tomorrow. Does a judge throw out the house when dividing assets. Of course not. It is included.

Would also like to add, my house is more more liquid than my retirement fund, which I will not touch for 25 years. I could put up my house for sale this weekend and get a dozen offers (not kidding, my neighbor did just that a few months ago).

[Ron Ronnerson]

Yes, I include it per the definition of net worth. If I take $100k I have sitting in a bank and put it toward the mortgage to lower my liability, I didn't just become $100k poorer.

[obgraham]

I track my net worth on a simple Excel spreadsheet. I look at it every 6 months, and now have a 15 year history on that sheet. (Some would say I'm obsessing, others would say that's too infrequent!)
I don't live in a high-priced place, but I do include my home, and a couple of small real estate things, and I add in a trade-in value of my vehicles.

But I also have a line that just includes "liquid" assets, excluding stuff I would have to sell, like house and cars. This is the number that I really pay attention to.

[japan4ever]

There's an important point here: Houses (with or without mortgages) make calculations about retirement more complicated.

For retirement, we need a financial asset net worth measure that shows investible assets net of financial liabilities, to calculate the cash flow we can match against living expenses.

With a house with no mortgage, living expenses are lower - but only for so long as the house is livable (don't need a new roof, etc.). You can mitigate that caveat by allocating cash flow each year to upkeep / long-term replacement cost of the dwelling. But this will not cover you in a local bad property event, e.g., when the government condemns the lot next door to build a supermax prison, next to which you are unwilling to live and which dramatically reduces the house's resale value.

With a house with a mortgage, you have the same problem coupled with the fact that, in the next-door-supermax scenario, the home may be underwater and the repayment of the mortgage (assuming the mortgage is not non-recourse) represents a direct hit to your investible assets, a double-whammy to your cash flow.

Thus, ignoring the home from the net investible asset scenario doesn't just understate the assets of the homeowner - it ignores the asset concentration risk of the homeowner. Ignoring the house is not a good option.

How about we ignore the value of the home from the asset side of your net investment asset equation (your home is not an investment and could well be worth nothing at the time you need to sell it), and include the cost of renting an acceptable dwelling in case your home value evaporates in the needed cash for living expense side of that calculation? Any mortgage balance should be deducted from the asset side of the net investment assets as well, in case you have to sell your home for nothing and pay off the mortgage (unless the mortgage is non-recourse).

This approach may make homeowners look at their spreadsheets and grow unhappy about the financial results of home ownership - but this reflects the consumption decision that is home ownership.

[ryman554]

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.

This is exactly what I do.

NIA tells me my retirement number -> the income stream I could generate from the things I can sell.
NLA tells me the state of my emergency fund and what I can afford to spend monthly as I drive NIA higher..
NW tells me how rich *I could be* were I to sell off everything and start fresh or move somewhere cheaper.

As you say, all have different uses. NW "feels good", but is not as actionable as the rest.

[KlangFool]

Folks,

In summary, by excluding the house, I only need to keep track of one number. Meanwhile, others has to create a few more numbers. I can safely ignore the home equity, mortgage, and so on from my consideration because it is 1/3 or less of my "Net Worth".

There is a larger question behind this calculation. People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more. The larger question is this: how much the house value should be in relationship to the overall portfolio?

There are people that do not want to think about this at all.

KlangFool

[grettman]

My question is do people incorporate their home into their net worth in anyway?....and if so how?

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.

Just two weeks ago I applied for term life insurance and on page one I was asked "What is your net worth". So right there is an example that comes to mind as to why you might want this information other than the examples you offered.

[sesq]

The larger question is this: how much the house value should be in relationship to the overall portfolio?

My home has fluctuated as a percent of my net worth (calc'd the old fashion way) as I have moved, borrowed, remodeled or suffered losses. It hasn't really changed my behavior other than feeling angst in 2008 that I could have paid off the mortgage with all the money I lost in the market (typical loss aversion). I wasn't quite as giddy in 2013 when the market spiked and I should have been thankful that I didn't pull everything off the table to pay the mortgage.

