Accounting for house in net worth, expenses

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Atgard
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Re: Accounting for house in net worth, expenses

Post by Atgard » Tue Mar 12, 2019 10:58 am

Lots of people differ on how to do this. The good news is your "net worth" calculation is basically only meaningful for you, so you get to define it however you'd like. I take an estimate of the current home value (I average Zillow + Redfin, not perfectly accurate but doesn't need to be, it's in the ballpark based on recent sales) minus 10% for uncertainty/sale costs, then subtract current outstanding principal owed (not interest, since we're looking at a snapshot today, not trying to predict home prices 30 years from now).

For expenses, under "housing" I count mortgage principle + interest (base mortgage payment), real estate taxes and property insurance (may be escrowed as part of your mortgage payment or may not), maintenance costs (an estimate based on experience), HOA (if any), plus yard work + pest control costs (if not included in HOA). I personally count "Utilities" (power, water, etc.) as a separate category. I would NOT include down payment or extra premium payments as part of an annual or monthly budget -- the down payment is one-time and extra premium payments are not required monthly; also, they are more like "re-allocations," since they are just reducing your liability (outstanding principal owed) -- paying principal early does not change your net worth.

Now, if you wanted to include a certain amount for "savings" in your budget -- to include emergency fund, 401K/IRA, college savings, extra principal, etc., then yes, you would budget those things first. But I don't consider them "expenses."

LiterallyIronic
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Re: Accounting for house in net worth, expenses

Post by LiterallyIronic » Tue Mar 12, 2019 11:59 am

acegolfer wrote:
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.
I don't consider my house to be a fixed asset, hence I don't apply depreciation to it. Everything is the same. I bought it? It's an expense. I sold it? It's income. I live a simple life.
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.
So, if instead of buying a house, I simply bought all the parts individually, like literally going down to Home Depot and picking up loads of bricks, and pipes, and wood, and a toilet, and a sink, and so on, and threw them in a pile, would you count that as an expense? I know I would. I would count the purchase of those items as an expense, whether they were arranged aesthetically or thrown in a heap.

TN_Boy
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Re: Accounting for house in net worth, expenses

Post by TN_Boy » Tue Mar 12, 2019 12:05 pm

I've learned an awful lot on boglehead forums, and there is a huge amount of great information from the folks here.

Except for the threads on net worth :oops:

Because a person might read a net worth thread and come away knowing less than they did before. Or rather, having a completely incorrect view of what net worth is, despite the relative simplicity of the basic concept.....

barnaclebob
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Re: Accounting for house in net worth, expenses

Post by barnaclebob » Tue Mar 12, 2019 12:08 pm

LiterallyIronic wrote:
Tue Mar 12, 2019 11:59 am
I don't consider my house to be a fixed asset, hence I don't apply depreciation to it. Everything is the same. I bought it? It's an expense. I sold it? It's income. I live a simple life.
A simple but terminologically incorrect life.

JackoC
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Re: Accounting for house in net worth, expenses

Post by JackoC » Tue Mar 12, 2019 12:08 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.
I agree, there's still a standard definition for net worth, it's not a personal or subjective term. It means assets minus liabilities, and a house is an asset (mortgage, if any, a liability), period.

And there are all kinds of potentially more rational ways to count up a more conservative number than your actual current net worth, like applying some % factor to risk assets, including stocks (take 70% of your stock value to account for a serious market drop, etc). Just leaving out your house doesn't make a lot of sense, and leaving out real property as in rental properties you own makes no sense.

As to valuation, on houses it's a little fuzzier than stocks. Zillow isn't as accurate* a snapshot of current value as today's closing price on your mutual fund. OTOH, again, that mutual fund price could change significantly tomorrow.

*some of our rental properties are single family so show up on Zillow. A couple were quite inaccurate, and since I don't constantly run comparables to reality check it I admit it was a bummer when we decided to sell one to find out much Zillow was overestimating it. It actually seems our offer price was one of factors in Zillow's algorithm correcting itself some time later. *Now* they show up at a reasonably accurate value, though we later removed that place from the market. Zillow's price on our house though is pretty accurate lately, I saw by reviewing comparables after realizing those other prices were pretty far off. For commercial type properties there isn't a free service like Zillow, but they are still assets, they still have a price, and if you're in that business it doesn't serve your interest to ignore those prices and their variations.

autolycus
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Re: Accounting for house in net worth, expenses

Post by autolycus » Tue Mar 12, 2019 12:18 pm

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.
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.
Your net worth includes the value of all of those things whether you include it in your own calculations of your "net worth" or not. They are assets. Now, some of them may have no real value [worth tracking]. An old tv or couch may literally have no value or a negative value (you would have to pay someone to take it off your hands). To a large extent I think it's completely justifiable, even within the strict technical construction of "net worth", to not include an old couch, tv, clothes, etc. because they could reasonably be deemed worthless. That said...

