Accounting for house in net worth, expenses

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Njm8845
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Accounting for house in net worth, expenses

Post by Njm8845 » Sun Mar 10, 2019 4:44 pm

I am new to home owning and am very torn about how to account for this new asset class in my various spreadsheets.

1. Net worth. Accounting for our house seems simple enough with the equation “Assets - Liabilities”. The hard part for me is determining what exactly these terms mean.
Assets - do you have your house appraised every couple years?
Liabilities - is this my loan amount (principle) or the amount I will end up paying (principle + interest)?
I see my total debts as what I will owe the bank, not just the amount I borrowed. However, if I consider that, then it seems like for Assets, I should consider what I will sell my home for as opposed to what it’s currently worth. And then my mind starts thinking of factoring in inflation and it all seems overly complicated.

2. Expenses. I have tracked expenses in a very detailed way since I took my first job. One of the categories is “housing”. It’s easy enough to input my monthly mortgage payments, no different than what I’ve done with rent. However, how do you handle the down payment? I put 30% down and this large sum will obviously blow any savings goal out of the water. I also plan on making extra payments occasionally. Should these be considered “housing” expenses as well? I’m not one to generally view my house as an investment, but these could be considered investments and not expenses, as I’m building equity. I’ve toyed with the idea of only putting the interest payments in as expenses, and not considering any amount of principle an “expense”.

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Re: Accounting for house in net worth, expenses

Post by LadyGeek » Sun Mar 10, 2019 6:26 pm

This thread is now in the Personal Finance (Not Investing) forum (net worth).
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JBTX
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Re: Accounting for house in net worth, expenses

Post by JBTX » Sun Mar 10, 2019 6:34 pm

I use quicken and have the house as an asset. But I always have left it at cost. Updating for changes in theoretical market value would be pointless and a waste of time. (But, if you wanted true net worth, you would update the home price to market value, but have a corresponding deduction for realtor fees and other selling expenses)

Also have the mortgage as a liability account.

The down payment is the upfront difference in the two and was a reduction of cash. It was not an expense.

Example

Increase Asset Home (debit) : 200k
Increase liability mortgage (credit): 160k
Decrease asset cash (credit) : 40k
Last edited by JBTX on Sun Mar 10, 2019 6:36 pm, edited 1 time in total.

tigers174
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Re: Accounting for house in net worth, expenses

Post by tigers174 » Sun Mar 10, 2019 6:36 pm

1. I just do what I bought the house for for the asset value and what I still owe for the liability. I ignore resale value and interest payments, because net worth doesn't really mean much anyways. It is also a snapshot view. If you were to sell next week, you wouldn't be paying all of the interest.

2. In my budget, I include the entire mortgage because that is the monthly expense. My budget also includes Roth IRA and 529 contributions. If you plan on paying extra every month, I'd include it in the budget too. If you plan on paying every other month, you could include half the payment in each month's budget.

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Kenkat
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Re: Accounting for house in net worth, expenses

Post by Kenkat » Sun Mar 10, 2019 6:45 pm

I use my current estimated value of my house, based on real estate valuation and Zillow, as the value of the asset portion of the house. I update occasionally, maybe every 2-3 years. I use my current mortgage balance as the liability portion attached to the house.

Net worth is a statement of your current position, so you wouldn’t really want to use future projected values or future interest due, etc. Interest is an expense. Since I use Quicken, every month the interest portion of my mortgage payment is captured as an expense and the principal portion reduces the mortgage, increasing net worth by that amount. Extra payments should be treated the same - reducing mortgage balance and therefore increasing net worth by that amount.

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Re: Accounting for house in net worth, expenses

Post by RickBoglehead » Sun Mar 10, 2019 6:53 pm

Each payment has an interest component and a principal component. Interest goes to an expense category, mortgage interest. Principal reduces the mortgage and thereby increases the value of the house by decreasing the amount of the liability (mortgage).
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Re: Accounting for house in net worth, expenses

Post by dcop » Sun Mar 10, 2019 7:09 pm

I have never used any real property in my NW figure. When the time came to sell then the net amount went into the NW. I've always never referred to my primary residence as an 'investment' until I made the decision to sell it. Many folks keep their primary residence until death hence not becoming liquid. All this can be construed as play on words I suppose but to me networth is Liquid - Debt. Then I guess if we want to complicate more we could figure in future taxes. Lot of ways to play the NW game.

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Re: Accounting for house in net worth, expenses

Post by JGoneRiding » Sun Mar 10, 2019 7:16 pm

How I do it : first couple of years I just use purchase price minus amount owed that month.

After a while I think there had been some appreciation I will once or twice a year adjust the price to Zillow minus a 10% discount for fudge factor and agent fees if sold.

This is close enough for my desired tracking purposes

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Re: Accounting for house in net worth, expenses

Post by baconavocado » Sun Mar 10, 2019 7:18 pm

Kenkat wrote:
Sun Mar 10, 2019 6:45 pm
I use my current estimated value of my house, based on real estate valuation and Zillow, as the value of the asset portion of the house. I update occasionally, maybe every 2-3 years. I use my current mortgage balance as the liability portion attached to the house.