As you can see the share that was home equity has bounced around a fair bit. I think the "answer" will be impacted by a person's age. When I was younger my house value was greater than my net worth. I suppose the relationship to the portfolio becomes most salient when the portfolio is the income source needed to maintain the property.

Code: Select all

			Price | Mortgage | Equity
BB	8/2004	152%	-120%	32%
BB	2005	132%	-101%	31%
BB	2006	126%	-89%		38%
BB	2007	119%	-78%		40%
BB	2008	119%	-68%		51%
BB	2009	142%	-91%		52%
BB	2010	101%	-59%		42%
BB	2011	94%		-70%		25%
BB	2012	86%		-56%		30%
BB	2013	66%		-41%		25%
BB	2014	49%		-29%		20%
BB	2015	38%		-4%		33%
BB	2016	35%		-9%		26%

[KlangFool]

The larger question is this: how much the house value should be in relationship to the overall portfolio?

My home has fluctuated as a percent of my net worth (calc'd the old fashion way) as I have moved, borrowed, remodeled or suffered losses. It hasn't really changed my behavior other than feeling angst in 2008 that I could have paid off the mortgage with all the money I lost in the market (typical loss aversion). I wasn't quite as giddy in 2013 when the market spiked and I should have been thankful that I didn't pull everything off the table to pay the mortgage.

As you can see the share that was home equity has bounced around a fair bit. I think the "answer" will be impacted by a person's age. When I was younger my house value was greater than my net worth. I suppose the relationship to the portfolio becomes most salient when the portfolio is the income source needed to maintain the property.

sesq,

<<When I was younger my house value was greater than my net worth. >>

In my case, the answer is never. When I was younger, I bought a corresponding cheaper house or rent.

<< I suppose the relationship to the portfolio becomes most salient when the portfolio is the income source needed to maintain the property.>>

The property has to be maintained either by salary income or portfolio income. Given that a person always has the possibility of losing their job and unemployed for a while, the property will be maintained by the portfolio income.

We are shaped by our life experiences. I am surviving from one recession to another for the past 20 to 30 years. Hence, I could never assume that everything could go well for any extended period of time. I had multiple periods of unemployment lasting more than a year.

KlangFool

[Johno]

There is a larger question behind this calculation. People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more. The larger question is this: how much the house value should be in relationship to the overall portfolio?

Definitions are based on rational distinctions, they don't start with assumed irrational behavior and then work back to what a definition should be to supposedly avoid or ameliorate irrational behavior. You basically propose the latter, observe the (supposed) effect of a definition on irrational behavior and change the definition in pursuit of better behavior. But irrationality is inherently individual and infinitely variable. That's why definitions are best based on objective reality.

My house is a small % of my net worth, but it's still part of it whether I acknowledge it or not. Net worth=assets-liabilities. My house is an asset, if I had mortgage that would be a liability. That's not subject to my attitudes, feelings, beliefs, etc. And what % of my net worth my house 'should' be is a not a 'larger question', it's an unrelated question.

[Rodc]

There's an important point here: Houses (with or without mortgages) make calculations about retirement more complicated.

Maybe if you only think in terms of one number - net worth and don't think things through. We all have different situations and there is no one size fits all retirement planning approach so there will be some level of complication. Computing a fake net worth does not seem very simplifying to me.

**********************************************************************

We are shaped by our life experiences. I am surviving from one recession to another for the past 20 to 30 years. Hence, I could never assume that everything could go well for any extended period of time. I had multiple periods of unemployment lasting more than a year.

It seems you have had a very tough time. I am sorry that happened. And maybe then for you, you need to take an irrational approach to deal with the issues that arose. I could see how that might be useful for a very tiny set of people. I suggest that is not a sound basis for making recommendations to others on how to approach their finances.

[Bill M]

My question is do people incorporate their home into their net worth in anyway?....and if so how?

It is clear that your home is an asset. And it is clear that net worth is assets less liabilities. So it should be.

But...some of those assets can easily be valued, and some can't. Things that can be easily valued, like bank accounts, mutual funds, stocks, bonds, etc, you just look at the latest statement (or latest quote from an exchange) and use that figure.