Not counting your principal in a house as part of your net worth is, as others have pointed out, inaccurate. The principal payment component of your monthly PITI is no more of an expense than your per pay period contributions to a 401k plan, your annual contributions to an IRA, or you purchase of mutual fund shares in a taxable account.

EDIT: Fixed a couple words and added 2 clarifying words.

LiterallyIronic
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Re: Accounting for house in net worth, expenses

Post by LiterallyIronic » Tue Mar 12, 2019 12:59 pm

autolycus wrote:
Tue Mar 12, 2019 12:18 pm
Not counting your principal in a house as part of your net worth is, as others have pointed out, inaccurate. The principal payment component of your monthly PITI is no more of an expense than your per pay period contributions to a 401k plan, your annual contributions to an IRA, or you purchase of mutual fund shares in a taxable account.

EDIT: Fixed a couple words and added 2 clarifying words.
No, I count my home equity as part of my net worth, just as I do my retirement account balances. I don't count my other stuff because selling my old Nintendo for $10 would just be noise and a waste of time for me to tally up. Just cash + checking account balance + savings account balance + 401k balance + IRA balance + Zillow home value estimate - outstanding mortgage value.

But I count the principal payment of my mortgage as an expense because it's me buying something. Me buying a stack of bricks. I count my investment contributions as an expense, too. That's me buying a bunch of stocks and bonds. Investing is my biggest monthly expense, followed by my mortgage. My expenses are way higher now than they'll be in retirement because I won't be paying a mortgage nor buying stocks and bonds.

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vineviz
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Re: Accounting for house in net worth, expenses

Post by vineviz » Tue Mar 12, 2019 1:03 pm

LiterallyIronic wrote:
Tue Mar 12, 2019 12:59 pm
autolycus wrote:
Tue Mar 12, 2019 12:18 pm
Not counting your principal in a house as part of your net worth is, as others have pointed out, inaccurate. The principal payment component of your monthly PITI is no more of an expense than your per pay period contributions to a 401k plan, your annual contributions to an IRA, or you purchase of mutual fund shares in a taxable account.

EDIT: Fixed a couple words and added 2 clarifying words.
No, I count my home equity as part of my net worth, just as I do my retirement account balances. I don't count my other stuff because selling my old Nintendo for $10 would just be noise and a waste of time for me to tally up. Just cash + checking account balance + savings account balance + 401k balance + IRA balance + Zillow home value estimate - outstanding mortgage value.

But I count the principal payment of my mortgage as an expense because it's me buying something. Me buying a stack of bricks. I count my investment contributions as an expense, too. That's me buying a bunch of stocks and bonds. Investing is my biggest monthly expense, followed by my mortgage. My expenses are way higher now than they'll be in retirement because I won't be paying a mortgage nor buying stocks and bonds.
I suspect that you are confusing yourself by using "expense" as a synonym for "cash flow".

Investment contributions are not an expense any more than the principal payment on your mortgage is.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

acegolfer
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Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 1:09 pm

TN_Boy wrote:
Tue Mar 12, 2019 12:05 pm
I've learned an awful lot on boglehead forums, and there is a huge amount of great information from the folks here.

Except for the threads on net worth :oops:

Because a person might read a net worth thread and come away knowing less than they did before. Or rather, having a completely incorrect view of what net worth is, despite the relative simplicity of the basic concept.....
IMO, the following is why some BH may have hard time understanding the basic concept. (I'm fortunate that I took finance/accounting in my early years. If not, I could be easily lost/confused in these threads.)

1. definition of net worth?
In accounting, net worth = total asset - total liability. If one uses a different definition such as current asset - current liability, then he is discussing a different concept. I'm not saying it's worthless to consider a different concept. I'm just pointing out that one can't call it as net worth. Please don't confuse other people with wrong definition.

2. cash outflow = expense?
In accounting, cash outflow =/= expense. However, some BH think cash inflow = income, cash outflow = expense. Cash flow and expense are related but not identical. If one thinks they are same, then he may think PITI (which is cash outflow) is an expense.