Net worth is a statement of your current position, so you wouldn’t really want to use future projected values or future interest due, etc. Interest is an expense. Since I use Quicken, every month the interest portion of my mortgage payment is captured as an expense and the principal portion reduces the mortgage, increasing net worth by that amount. Extra payments should be treated the same - reducing mortgage balance and therefore increasing net worth by that amount.
+1

Your house is an asset and the value is whatever is the current appraised value, which is usually pretty close to what Zillow says it's worth.

Your mortgage is a liability. The original value of that liability was the amount you borrowed. Each mortgage payment is part interest (an expense) and part principal (which reduces the value of your mortgage liability).

The value of your down payment will be apparent in your net worth when you total your assets (incl the value of your house) and liabilities (incl your mortgage). Your home equity is the difference in the value of your house and the amount you owe on it.

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Re: Accounting for house in net worth, expenses

Post by KlangFool » Sun Mar 10, 2019 7:20 pm

OP,

What is the reason and goal of counting those numbers (net worth and expense)?

My goal is Financial Independence. I do not count the house and home equity as part of my net worth. And, I count the whole PITI as part of my annual expense. My way of counting is useful to me. It is easy enough for me to find my FI number. It is 25 times my annual expense. It works for me.

I do not care how the accountant and/or any other finance folks choose to count their numbers.

KlangFool

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Re: Accounting for house in net worth, expenses

Post by acegolfer » Sun Mar 10, 2019 8:18 pm

OP,

As you can see above, BHs have 2 different ways to approach this.

1. Consider house as an asset and you are building equity (=asset - liability) over time. Down payment and any principal payment are transfers between accounts not expenses. This solves your case of having a large expense up front.

2. Consider PITI cash outflow as a housing expense. This is simpler, if you have been a long time renter and don't know about mortgage amortization table.

Personally, when I was young, I used #2 because managing cash flow day to day was important. But it was hard to see the bigger picture such as net worth for annual reviews. After a few years, I switched to #1 method. The trouble was I had to manually re-categorize previous entries (splitting up mortgage pmt into principal pmt and interest expense).

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Re: Accounting for house in net worth, expenses

Post by quantAndHold » Sun Mar 10, 2019 9:13 pm

dcop wrote:
Sun Mar 10, 2019 7:09 pm
I have never used any real property in my NW figure. When the time came to sell then the net amount went into the NW. I've always never referred to my primary residence as an 'investment' until I made the decision to sell it. Many folks keep their primary residence until death hence not becoming liquid. All this can be construed as play on words I suppose but to me networth is Liquid - Debt. Then I guess if we want to complicate more we could figure in future taxes. Lot of ways to play the NW game.
Of course, then you wouldn’t be calculating net worth. It would be net worth minus the value of the house. The definition of net worth says nothing about whether something is an “investment” or not, just assets (which your house certainly is) minus liabilities (which your mortgage is).

You can argue about whether or not net worth is a useful measure, but the definition of net worth itself isn’t up for negotiation.

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Re: Accounting for house in net worth, expenses

Post by acegolfer » Sun Mar 10, 2019 9:42 pm

quantAndHold wrote:
Sun Mar 10, 2019 9:13 pm
dcop wrote:
Sun Mar 10, 2019 7:09 pm
I have never used any real property in my NW figure. When the time came to sell then the net amount went into the NW. I've always never referred to my primary residence as an 'investment' until I made the decision to sell it. Many folks keep their primary residence until death hence not becoming liquid. All this can be construed as play on words I suppose but to me networth is Liquid - Debt. Then I guess if we want to complicate more we could figure in future taxes. Lot of ways to play the NW game.
Of course, then you wouldn’t be calculating net worth. It would be net worth minus the value of the house. The definition of net worth says nothing about whether something is an “investment” or not, just assets (which your house certainly is) minus liabilities (which your mortgage is).

You can argue about whether or not net worth is a useful measure, but the definition of net worth itself isn’t up for negotiation.
Unfortunately, some ppl don't speak the same language. We will have to keep correcting, even if they don't listen.

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Re: Accounting for house in net worth, expenses

Post by BolderBoy » Sun Mar 10, 2019 10:25 pm

Njm8845 wrote:
Sun Mar 10, 2019 4:44 pm
Assets - do you have your house appraised every couple years?
I just use the property tax assessor's valuation. Done Q 2 years.
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Re: Accounting for house in net worth, expenses

Post by WolfgangPauli » Sun Mar 10, 2019 10:39 pm

I think about it this way:

1. I only use the figure I paid for the house. I never mark it up (I suppose I might a little if I lived in a real high increase area like San Francisco but for the vast majority of the country leave as is).