Things that can't be easily valued need something special. A statement I've always referred to in my employer's annual report, part of the explanation for "Level 3" assets in the company's pension plan, sums this up:

Alternative investments, including investments in private equity, real estate, natural resources (included in real assets), mezzanine and distressed debt (included in partnerships/joint ventures), limited partnership interest, fixed income securities and hedge funds do not have readily available market values. These estimated fair values may differ significantly from the values that would have been used had a ready market for these investments existed, and such differences could be material.

So how useful is a net worth statement if it "may differ significantly" from reality? So I don't include it.

[KlangFool]

There is a larger question behind this calculation. People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more. The larger question is this: how much the house value should be in relationship to the overall portfolio?

Definitions are based on rational distinctions, they don't start with assumed irrational behavior and then work back to what a definition should be to supposedly avoid or ameliorate irrational behavior. You basically propose the latter, observe the (supposed) effect of a definition on irrational behavior and change the definition in pursuit of better behavior. But irrationality is inherently individual and infinitely variable. That's why definitions are best based on objective reality.

My house is a small % of my net worth, but it's still part of it whether I acknowledge it or not. Net worth=assets-liabilities. My house is an asset, if I had mortgage that would be a liability. That's not subject to my attitudes, feelings, beliefs, etc. And what % of my net worth my house 'should' be is a not a 'larger question', it's an unrelated question.

Johno,

<< You basically propose the latter, observe the (supposed) effect of a definition on irrational behavior and change the definition in pursuit of better behavior.>>

This is the engineer's approach.

<< That's why definitions are best based on objective reality.>>

This is the scientist's approach.

I am an engineer. A definition is only as good as its end result.

<< if I had mortgage that would be a liability. That's not subject to my attitudes, feelings, beliefs, etc. And what % of my net worth my house 'should' be is a not a 'larger question', it's an unrelated question.>>

If you have 1 billion in asset, do you care about your 1 million mortgage? For all practical purposes, it is irrelevant. Only an accountant and / or scientist would care that it is a liability. For a normal human being / engineer, at the first order of approximation, we can safely ignore that mortgage.

In my opinion, people spend too much time looking at tree and miss the forest.

KlangFool

[tennisplyr]

Yes I include it. My home equity represents fully one-half of my totals assets. That allows me to sleep well at night.

[rgarling]

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Lewis Carroll

[Rodc]

My question is do people incorporate their home into their net worth in anyway?....and if so how?

It is clear that your home is an asset. And it is clear that net worth is assets less liabilities. So it should be.

But...some of those assets can easily be valued, and some can't. Things that can be easily valued, like bank accounts, mutual funds, stocks, bonds, etc, you just look at the latest statement (or latest quote from an exchange) and use that figure.

Things that can't be easily valued need something special. A statement I've always referred to in my employer's annual report, part of the explanation for "Level 3" assets in the company's pension plan, sums this up:

Alternative investments, including investments in private equity, real estate, natural resources (included in real assets), mezzanine and distressed debt (included in partnerships/joint ventures), limited partnership interest, fixed income securities and hedge funds do not have readily available market values. These estimated fair values may differ significantly from the values that would have been used had a ready market for these investments existed, and such differences could be material.

So how useful is a net worth statement if it "may differ significantly" from reality? So I don't include it.

The challenge is that stocks if anything are more unstable than houses. I know the value of my stocks right this moment pretty well. But if I am thinking about future uses of the money my current estimate (which is good today) is a very lousy estimate of its value at the time I might use it. Even out one year the value is very uncertain - might be up 30% or down 50% for example. Very unlikely my house will go up or down in value by that amount over a year. On the other hand I do have uncertainty in the today value of my house - maybe on the order of 10% (enough sales around here I think to get to that level, though of course it might be higher). In the end the uncertainty out say a year is a combination of uncertainty today and uncertainty in changes over time. If I had to bet I would say the combined uncertainty in home value out a year is less than the combined uncertainty in my stock holdings.

That be as it may, the more important point is that in any financial number be it net worth, liquid assets, college funds or whatever is to keep some reasonable level of the current and future uncertainty in mind. It would be wise to keep in mind some sense of the value if things go south, maybe not absolute worst case, but say 90th percentile "bad case" or 80th as a sort of floor, along with a median type estimate.