3. loan amortization table
Mortgage payment is the sum of principal pmt + interest pmt. The sum is fixed. But over time, each component amount varies. If one can't separate principal pmt from mortgage pmt, then he won't realize principal pmt as a transfer. In addition, he can't update his home equity number (=home value - mortgage balance) and his correct net worth. For him, it may be easier to consider mortgage pmt as an expense (even if is technically incorrect) and not calculate net worth by total asset - total liability.
If one knows how to calculate the principal pmt in PITI, it's better to consider this part as a transfer to debt account. The amount will lower your debt balance, increase home equity and net worth.

After all, it's more about whether one knows how to calculate each item or not. It's less about one's philosophy on net worth.

KlangFool
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Re: Accounting for house in net worth, expenses

Post by KlangFool » Tue Mar 12, 2019 1:28 pm

acegolfer wrote:
Tue Mar 12, 2019 1:09 pm

After all, it's more about whether one knows how to calculate each item or not. It's less about one's philosophy on net worth.
acegolfer,

I disagreed. I know how to calculate those numbers with those definitions. But, those definitions are useless to me. So, why should I waste my time and effort to calculate useless numbers?

I only calculate numbers that are useful to me. I do not care to compare my numbers with others. So, all those accounting and financial definitions are irrelevant to me.

KlangFool

Thesaints
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Re: Accounting for house in net worth, expenses

Post by Thesaints » Tue Mar 12, 2019 1:34 pm

LiterallyIronic wrote:
Tue Mar 12, 2019 10:38 am
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.
"expenses" are to "net worth" what "inflation rate" is to "prices".
According to your accounting, not only you lose money the day you purchase something, but you lose double its price !

acegolfer
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Joined: Tue Aug 25, 2009 9:40 am

Re: Accounting for house in net worth, expenses

Post by acegolfer » Tue Mar 12, 2019 1:34 pm

KlangFool wrote:
Tue Mar 12, 2019 1:28 pm
acegolfer,

I disagreed. I know how to calculate those numbers with those definitions. But, those definitions are useless to me. So, why should I waste my time and effort to calculate useless numbers?

I only calculate numbers that are useful to me. I do not care to compare my numbers with others. So, all those accounting and financial definitions are irrelevant to me.

KlangFool

I believe you are an exception.

To others, if the standard definitions are useless to you, then please do not use the same name. BH forum using incorrect definition will not look good for our community. If you want, please define a new variable instead.

pdavi21
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Re: Accounting for house in net worth, expenses

Post by pdavi21 » Tue Mar 12, 2019 1:35 pm

When you are tracking the growth of your net worth, house must be included.
Otherwise, it will look like you are losing/gaining money randomly.
Also, when you die, a home value would be included in net worth.

If you are using assets to forecast future growth, I would break a home into an asset appreciating near the rate of inflation and an expense.
Since a home appreciates around the rate of inflation, your property tax should too, as will your other expenses. That makes property tax, repairs, etc. a perfect candidate for adding to annual expenses.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

autolycus
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Re: Accounting for house in net worth, expenses

Post by autolycus » Tue Mar 12, 2019 1:53 pm

vineviz wrote:
Tue Mar 12, 2019 1:03 pm
LiterallyIronic wrote:
Tue Mar 12, 2019 12:59 pm
autolycus wrote:
Tue Mar 12, 2019 12:18 pm
Not counting your principal in a house as part of your net worth is, as others have pointed out, inaccurate. The principal payment component of your monthly PITI is no more of an expense than your per pay period contributions to a 401k plan, your annual contributions to an IRA, or you purchase of mutual fund shares in a taxable account.

EDIT: Fixed a couple words and added 2 clarifying words.
No, I count my home equity as part of my net worth, just as I do my retirement account balances. I don't count my other stuff because selling my old Nintendo for $10 would just be noise and a waste of time for me to tally up. Just cash + checking account balance + savings account balance + 401k balance + IRA balance + Zillow home value estimate - outstanding mortgage value.

But I count the principal payment of my mortgage as an expense because it's me buying something. Me buying a stack of bricks. I count my investment contributions as an expense, too. That's me buying a bunch of stocks and bonds. Investing is my biggest monthly expense, followed by my mortgage. My expenses are way higher now than they'll be in retirement because I won't be paying a mortgage nor buying stocks and bonds.
I suspect that you are confusing yourself by using "expense" as a synonym for "cash flow".

Investment contributions are not an expense any more than the principal payment on your mortgage is.
Yup. Based on the response to me, I think LiterallyIronic and I are on the same page except for the use of the term "expense". Investing is not an expense. Expenses shift money off your books. Investments and principal payments on a house shift money from one account to another.

