FYI: Don't include home equity in net worth

[Anonymous]

Anonymous wrote:This thread really just underscores the point that net worth is a fundamentally meaningless measure for most people — personally, I'd like to be able to plan not to have to sell my house in retirement (for instance), so I want my net worth to be whatever I need to retire on without calculating home equity at all.

Since it's also not a measure you ever really have to report to any official body in any way, it doesn't really matter whether you do or don't count your home equity in your planning.

It does seem pretty well beyond dispute that the definition of net worth includes your home equity. But it's also true that the value of your home really only exists on paper until you sell it, so it's inherently a bit arbitrary.

No one uses their net worth for retirement planning. What finances someone uses for retirement planning is highly personal.

Net worth has a definition. Using term correctly is important because we should communicate accurately. If we just get to redefine words based on our feelings, what’s the point to discussing anything?

[Anonymous]

Anonymous wrote:Net Worth = investments that make money like saving accounts, bonds, stocks, brokerage and rental property (just the net income).

Here's why. NW is a calculation of assets that are making money for you. Your house is a cost center. Tax, repairs, ect. Even if you have equity, it still doesn't count because you don't really know what you'll earn until you get that check on closing day.

Feel free to argue all you want but it's true for financial planning purposes.

You can give your definition a name and use it for your purposes, but Net Worth already has a definition and it is different from yours.

[Anonymous]

We have a paid-off primary home and 2 paid-off rental properties that produce income. They are absolutely part of our NW.

[Anonymous]

Anonymous wrote:Posts like this are a reminder that this forum is a terrible place to get financial advice from.

Grammar advice, too.

[Anonymous]

Anonymous wrote:This is all so stupid.

You are not counting "net worth" for a legal document. You are counting it for some other reason - to figure out if you have cash flow to retire, or to decide if you are a multi-millionaire, or to decide if you should take out a HELOC, or to decide if you can brag to your in-laws about it. Or for some other reason.

Figure out why you are calculating "net worth". Then either count your home equity accordingly - or don't count it accordingly.

This, exactly.

[Anonymous]

Don't count 401k

[Anonymous]

Anonymous wrote:Posts like this are a reminder that this forum is a terrible place to get financial advice from.

Most of us know this, but we enjoy arguing

[Anonymous]

Anonymous wrote:Net Worth = investments that make money like saving accounts, bonds, stocks, brokerage and rental property (just the net income).

Here's why. NW is a calculation of assets that are making money for you. Your house is a cost center. Tax, repairs, ect. Even if you have equity, it still doesn't count because you don't really know what you'll earn until you get that check on closing day.

Feel free to argue all you want but it's true for financial planning purposes.

You are wrong.

[Anonymous]

Anonymous wrote:Don't count 401k

LOL. Just stop.

[Anonymous]

By that logic investments in the stock market should not count because you don't know what you'll earn until you cash out.

[Anonymous]

I count my home equity as part of my big-picture net worth, but I separately calculate assets that make money for me in retirement, and that calculation excludes home equity and 529 plans. One nice thing about home equity is you can sell your house and use it for end-of-life care someday, so you don't have to worry that if your retirement assets only generate $200k annually but you think you'll need $300k annually in the last few years for quality assisted living.

[Anonymous]

Anonymous wrote:Net Worth = investments that make money like saving accounts, bonds, stocks, brokerage and rental property (just the net income).

Here's why. NW is a calculation of assets that are making money for you. Your house is a cost center. Tax, repairs, ect. Even if you have equity, it still doesn't count because you don't really know what you'll earn until you get that check on closing day.

Feel free to argue all you want but it's true for financial planning purposes.

You don't know what you will get for a stock, bond or rental property until closing day either. Not all stocks (or even bonds for that matter) pay income while you hold them. Guess they don't count in NW either!

[Anonymous]

Anonymous wrote:

Anonymous wrote:Does not make sense at all!

My homes appreciate in value, just like my market investments.

Bought one home 10 years ago for $1.2M, did only routine maintenance (no renovations) of about $35K (had to repaint exterior and new hot water heater and new furnace), sold it 8 years later for $2.4M.

Between what we paid and what we put into our two homes, I've spent $5.5M. However, they are worth over 6.5 currently.

Sure I'm not going to sell my home just to "get some cash", but if I truly needed to I could sell both homes, get $6-7M and rent somewhere (or buy a cheaper place to live). No way that $6M+ is NOT part of my Net worth. If we drop dead, the kids will inherit those $6.5M homes and can sell and get the cash.

Kids can also get a stepped up basis!

And pumped up kicks!

[Anonymous]

My two homes are mortgage free with a combined value of $8 million. It damn well is included in my net worth!

[Anonymous]

Anonymous wrote:Net Worth = investments that make money like saving accounts, bonds, stocks, brokerage and rental property (just the net income).

Here's why. NW is a calculation of assets that are making money for you. Your house is a cost center. Tax, repairs, ect. Even if you have equity, it still doesn't count because you don't really know what you'll earn until you get that check on closing day.

Feel free to argue all you want but it's true for financial planning purposes.

I thought there were a couple of pedantic types here but looks like we have a village! The 'official' or textbook definition of net worth includes all assets less all liabilities. For all practical purposes it's OK to exclude primary residence with a couple of caveats, or have a pointless 'big picture' net worth that includes primary residence and a 'real-world' net worth which excludes primary residence. The reason being you'll always need a roof over your head and at the current moment and what seems likely in the foreseeable future, your replacement 'downsized' how will cost about as much as your primary residence.

Caveats: - Include equity if it's far in excess of what you really need. For instance, if you live in a $5M house and can sell that and easily live in a $1mil home, the excess can be counted as part of your net worth (assume all equity) since it's money you can release for spending should the need arise. This also includes situations where 'you know', in the future, you will be selling your home for $X and will be buying a smaller home worth $Y in Wyoming or Timbuktu (Wish I had that crystal ball). $X - $Y can be included as part of your net worth provided said crystal ball is in your possession.
- Include investment or vacation real estate equity.
- If you do, don't forget to offset with associated liabilities.

I personally don't include primary residence equity in my net worth (yes, net worth) because I don't need to. If you do have to include that component to feel good about your net worth, by all means, do so.