If one is really worried about this it would be better to just value the house in conservative manner (frankly a good idea if one is really going to make decisions based on the value of a house).

[Johno]

There is a larger question behind this calculation. People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more. The larger question is this: how much the house value should be in relationship to the overall portfolio?

Definitions are based on rational distinctions, they don't start with assumed irrational behavior and then work back to what a definition should be to supposedly avoid or ameliorate irrational behavior. You basically propose the latter, observe the (supposed) effect of a definition on irrational behavior and change the definition in pursuit of better behavior. But irrationality is inherently individual and infinitely variable. That's why definitions are best based on objective reality.

My house is a small % of my net worth, but it's still part of it whether I acknowledge it or not. Net worth=assets-liabilities. My house is an asset, if I had mortgage that would be a liability. That's not subject to my attitudes, feelings, beliefs, etc. And what % of my net worth my house 'should' be is a not a 'larger question', it's an unrelated question.

Johno,

<< You basically propose the latter, observe the (supposed) effect of a definition on irrational behavior and change the definition in pursuit of better behavior.>>

This is the engineer's approach.


If you have 1 billion in asset, do you care about your 1 million mortgage? For all practical purposes, it is irrelevant. Only an accountant and / or scientist would care that it is a liability. For a normal human being / engineer, at the first order of approximation, we can safely ignore that mortgage.

In my opinion, people spend too much time looking at tree and miss the forest.

I am an engineer by training and that is definitely not an engineer's approach, to define things in terms of the supposed effect of the definition on irrational human behavior. It's some of kind of social 'science' approach maybe, but an unsound one in any case. It's not a matter of ignoring human irrationality, it's the inadvisability of redefining standard terms according to a particular person's view of human irrationality.

On the last point you're speaking of whether something is too small a number to worry about. That's pretty much the opposite of your main theme previously, that 'irrational exuberance' caused by acknowledging the reality of a large house value in net worth has to be counteracted by irrationally excluding it from net worth.

I don't include non-material amounts in my net worth calculation (cars, personal possessions etc) because...they aren't material, different issue. My house is a small %, but not immaterial.

[HomerJ]

Computing a fake net worth does not seem very simplifying to me.

Oh, it absolutely does make it simpler.

It's like rat-holing chips at a blackjack table... Say you start with $200, and find yourself up to $500. Sure, you could keep $500 out on the table, but think to yourself, "Okay, I want to walk away a winner, so I'm going to quit if I'm drop to $300."

But then you have to keep track of the pile while playing the game and talking to friends. An easier method is to just put $300 in chips into your pockets, and play with the $200 that is left on the table. Completely ignore the $300 in your pocket. Much easier way to handle money.



Yes, I know this is a terrible example, but it's not that far off.

But that said, I do totally agree with you guys that net worth is net worth, and you have to use a different metric if you want to exclude your house.

This was a good post.

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.

[NotWhoYouThink]

How many legs does a dog have, if you call the tail a leg?

[KlangFool]

How many legs does a dog have, if you call the tail a leg?

NotWhoYouThink,

Does your treatment to a dog changes depending on whether you call the tail a leg?

No. Hence, it does not matter.

Do you buy more or less house depending on whether you include the house as part of asset?

Yes. Hence, it matters.

Things matters if it affects your action and behavior. Or else, it don't.

KlangFool

[Rodc]

But that said, I do totally agree with you guys that net worth is net worth, and you have to use a different metric if you want to exclude your house.

Right. Where this thread went off the rails is a couple of folks made a leap to assuming that net worth is computed for the sole purpose of retirement planning and it is the only number the OP might use, and moreover was likely to use it incorrectly.

For me my primary calculation is what continuous inflation adjusted income I can generate in retirement if we retire today, in N years, at age 65, and I do not use the value of my house because my desire is to continue living it, or perhaps another house of similar value. Now we could sell it move somewhere less expensive which gives us some margin of error. A margin of error I do not ignore or pretend does not exist but for now do not pay much attention to.

This number is uncertain primarily because I do not know the future value of my stock holdings, but for this moderately rough calculation I just use the 4% WR of current value as a planning number in pencil.