2. Always list mortgage as an offsetting liability.

3. Finally, now this is the trick, the only amount i use in my true net worth number is any amount I think I will monetize if I were to downsize. I know this is not "true" accounting but it makes sense as the real question you likely are trying to figure out is how much money do you have at your disposal. Since a house is illiquid and you have to live somewhere I do not count the whole thing.

So, for example, let's say my house is worth $500K and I know I plan on downsizing in a few years to a house size that is roughly $250K then I may think about adding $250k to my "usable net worth". But, let's say I am in that $250K house, it is all paid off and i have no intention of ever leaving it, I would not include it at all. It is sunk in the dirt and there it will stay until we go in the dirt and when that happens. who cares?
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Nate79
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Re: Accounting for house in net worth, expenses

Post by Nate79 » Mon Mar 11, 2019 6:37 am

The weekly "is your house a part of net worth" thread is here.

There should be a master thread to collect all these....

HobbesMB
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Re: Accounting for house in net worth, expenses

Post by HobbesMB » Mon Mar 11, 2019 9:35 am

I track my net worth in Personal Capital (because it is easy). You can set up a link to the Zillow value of your house and Personal Capital will automatically update that number. Every 2-3 months I update the outstanding balance on my mortgage as listed on my mortgage statements. This number doesn't match the original amortization table since I pay a large chunk of extra to the principal each month.

While there is debate on the value of determining your net worth, it is clear that your house is part of it. IMO it is beneficial, if even only from a psychological standpoint, to keep track of your net worth as it increases over the years. There is a definite spark you feel when you see your net worth steadily increase and pass the $1M mark.

You may not be able to determine your FI point based on your net worth, but you can at least see that you are on the right track as it continues to move in the right direction.

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Re: Accounting for house in net worth, expenses

Post by alfaspider » Mon Mar 11, 2019 9:38 am

Just a note that Zillow is better in some markets than others. In mine, it's nowhere close to market value and fluctuates all over the place (+/- 25% in a period of a few months even as the market itself was quite steady). I find searching listings in your market manually can give you a better picture. If you don't have access to actual sales prices, you can often use time on the market as a decent proxy for actual sales price vs asking. If the house sat on the market for 6 months, they probably didn't get their asking price- if it was gone in 3 days, it probably went for at or over asking. You can reevaluate annually if you are updating a net worth spreadsheet. I'd also discount any value you arrive at by 6% to account for transaction costs if you sell.

I disagree with those who would exclude home value entirely from net worth calculations, as it could distort the picture. I'd much rather have a $2M house and $1M in financial investments than only $2M financial investments! Of course you always have to consider liquidity in any evaluation of your net worth.

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Re: Accounting for house in net worth, expenses

Post by RickBoglehead » Mon Mar 11, 2019 9:41 am

Agree 1,000%. However, whether it's Zillow or anything else, updating the market value of a home more than annually is simply a waste of time. IMO, updating from when it was purchased is also a waste of time unless the value is much, much larger.
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Re: Accounting for house in net worth, expenses

Post by lthenderson » Mon Mar 11, 2019 10:06 am

KlangFool wrote:
Sun Mar 10, 2019 7:20 pm
OP,

What is the reason and goal of counting those numbers (net worth and expense)?

My goal is Financial Independence. I do not count the house and home equity as part of my net worth. And, I count the whole PITI as part of my annual expense. My way of counting is useful to me. It is easy enough for me to find my FI number. It is 25 times my annual expense. It works for me.

I do not care how the accountant and/or any other finance folks choose to count their numbers.

KlangFool
+1

LiterallyIronic
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Re: Accounting for house in net worth, expenses

Post by LiterallyIronic » Mon Mar 11, 2019 12:09 pm

Njm8845 wrote:
Sun Mar 10, 2019 4:44 pm
Assets - do you have your house appraised every couple years?
Liabilities - is this my loan amount (principle) or the amount I will end up paying (principle + interest)?
I just check Zillow's estimate on the first of every month and use that as the "house value". Then I check how much is outstanding on our mortgage. The former minus the latter is how much equity we have. There will be selling expenses someday, should we ever sell, but I'll deal with that when it comes up.
Njm8845 wrote:
Sun Mar 10, 2019 4:44 pm
how do you handle the down payment?
I also plan on making extra payments occasionally.
I put our down payment, and all payments (including principal pre-payments) under the category of "mortgage." We also have a category for "house maintenance" where all repairs, replacements, and remodels would go (unless they were outside, then they go under "yard maintenance.") We have a lot of categories.

But it doesn't really matter, as long as you're consistent.

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Re: Accounting for house in net worth, expenses

Post by Quirkz » Mon Mar 11, 2019 2:57 pm

Zillow is all over the place for me. The area has grown by 3% annually, smooth and steady for a decade. In the four years I've had my house, Zillow has had it spike, plummet, flatline, and spike again. I'm currently up 15% since September. Whatever they're doing, it's not reliable in my book.

