Tuesday, April 17

Net Worth and Housing

I know that this topic has received airtime in other places at other times, but I thought I would respond a bit more thoroughly to a comment from Customer's Revenge. The comment was that I should not include my house in my net worth.

My response is... that depends on what I am measuring and why.

If I am trying to measure how much I would be worth today if I sold everything and paid off any debts then my house absolutely needs to be there. It is certainly part of the assets that I own and have accumulated and there is value in knowing what this number is.

If, however, I am trying to measure my assets that can support a retirement plan by generating capital growth and/or income then perhaps my house does not belong in there.

I once saw an article that referred to your net worth without housing as your "nest egg". I liked the term and the concept and so I have taken to tracking this number as well as the traditional net worth. I also take out my car and some personal property. According to this formula, I have recently passed $400,000 of nest egg worth. About $290,000 of this is invested, about $85,000 is in bank accounts (some due to asset allocation, some waiting for investment choices or opportunities) and the remaining amount includes receivables and miscellaneous amounts.

This nest egg is the number that tells me about retirement using the 4% rule. Right now, I can raise $16,000 per year from this amount - not enough to retire on. :(

But I have to say that I disagree with those who say that housing should be excluded altogether because that gives a one-sided picture. A balanced view must include tracking both numbers, in my opinion.

BTW, Consumer's Revenge also asked about how I grew my net worth so quickly. That is a topic for another post so stay tuned for that later this week.... :)

3 comments:

MillionDollarJourney.com said...

Hey Diva, I think you are right, you should include your principle residence in your net worth. Some people feel that net worth should only be counted as assets that produces income - liabilities. In my opinion, net worth is simply assets - liabilities.

FT

Canadian Money said...

My philosohy was always to include our home in our net worth.

To achieve financial independence I guess it comes down to owning a home free and clear or having sufficient monthly income to pay for a place to live.

I also recall, that during the early stages of accumulation, it was nice to know that our networth was growing each year.

Canadian Capitalist said...

Net worth = assets - liabilities.

A house is an asset, so it definitely belongs in a net worth statement.

It shouldn't count in an investment portfolio because a primary purpose of a house is shelter, not returns. Everyone should track both their net worth and investment portfolio.