When we get to seriously considering retiring I will be more explicit in regards to these issues, but for now it is not too important.

For college funds I use the cost of attending the state flagship U and keep track of how many years our college savings will cover. The primary uncertainties are in cost inflation and stock returns, though the allocation to stocks at this point if pretty modest.

[mpowered]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

[KlangFool]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

mpowered,

+100.

That is my whole point. Most normal people only use one number, "net worth" to judge how well that they are doing. They could not bother to count 3 to 4 separate numbers.

KlangFool

[letsgobobby]

Folks,
People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more.

KlangFool

Do you have any evidence for this? It sounds completely made up.

[letsgobobby]

I suggest that those who want to calculate their net worth excluding their house... calculate their net worth excluding their house.

[Rodc]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

mpowered,

+100.

That is my whole point. Most normal people only use one number, "net worth" to judge how well that they are doing. They could not bother to count 3 to 4 separate numbers.

KlangFool

-101

I don't know why you don't just say:"I do not like net worth so I do not calculate net worth."

That is all this really comes down to.

[mpowered]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

mpowered,

+100.

That is my whole point. Most normal people only use one number, "net worth" to judge how well that they are doing. They could not bother to count 3 to 4 separate numbers.

KlangFool

-101

I don't know why you don't just say:"I do not like net worth so I do not calculate net worth."

That is all this really comes down to.

I think it stems down to the fact that people use the Net Worth number inappropriately. Net worth is a measure of your total assets minus liabilities, and is an overall picture of how you are doing at any given time. It should not be used for retirement purposes, evaluating risk, or any other more specialized purpose. It is rule of thumb at best.

To get a more useful number, you have to make adjustments to that number.

[Rodc]

Most normal people only use one number

That is quite a leap. Just your wild guess.

I think it stems down to the fact that people use the Net Worth number inappropriately.

Again, just a wild assumption.

But more importantly, how does that change the established definition of the term "net worth"?

Again, all you are both saying is you don't like the use of net worth. Which is fine. It does not change the definition of net worth.

[SGM]

I don't calculate net worth. I am much more interested in how much income I am producing in retirement from multiple streams.

I find formal budgets and calculation of net worth to be tedious and not important to me. I acknowledge home value may be very important to others and if they want or need to calculate net worth have at it.

If someone asks me the value of my home or property I ask them with obvious sarcasm if they also want to see my 1040, if they are rude. I have very big feet and it is best to avoid them. If they are not offensive I just tell them I have no freakin' idea.

[SQRT]

I don't calculate net worth. I am much more interested in how much income I am producing in retirement from multiple streams.

I find formal budgets and calculation of net worth to be tedious and not important to me. I acknowledge home value may be very important to others and if they want or need to calculate net worth have at it. .

Agree. Cash flow in retirement is paramount. So if you have a generous pension you may want to capitalize it and include that in you "earning assets" calculation for comparability. But in the end what does it matter? Depends on what you are concerned about.

For instance if you are worried about your legacy, include investable assets plus real estate, not pensions. If you are concerned about cash flow and lifestyle, include investable assets and pensions but not personal use real estate.

In my case investable assets represents about 50% of our total "net worth" with personal use real estate about 20% and capitalized pension about 30%. Lots of ways to look at this stuff. No universally correct answer in my view.

[HomerJ]

For me my primary calculation is what continuous inflation adjusted income I can generate in retirement if we retire today, in N years, at age 65, and I do not use the value of my house because my desire is to continue living it, or perhaps another house of similar value. Now we could sell it move somewhere less expensive which gives us some margin of error. A margin of error I do not ignore or pretend does not exist but for now do not pay much attention to.

This is exactly how I do it. It is possible to get some money out of your house when you retire if you downsize (or move from California to Texas, and upsize!), but for me, I plan to live in this house or a house of similar value in retirement, so that money is not available, unless things really go bad... in which case, I'll pull the $300 in casino chips out of my pocket, and I'll be happy I have that cushion.

[Broken Man 1999]

Folks,

In summary, by excluding the house, I only need to keep track of one number. Meanwhile, others has to create a few more numbers. I can safely ignore the home equity, mortgage, and so on from my consideration because it is 1/3 or less of my "Net Worth".