I just assume 2-3% annual growth for the value of the house unless something weird happens with the local market. It's not perfect, but as a hand-wavy estimate at a momentary snapshot value, it's good enough. I don't bother doing this calculation more than once a year. Net worth isn't hugely important to me most of the time (I'm more focused on retirement) but for a sense of progress, or what needs to be accounted for in the will, it's useful to at least glance at now and then.

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Re: Accounting for house in net worth, expenses

Post by dbr » Mon Mar 11, 2019 3:55 pm

A house is an asset the value of which fluctuates and is not known exactly until after the house is sold.

There are lots of reasons a person might want to know and include the value of the house, such as for example considering the financial situation if one should sell the house, gain money, and then rent, or buy a cheaper house.

Technically I would say a mortgage loan is a liability but the house itself is not a liability in the same sense.

A house also generates expenses. I can't imagine not tracking and including those expenses in one's budget or spending records.

But, why is the question being asked. It is possible to scheme all sorts of choices for how one accounts for what, any or all of which could be well defined and useful for some purpose. Self contradictory accounting would not seem to be helpful.

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Re: Accounting for house in net worth, expenses

Post by JGoneRiding » Mon Mar 11, 2019 7:41 pm

KlangFool wrote:
Sun Mar 10, 2019 7:20 pm
OP,

What is the reason and goal of counting those numbers (net worth and expense)?

My goal is Financial Independence. I do not count the house and home equity as part of my net worth. And, I count the whole PITI as part of my annual expense. My way of counting is useful to me. It is easy enough for me to find my FI number. It is 25 times my annual expense. It works for me.

I do not care how the accountant and/or any other finance folks choose to count their numbers.

KlangFool
I have always wondered on your 25 expense number? Don't you plan to have it paid off by retirement? I took it out of my goal target number (though on one calculation forgot to put taxes back in) because I need must have it paid to retire early (before 65) If I don't pay it off I need a bigger number so would have to work longer or a refi to lower the payment (my husband and I both have high demand pretty recession proof kinds of jobs)

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Re: Accounting for house in net worth, expenses

Post by JGoneRiding » Mon Mar 11, 2019 7:45 pm

BolderBoy wrote:
Sun Mar 10, 2019 10:25 pm
Njm8845 wrote:
Sun Mar 10, 2019 4:44 pm
Assets - do you have your house appraised every couple years?
I just use the property tax assessor's valuation. Done Q 2 years.
Does your county asses for real value? I ask because mine isn't even close maybe 150k less maybe more.

We recently did a large property improvement THAT I thought the county massively over assessed the value but I have the actual cost and the overall is still low. That caused Zillow to shoot way up so now I just "guess" on what my house is worth. Some where in between the 2 for sure.

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Re: Accounting for house in net worth, expenses

Post by KlangFool » Mon Mar 11, 2019 8:08 pm

JGoneRiding wrote:
Mon Mar 11, 2019 7:41 pm
KlangFool wrote:
Sun Mar 10, 2019 7:20 pm
OP,

What is the reason and goal of counting those numbers (net worth and expense)?

My goal is Financial Independence. I do not count the house and home equity as part of my net worth. And, I count the whole PITI as part of my annual expense. My way of counting is useful to me. It is easy enough for me to find my FI number. It is 25 times my annual expense. It works for me.

I do not care how the accountant and/or any other finance folks choose to count their numbers.

KlangFool
I have always wondered on your 25 expense number? Don't you plan to have it paid off by retirement? I took it out of my goal target number (though on one calculation forgot to put taxes back in) because I need must have it paid to retire early (before 65) If I don't pay it off I need a bigger number so would have to work longer or a refi to lower the payment (my husband and I both have high demand pretty recession proof kinds of jobs)
JGoneRiding,

In my case, the difference is minor. My annual expense with the mortgage is 60K. My annual expense without the mortgage is 45K. My mortgage is around 300K.

A) If I do not pay off the mortgage, the number is 25 X 60K = 1.5 million.

B) If I pay off the mortgage, the number is 25 X 45K = 1.125 million. If I add in the 300K, it is 1.425 million.

The difference is 75K.

KlangFool

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Re: Accounting for house in net worth, expenses

Post by StevieG72 » Mon Mar 11, 2019 9:57 pm

I keep it simple.

Whatever Zillow says my house is worth when I update my spreadsheet is the figure I use. ( Yes, I know my house could sell for $10,000 less than this figure and I would have to pay relator fees etc.) I have lived in my house for 18 years and have a boatload of equity which helps me not obsess about dialing in the exact value.

Mortgage principal is the liability.
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 7:16 am

KlangFool wrote:
Mon Mar 11, 2019 8:08 pm
JGoneRiding,

In my case, the difference is minor. My annual expense with the mortgage is 60K. My annual expense without the mortgage is 45K. My mortgage is around 300K.

A) If I do not pay off the mortgage, the number is 25 X 60K = 1.5 million.

B) If I pay off the mortgage, the number is 25 X 45K = 1.125 million. If I add in the 300K, it is 1.425 million.