TN_Boy
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Re: Accounting for house in net worth, expenses

Post by TN_Boy » Tue Mar 12, 2019 2:11 pm

acegolfer wrote:
Tue Mar 12, 2019 1:09 pm
TN_Boy wrote:
Tue Mar 12, 2019 12:05 pm
I've learned an awful lot on boglehead forums, and there is a huge amount of great information from the folks here.

Except for the threads on net worth :oops:

Because a person might read a net worth thread and come away knowing less than they did before. Or rather, having a completely incorrect view of what net worth is, despite the relative simplicity of the basic concept.....
IMO, the following is why some BH may have hard time understanding the basic concept. (I'm fortunate that I took finance/accounting in my early years. If not, I could be easily lost/confused in these threads.)

1. definition of net worth?
In accounting, net worth = total asset - total liability. If one uses a different definition such as current asset - current liability, then he is discussing a different concept. I'm not saying it's worthless to consider a different concept. I'm just pointing out that one can't call it as net worth. Please don't confuse other people with wrong definition.

2. cash outflow = expense?
In accounting, cash outflow =/= expense. However, some BH think cash inflow = income, cash outflow = expense. Cash flow and expense are related but not identical. If one thinks they are same, then he may think PITI (which is cash outflow) is an expense.

3. loan amortization table
Mortgage payment is the sum of principal pmt + interest pmt. The sum is fixed. But over time, each component amount varies. If one can't separate principal pmt from mortgage pmt, then he won't realize principal pmt as a transfer. In addition, he can't update his home equity number (=home value - mortgage balance) and his correct net worth. For him, it may be easier to consider mortgage pmt as an expense (even if is technically incorrect) and not calculate net worth by total asset - total liability.
If one knows how to calculate the principal pmt in PITI, it's better to consider this part as a transfer to debt account. The amount will lower your debt balance, increase home equity and net worth.

After all, it's more about whether one knows how to calculate each item or not. It's less about one's philosophy on net worth.
Your explanation may be right, but I don't think you need a finance class to understand, for example, that the equity in your house is an asset. Or that mortgage payments include both principal and interest. And that principal payments build equity. These are not arcane points; certainly someone capable of handling their own investments can understand such things.

The problem we seem to have is people not believing concepts like net worth and home equity are useful (a viewpoint which is seriously wrong in some cases, but probably correct in others) and then go the extra mile to call their view of the world "net worth." It's the refusal to accept that "net worth" has a well understood (outside this forum ....) meaning that is baffling.

chevca
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Re: Accounting for house in net worth, expenses

Post by chevca » Tue Mar 12, 2019 6:38 pm

LiterallyIronic wrote:
Tue Mar 12, 2019 12:59 pm
autolycus wrote:
Tue Mar 12, 2019 12:18 pm
Not counting your principal in a house as part of your net worth is, as others have pointed out, inaccurate. The principal payment component of your monthly PITI is no more of an expense than your per pay period contributions to a 401k plan, your annual contributions to an IRA, or you purchase of mutual fund shares in a taxable account.

EDIT: Fixed a couple words and added 2 clarifying words.
No, I count my home equity as part of my net worth, just as I do my retirement account balances. I don't count my other stuff because selling my old Nintendo for $10 would just be noise and a waste of time for me to tally up. Just cash + checking account balance + savings account balance + 401k balance + IRA balance + Zillow home value estimate - outstanding mortgage value.

But I count the principal payment of my mortgage as an expense because it's me buying something. Me buying a stack of bricks. I count my investment contributions as an expense, too. That's me buying a bunch of stocks and bonds. Investing is my biggest monthly expense, followed by my mortgage. My expenses are way higher now than they'll be in retirement because I won't be paying a mortgage nor buying stocks and bonds.
There's quite a difference between expense and ownership.

Expense = Food, gas, etc... goes in, goes out, and nothing to show for it when it's waste.

Ownership = buying stocks and bonds, paying down the principal on your house, etc.... something still there and worth something as long as it exsists.

Your "stack of bricks" way of thinking is untrue. It isn't just a stack of bricks piled up and worth the same as if they were piled up in the Home Depot lot. It's a wall that provides shelter, someone constructed it, it could/would be worth something to someone else, and you pay to own the wall.

To each their own though, feel free to count it however you want.

nolesrule
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Re: Accounting for house in net worth, expenses

Post by nolesrule » Tue Mar 12, 2019 7:49 pm

You aren't paying for a stack of bricks with your mortgage payment. You already bought the stack of bricks. You're paying back money someone loaned you in the past so you could buy your stack of bricks.

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