There is a larger question behind this calculation. People that choose not to include house into net worth calculation spend a lot less on their houses in relationship to their overall portfolio. Meanwhile, those that include the house spend more. The larger question is this: how much the house value should be in relationship to the overall portfolio?

There are people that do not want to think about this at all.

KlangFool

I have to disagree with you on the bolded statement. I have purchased housing three times, and never considered my net worth at all. Income and credit cost (interest) are the main drivers in deciding how much home you can/should purchase. My second house cost a third of what my current house did. But, when I bought my current house, I was making a great deal more money. And, my net worth when I bought my current house was much, much greater than when I bought my second house. Still capped my house purchase at twice gross earnings, same formula I used to purchase second house. I probably had negative net worth when I bought my first house.

So far as including the number in your net worth, according to the definition you should. I see my net worth as my future consumption. And, certainly the value of a home can be consumed, in different methods. But day to day I concern myself with my investments, without much thought to my home's value. The home's value as a percentage of net worth fluctuates around 10%-12%, not a whole lot, but it is an asset.

Broken Man 1999

[chisey]

That is my whole point. Most normal people only use one number, "net worth" to judge how well that they are doing. They could not bother to count 3 to 4 separate numbers.

KlangFool

So "most normal people" will go through the effort of adding all their investments and bank accounts and debts to understand their financial position, but can't bother to subtract one number from another. I see. FWIW, "most normal people" wouldn't know their Net Worth from their ZIP code. Those of us who track it are already exceptionally focused (and anal) people.

It takes me two seconds to get from NW to NIA, and another two to get from there to NLA. Actually it takes me no time except the original 2 seconds to set up the formula in my template spreadsheet. I even took an extra minute or so to set up a calculation of Earned Retirement Income % (ERI%) to tell me what fraction of my goal retirement income my current investible savings are projected to provide . . . because I'm a nerd and that's another number I need to see rising (really, it's the one that matters most but it's also the most subject to error).

[inbox788]

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?

Easy. I'd rather have the $10M house that I could cash out and spend or use.

B is in the best shape. A probably inherited the house. No savings means A is a spender. $10M home has high upkeep. He may have been a trust fund kid that finally spent it all. Lowest job prospects. Going from rich to poor is a hard fall. C probably is lowest income, never able to buy a home. Has most savings, but still has to pay rent. maybe a blue collar fellow, but finding such jobs at older age is hard. B might be a white collar working stiff that had a decent job to pay off a $1M house.

Seriously, financial independence is a function of net worth and spending. Including home (equity) is part of the calculus.

[essbeer]

.....

[SouthernCPA]

Yes, I don't know why some on here have a problem with it. If you've got rental houses, those are also included in net worth as assets with their mortgages as liabilities. Same with primary residence.

It's not a liquid asset, but at the end of the day, it is an asset and could be converted to cash if need be. If it wasn't, we might as well all rent instead of buy. I can promise you the IRS views it as part of the estate value when you pass away.

[Rodc]

I think of it this way. You have lifestyle obligations: paying for a child's education, maintaining a standard of living, keeping a certain level of roof over your family's head. They aren't liabilities in the sense that a court can force a person to meet these obligations, but many of us still consider ourselves honor-bound to these obligations. So they function as liabilities.

And anytime you can exactly cancel out a liability with an asset you simplify the task of grasping your finances. If you've funded your 529 where you think it needs to be to pay for a child's education you can zero out the value of the 529 and the cost of the child's education.

Similarly, you can think of providing a home for your family as a liability. Owning your home is the satisfaction of that liability. I understand why a lot of people don't want to do that, but I don't think there is anything "fake" about choosing to think of your liabilities that way. It's just a different definition of "net", one that is focused on the maintenance of lifestyle. It has the benefit of being both simpler and more useful to many people. I think it is actually elegant.

That is the first logical post on the do not include it side, though I would point out that you are really saying it is included but since it cancels an equal liability you have chosen to not list either. Basically you counted both mentally. This is a rather different reason than Klang is using. That said if you want to include the future costs of housing one logically should include future cost of food and all sorts of things as well as future income streams (and that open the whole can of worms about counting SS) and you rapidly get into things that are clearly not assets.