The difference is 75K.

KlangFool
Doesn't the difference between A) and B) get larger and larger over time? Your A) calculation will not change over time. But B) will. B) will get smaller, as your mortgage balance decreases from 300k. For example, after years, if the mortgage balance becomes half of $300k, your B) calculation will be 1.125 mil + 150k = 1.275 mil. The difference from A) is now 225k (perhaps, you may call it minor).

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Re: Accounting for house in net worth, expenses

Post by mbasherp » Tue Mar 12, 2019 8:08 am

The bottom line of net worth is this: You liquidate everything and put the whole pile of cash in a backpack to become a drifter. How much is in the backpack?

At the end of each year, I go on Zillow to see my estimated home value. I subtract 6% (realtor fees) and use that number as the home value for the next year. This number is listed along with every other asset I have (investments, cash, etc) on my net worth spreadsheet. I count our cars on an aggressive depreciation schedule to smooth out their impact during a purchase year. I don't count any home furnishings or other belongings, not because I shouldn't, but because I can't easily assess their value. Thus my assets are understated, and I'm fine with that.

I list all my debts below all my assets. Currently, it's just the mortgage balance. Very cut and dry, black and white net worth snapshot. I update and review it at the end of every month because it is the single best way to gauge my progress toward my goals.

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Re: Accounting for house in net worth, expenses

Post by ohai » Tue Mar 12, 2019 8:29 am

Just one data point - but my friend's house has a Zillow estimate price of $4 million, but he has struggled to sell it for $3 million. It's really worth $2.6 million probably. Zestimate performs poorly in neighborhoods with a wide range of home prices and where certain houses do not trade frequently.

Transaction based real estate indexes that increase at 3% to 5% every year in a straight line are also highly suspicious. Sellers are very price sticky - if they don't get the price they want, they won't sell the house - like my friend who hasn't sold his house in years. If no low transaction prices are reported, the index can't fall. What happens instead is that transaction volumes decrease - and this is probably a reason why volumes are always cited in real estate news, unlike in other asset classes like stocks.

If you're counting your house in net worth for any practical reason, you'd probably want to assign a very conservative valuation, just like you should for any illiquid asset.

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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 8:43 am

mbasherp wrote:
Tue Mar 12, 2019 8:08 am
The bottom line of net worth is this: You liquidate everything and put the whole pile of cash in a backpack to become a drifter. How much is in the backpack?

At the end of each year, I go on Zillow to see my estimated home value. I subtract 6% (realtor fees) and use that number as the home value for the next year. This number is listed along with every other asset I have (investments, cash, etc) on my net worth spreadsheet. I count our cars on an aggressive depreciation schedule to smooth out their impact during a purchase year. I don't count any home furnishings or other belongings, not because I shouldn't, but because I can't easily assess their value. Thus my assets are understated, and I'm fine with that.

I list all my debts below all my assets. Currently, it's just the mortgage balance. Very cut and dry, black and white net worth snapshot. I update and review it at the end of every month because it is the single best way to gauge my progress toward my goals.
Despite some BH skeptics, the above is the logical way to calculate net worth.

However,
1. If one argues that Zillow's estimate is wrong, use some other estimate you think it's more accurate.
2. If one argues that one should not subtract 6% realtor fee, then don't.
3. If one argues that one should also include furniture in addition to cars, then include it as asset and depreciate over time.

The bottom line is Net worth is Total asset - Total liability by accounting standard. If one argues that one should only include current assets or only financial assets, then you are not calculating net worth. There are accounting terms for those and you should use them instead of calling it net worth.

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Re: Accounting for house in net worth, expenses

Post by autolycus » Tue Mar 12, 2019 9:07 am

acegolfer wrote:
Tue Mar 12, 2019 7:16 am
KlangFool wrote:
Mon Mar 11, 2019 8:08 pm
JGoneRiding,

In my case, the difference is minor. My annual expense with the mortgage is 60K. My annual expense without the mortgage is 45K. My mortgage is around 300K.

A) If I do not pay off the mortgage, the number is 25 X 60K = 1.5 million.

B) If I pay off the mortgage, the number is 25 X 45K = 1.125 million. If I add in the 300K, it is 1.425 million.

The difference is 75K.

KlangFool
Doesn't the difference between A) and B) get larger and larger over time? Your A) calculation will not change over time. But B) will. B) will get smaller, as your mortgage balance decreases from 300k. For example, after years, if the mortgage balance becomes half of $300k, your B) calculation will be 1.125 mil + 150k = 1.275 mil. The difference from A) is now 225k (perhaps, you may call it minor).
It doesn't because KlangFool, unusually, treats the entire PITI as an "expense". So his PITI is something near $1,250/month. I don't like accounting for it that way because it is technically incorrect, but it does highlight something important:

How you decide to use particular numbers doesn't really matter that much as long as you are internally consistent and perform all of your planning based on YOUR concepts. Where the definitions really matter is in discussions with other people. If you want to use your own concepts of expenses and net worth, great. But make sure you do all appropriate conversions when talking about these things with others or when reading advice from others.