And that might make sense for some. In my case I could not live here and buy a much lower cost house for the family. Once the kids are gone though the value of the house will be larger than the "liability". In particular, back to the real life example I list above, this is true in the extreme for many fixed income seniors in my town and the failure to account for this properly leads some to live a life of near poverty (or real poverty) when simply taping some of that very real net worth via deferred property tax or a reverse mortgage would greatly improve their situation.

[letsgobobby]

The practical purpose of knowing one's net worth is in estate planning and tax planning. In that context it is clear that homes and mortgages are part of one's net worth.

[japan4ever]

There's an important point here: Houses (with or without mortgages) make calculations about retirement more complicated.

Maybe if you only think in terms of one number - net worth and don't think things through. We all have different situations and there is no one size fits all retirement planning approach so there will be some level of complication. Computing a fake net worth does not seem very simplifying to me.

Rodc, I am not suggesting we compute a fake net worth number. I am suggesting that, whether we use a net liquid asset net worth number or a cash flow number or both to think about retirement, both numbers do not adequately reflect the illiquidity and concentration risk associated with having a single home make up a significant fraction of one's assets. If you own a home, and do not account for these risks in your modeling, you could be in a very difficult position if something bad happens to your home value which also makes you not wish to live there (and it's not uncommon for the drop in a home value to mean nobody wants to live there anymore - possibly including the unfortunate owner).

A net investible asset measure excluding home value but including any mortgage, or a cash flow model that adds in rent one will have to pay if the home becomes unlivable (and including any mortgage and its repayment as factors to reduce cash flow from investible assets), seems like how I would account for it. Do you account for these risks and if so how?

[schmitz]

My question is do people incorporate their home into their net worth in anyway?....and if so how?

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.

Just two weeks ago I applied for term life insurance and on page one I was asked "What is your net worth". So right there is an example that comes to mind as to why you might want this information other than the examples you offered.

Just curious- why did they need to know your net worth for term life insurance?

[Rodc]

There's an important point here: Houses (with or without mortgages) make calculations about retirement more complicated.

Maybe if you only think in terms of one number - net worth and don't think things through. We all have different situations and there is no one size fits all retirement planning approach so there will be some level of complication. Computing a fake net worth does not seem very simplifying to me.

Rodc, I am not suggesting we compute a fake net worth number. I am suggesting that, whether we use a net liquid asset net worth number or a cash flow number or both to think about retirement, both numbers do not adequately reflect the illiquidity and concentration risk associated with having a single home make up a significant fraction of one's assets. If you own a home, and do not account for these risks in your modeling, you could be in a very difficult position if something bad happens to your home value which also makes you not wish to live there (and it's not uncommon for the drop in a home value to mean nobody wants to live there anymore - possibly including the unfortunate owner).

A net investible asset measure excluding home value but including any mortgage, or a cash flow model that adds in rent one will have to pay if the home becomes unlivable (and including any mortgage and its repayment as factors to reduce cash flow from investible assets), seems like how I would account for it. Do you account for these risks and if so how?

None of that relates to the definition of what net worth is.

All you are saying is planning done poorly is not a good idea, and you need to account for various items using various metrics. I think everyone agrees with that point. Indeed you say, "If you own a home, and do not account for these risks in your modeling..." which I already said as well.

But none of that changes the definition of net worth.

[Bungo]

I include it for retirement planning, since part of that planning includes selling the house (Bay Area) and moving somewhere much cheaper. I don't include the full value of the house. I subtract the mortgage balance and I also subtract the estimated cost of buying a replacement house in the cheaper destination, because I'm only interested in how much the house will contribute to my liquid net worth (money spendable in retirement). If I were planning to "retire in place" then I would not include the house at all.

[SouthernCPA]

Rodc, I am not suggesting we compute a fake net worth number. I am suggesting that, whether we use a net liquid asset net worth number or a cash flow number or both to think about retirement, both numbers do not adequately reflect the illiquidity and concentration risk associated with having a single home make up a significant fraction of one's assets. If you own a home, and do not account for these risks in your modeling, you could be in a very difficult position if something bad happens to your home value which also makes you not wish to live there (and it's not uncommon for the drop in a home value to mean nobody wants to live there anymore - possibly including the unfortunate owner).

A net investible asset measure excluding home value but including any mortgage, or a cash flow model that adds in rent one will have to pay if the home becomes unlivable (and including any mortgage and its repayment as factors to reduce cash flow from investible assets), seems like how I would account for it. Do you account for these risks and if so how?

If my aunt was a guy, she'd be my uncle.

Net Worth includes all assets and all liabilities. You're arguing that there are better metrics for planning, which I agree with, but lets not try and redefine what net worth means.

[SGM]

I am just sort of brain storming: In terms of legacy it would be important to know the value of your home if you are splitting up assets, if one child gets the house and another gets an equivalent amount of cash or other assets. At what point you should pay get an appraisal? Probably get the appraisal when you are near to making some exchange. Or one of your children may get half or all of a house and the surviving parent or parents may have a life estate. That would be a time to get an appraisal.

Or if you are near the limits for transfer of wealth without paying a federal inheritance tax or a state inheritance tax which may be based on a different amount then it might be important. One could gift part of a home or other assets up to $14,000 per parent per year for each heir. So two parents could gift to 5 children $280,000 per year. Probably you don't want more than 1 individual heir to own the home unless that is by far the largest part of an estate. So you might pick one to gift part of the home and others part of financial assets. Most wealthy folks will have an estate attorney help them with this.

If you are going to estimate the value of your home for reasons other than legacy you may want to use the amount you paid for it. Then you could evaluate those decisions that you make on a regular basis concerning your investments. The changing value of your home would make it make a net worth calculation not valuable in seeing how those controllable decisions such as your AA and savings rate are affecting your wealth. You would have to subtract it out to see how you are doing which isn't very difficult. Whether your neighborhood is more or less desirable than when you bought it is not related to how well your investment decisions are on a daily or yearly basis.

Just take this as brain storming. I make no claim that it is helpful.

[The Wizard]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

Primary practical use of computing a couple's joint net worth is to facilitate a 50/50 split of it in a divorce.
I thought I explained this already...

[letsgobobby]

My question is do people incorporate their home into their net worth in anyway?....and if so how?

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.

Just two weeks ago I applied for term life insurance and on page one I was asked "What is your net worth". So right there is an example that comes to mind as to why you might want this information other than the examples you offered.

Just curious- why did they need to know your net worth for term life insurance?

They told me it's because they won't sell an inappropriate amount of insurance to someone, based on their income and assets. I guess it makes the insured too tempting a target.

[MnD]

Why not?

Once a year I update a spreadsheet with Dec 31 values of major assets (investments plus house), home value, debt, net worth, investment net worth, investments by account XIRR returns and absolute account changes (including subtractions and additions of funds). It take a couple hours while drinking coffee and recovering from New Years Eve.

It's interesting to see the trends and changes over the years. Not everyone that is systematically building wealth does this, but among the paycheck to paycheck crowd I'd speculate that this behavior is very uncommon, regardless of income.

It's likely we are going to sell the house and move when we retire in just a few years with pretty much a clean slate on what our new housing situation and cost is going to be so the current home value is not something we would just wall off and/or ignore.

[mpowered]

So I guess the answer is, it depends on the purpose for which you plan on using this net worth calculation.

Primary practical use of computing a couple's joint net worth is to facilitate a 50/50 split of it in a divorce.
I thought I explained this already...

Then you include everything.

[anonyvestor]

Despite all of the banter, your question was simple. Yes, the value of your house is part of your net worth. Just ask any creditor. This is a matter of law, not opinion.

All of this other chit-chat is about two questions you did NOT ask (which others apparently fear you SHOULD ask)

Namely:

1. How does one calculate the risk/leverage of a mortgage? (I don't think we even know if you have one)

Clearly in a normal market, if you have a $1,000,000 home with nothing down, you have higher risk (and potential return) than the individual who rents.

2. Should one include the value of one's home in the funds available for retirement planning?

(Which depends of course on whether or not you will be living in your home, amongst other factors.)

On this, you just have to be consistent.