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Re: Accounting for house in net worth, expenses

Post by KlangFool » Tue Mar 12, 2019 9:35 am

acegolfer wrote:
Tue Mar 12, 2019 7:16 am
KlangFool wrote:
Mon Mar 11, 2019 8:08 pm
JGoneRiding,

In my case, the difference is minor. My annual expense with the mortgage is 60K. My annual expense without the mortgage is 45K. My mortgage is around 300K.

A) If I do not pay off the mortgage, the number is 25 X 60K = 1.5 million.

B) If I pay off the mortgage, the number is 25 X 45K = 1.125 million. If I add in the 300K, it is 1.425 million.

The difference is 75K.

KlangFool
Doesn't the difference between A) and B) get larger and larger over time? Your A) calculation will not change over time. But B) will. B) will get smaller, as your mortgage balance decreases from 300k. For example, after years, if the mortgage balance becomes half of $300k, your B) calculation will be 1.125 mil + 150k = 1.275 mil. The difference from A) is now 225k (perhaps, you may call it minor).
acegolfer,

There is no long-term for me. It is the end game now. My portfolio is at 1.2 million. My annual savings is about 50K to 60K. So, the difference of 75K is about OMY.

KlangFool

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vineviz
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Re: Accounting for house in net worth, expenses

Post by vineviz » Tue Mar 12, 2019 9:45 am

baconavocado wrote:
Sun Mar 10, 2019 7:18 pm
Kenkat wrote:
Sun Mar 10, 2019 6:45 pm
I use my current estimated value of my house, based on real estate valuation and Zillow, as the value of the asset portion of the house. I update occasionally, maybe every 2-3 years. I use my current mortgage balance as the liability portion attached to the house.

Net worth is a statement of your current position, so you wouldn’t really want to use future projected values or future interest due, etc. Interest is an expense. Since I use Quicken, every month the interest portion of my mortgage payment is captured as an expense and the principal portion reduces the mortgage, increasing net worth by that amount. Extra payments should be treated the same - reducing mortgage balance and therefore increasing net worth by that amount.
+1

Your house is an asset and the value is whatever is the current appraised value, which is usually pretty close to what Zillow says it's worth.

Your mortgage is a liability. The original value of that liability was the amount you borrowed. Each mortgage payment is part interest (an expense) and part principal (which reduces the value of your mortgage liability).

The value of your down payment will be apparent in your net worth when you total your assets (incl the value of your house) and liabilities (incl your mortgage). Your home equity is the difference in the value of your house and the amount you owe on it.
+2
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Re: Accounting for house in net worth, expenses

Post by LiterallyIronic » Tue Mar 12, 2019 9:56 am

autolycus wrote:
Tue Mar 12, 2019 9:07 am
It doesn't because KlangFool, unusually, treats the entire PITI as an "expense". So his PITI is something near $1,250/month. I don't like accounting for it that way because it is technically incorrect
Wait, why wouldn't you treat the entire PITI as an expense? That's what I do. The P, I, T, and other I are all money that I'm spending on a good or service, and therefore is what I would consider an expense.

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Re: Accounting for house in net worth, expenses

Post by chevca » Tue Mar 12, 2019 9:57 am

Njm8845 wrote:
Sun Mar 10, 2019 4:44 pm
1. Net worth. Accounting for our house seems simple enough with the equation “Assets - Liabilities”. The hard part for me is determining what exactly these terms mean.
Assets - do you have your house appraised every couple years?
Liabilities - is this my loan amount (principle) or the amount I will end up paying (principle + interest)?
I see my total debts as what I will owe the bank, not just the amount I borrowed. However, if I consider that, then it seems like for Assets, I should consider what I will sell my home for as opposed to what it’s currently worth. And then my mind starts thinking of factoring in inflation and it all seems overly complicated.
It seems overly complicated because you're WAY over complicating it. What you might sell your house for someday in the future, future inflation, future interest to pay, and whatever else may happen in the future. Do you count future income and returns into your net worth also?

It is "simple enough" to figure out net worth as simply assets - liabilities... at the moment. Not the future because no one knows.

But, as I like to say, for as many members there are on Bogleheads, there seems to be just as many ways folks calculate their net worth. So, feel free to calculate as you wish. But, it's really not complicated at all and doesn't have to be precise (don't know what the house would sell for, etc.). In fact, short of doing the backpack and become a drifter example above, I don't think any of of would know precisely what our net worth is. Just get it in the ball park, call it good, and hope the number goes up over time.

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Re: Accounting for house in net worth, expenses

Post by barnaclebob » Tue Mar 12, 2019 10:01 am

LiterallyIronic wrote:
Tue Mar 12, 2019 9:56 am
autolycus wrote:
Tue Mar 12, 2019 9:07 am
It doesn't because KlangFool, unusually, treats the entire PITI as an "expense". So his PITI is something near $1,250/month. I don't like accounting for it that way because it is technically incorrect
Wait, why wouldn't you treat the entire PITI as an expense? That's what I do. The P, I, T, and other I are all money that I'm spending on a good or service, and therefore is what I would consider an expense.
Paying principle is an expense related to your cash flow but paying it results in zero net worth change.

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Re: Accounting for house in net worth, expenses

Post by RickBoglehead » Tue Mar 12, 2019 10:06 am

Why does it matter?

Are people wearing t-shirts that say "My net worth is $2.4 million, what's yours?"

Net worth has a definition. Some choose to ignore it. It's not used for anything, beyond a personal measuring stick. Like other personal measuring sticks, no one else cares because it's not used for anything.

Calling principal (not principle) payment of a mortgage an expense (the interest is an expense) is simply wrong by accounting rules. It's a reduction in loan balance which therefore increases the net value of the asset because the value is determined by subtracting the loan from the asset.

It should be noted that in Quicken, the mortgage payment is automatically divided CORRECTLY into principal (which reduces the loan balance), and interest, which goes to an expense. Therefore, when you review your annual expenses, if you don't include the amount of the principal you paid in the year (which is a decrease of cash balance), and you use that to forecast how much you'll need to pay bills next year, you'll be light.

On principle, there is one way. But no one cares what someone else does - unless I wear a T-shirt...
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Re: Accounting for house in net worth, expenses

Post by RickBoglehead » Tue Mar 12, 2019 10:06 am

barnaclebob wrote:
Tue Mar 12, 2019 10:01 am

Paying principle is an expense related to your cash flow but paying it results in zero net worth change.
Flat out incorrect. But do what you wish with your principal payment.
Last edited by RickBoglehead on Tue Mar 12, 2019 10:13 am, edited 1 time in total.
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Re: Accounting for house in net worth, expenses

Post by vineviz » Tue Mar 12, 2019 10:11 am

LiterallyIronic wrote:
Tue Mar 12, 2019 9:56 am
autolycus wrote:
Tue Mar 12, 2019 9:07 am
It doesn't because KlangFool, unusually, treats the entire PITI as an "expense". So his PITI is something near $1,250/month. I don't like accounting for it that way because it is technically incorrect
Wait, why wouldn't you treat the entire PITI as an expense? That's what I do. The P, I, T, and other I are all money that I'm spending on a good or service, and therefore is what I would consider an expense.
I, T, & I are expenses but P is not: it is savings.

Likewise, withdrawing cash from an ATM isn't an expense. Not until the cash is SPENT on something is it an expense.
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 10:14 am

LiterallyIronic wrote:
Tue Mar 12, 2019 9:56 am
autolycus wrote:
Tue Mar 12, 2019 9:07 am
It doesn't because KlangFool, unusually, treats the entire PITI as an "expense". So his PITI is something near $1,250/month. I don't like accounting for it that way because it is technically incorrect
Wait, why wouldn't you treat the entire PITI as an expense? That's what I do. The P, I, T, and other I are all money that I'm spending on a good or service, and therefore is what I would consider an expense.
Even if principal payment (P) is a cash outflow, technically, it is not an expense. In accounting, cash flow and expense are not the same concepts. (Hence 2 different statements; income statement and the statement of cash flow.)

Unfortunately, some people think cash outflow = expense. Once you realize the difference, then you will understand how to accurately calculate the net worth, when involving a house with mortgage (OP question).

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Re: Accounting for house in net worth, expenses

Post by Mr.BB » Tue Mar 12, 2019 10:19 am

I don't count my house as part of my assets. I know it's there, I can access its value if we truly needed to, it's not something that I'm going to spend down in retirement; hopefully.
I do count the expenditures as part of the yearly budget.
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Re: Accounting for house in net worth, expenses

Post by barnaclebob » Tue Mar 12, 2019 10:23 am

RickBoglehead wrote:
Tue Mar 12, 2019 10:06 am
barnaclebob wrote:
Tue Mar 12, 2019 10:01 am

Paying principle is an expense related to your cash flow but paying it results in zero net worth change.
Flat out incorrect. But do what you wish with your principal payment.
My use of the word expense is was not accurate by accounting standards but paying principle counts against cash flow as far as I can tell. So "flat out incorrect" is a bit extreme.
Last edited by barnaclebob on Tue Mar 12, 2019 10:24 am, edited 1 time in total.

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Re: Accounting for house in net worth, expenses

Post by Sandtrap » Tue Mar 12, 2019 10:24 am

KlangFool wrote:
Sun Mar 10, 2019 7:20 pm
OP,

What is the reason and goal of counting those numbers (net worth and expense)?

My goal is Financial Independence. I do not count the house and home equity as part of my net worth. And, I count the whole PITI as part of my annual expense. My way of counting is useful to me. It is easy enough for me to find my FI number. It is 25 times my annual expense. It works for me.

I do not care how the accountant and/or any other finance folks choose to count their numbers.

KlangFool
Good point!
As long as it's completely paid for, I do not count the value of my home in net worth. At this point, the income producing portion of my total assets is what matters in retirement. (as well as expenses which include those generated by our home) Yes. At least 25X annual expenses. It keeps things simple for me and DW.
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 10:32 am

barnaclebob wrote:
Tue Mar 12, 2019 10:23 am
RickBoglehead wrote:
Tue Mar 12, 2019 10:06 am
barnaclebob wrote:
Tue Mar 12, 2019 10:01 am

Paying principle is an expense related to your cash flow but paying it results in zero net worth change.
Flat out incorrect. But do what you wish with your principal payment.
My use of the word expense is was not accurate by accounting standards but paying principle counts against cash flow as far as I can tell. So "flat out incorrect" is a bit extreme.
I agree. Calling "flat out incorrect" is a bit too harsh and out of context, especially when your 2nd part of the statement is correct.

Having said that, one correction. It's "principal" not "principle" of a loan.

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Re: Accounting for house in net worth, expenses

Post by LiterallyIronic » Tue Mar 12, 2019 10:38 am

vineviz wrote:
Tue Mar 12, 2019 10:11 am
I, T, & I are expenses but P is not: it is savings.

Likewise, withdrawing cash from an ATM isn't an expense. Not until the cash is SPENT on something is it an expense.
Yeah, and I SPENT the P on some bricks, pipes, sheetrock, shingles, etc.
barnaclebob wrote:
Tue Mar 12, 2019 10:01 am
Paying principle is an expense related to your cash flow but paying it results in zero net worth change.
Only as much as any other purchase of a good. I could, if I wanted, include my car, my couch, and my TV in my "net worth," but I still count the purchase of those as "expenses" just as much as purchasing a house is an "expense." Just because I have a better chance of selling one good (my house) for a price equal to or greater than the price I paid for it than the chance of doing the same for other goods (my car, couch, and TV), doesn't make a lick of difference. I buy a good or service - it's an expense. If I weren't counting the principal as an expense, then that means my house wasn't an expense. That means I didn't spend money on my house. That means I got a free house. I didn't get a free house, so it's an expense.

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Re: Accounting for house in net worth, expenses

Post by vineviz » Tue Mar 12, 2019 10:43 am

LiterallyIronic wrote:
Tue Mar 12, 2019 10:38 am
vineviz wrote:
Tue Mar 12, 2019 10:11 am
I, T, & I are expenses but P is not: it is savings.

Likewise, withdrawing cash from an ATM isn't an expense. Not until the cash is SPENT on something is it an expense.
Yeah, and I SPENT the P on some bricks, pipes, sheetrock, shingles, etc.
That may be the way you look at it, but financially and economically it's not correct.
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 10:46 am

vineviz wrote:
Tue Mar 12, 2019 10:43 am
LiterallyIronic wrote:
Tue Mar 12, 2019 10:38 am
vineviz wrote:
Tue Mar 12, 2019 10:11 am
I, T, & I are expenses but P is not: it is savings.

Likewise, withdrawing cash from an ATM isn't an expense. Not until the cash is SPENT on something is it an expense.
Yeah, and I SPENT the P on some bricks, pipes, sheetrock, shingles, etc.
That may be the way you look at it, but financially and economically it's not correct.
And also not correct in accounting.

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Re: Accounting for house in net worth, expenses

Post by RickBoglehead » Tue Mar 12, 2019 10:49 am

barnaclebob wrote:
Tue Mar 12, 2019 10:23 am
RickBoglehead wrote:
Tue Mar 12, 2019 10:06 am
barnaclebob wrote:
Tue Mar 12, 2019 10:01 am

Paying principle is an expense related to your cash flow but paying it results in zero net worth change.
Flat out incorrect. But do what you wish with your principal payment.
My use of the word expense is was not accurate by accounting standards but paying principle counts against cash flow as far as I can tell. So "flat out incorrect" is a bit extreme.
I meant nothing by the use of the words "flat out incorrect" except to say that it's not accurate as per the definition of the term net worth.

To say that we as a society can simply make up the definitions of various terminology as we see fit is sort of silly. Perhaps Bnet worth for barnaclebob net worth? :D

It's the principle of the way that you're accounting for principal payments. :wink:
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 10:52 am

LiterallyIronic wrote:
Tue Mar 12, 2019 10:38 am
Just because I have a better chance of selling one good (my house) for a price equal to or greater than the price I paid for it than the chance of doing the same for other goods (my car, couch, and TV), doesn't make a lick of difference. I buy a good or service - it's an expense. If I weren't counting the principal as an expense, then that means my house wasn't an expense. That means I didn't spend money on my house. That means I got a free house. I didn't get a free house, so it's an expense.
"Free house"? It seems you haven't learned how to depreciate a fixed asset in order to calculate its expense. Using proper accounting method, you will realize it's not a free house.

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