FYI: Don't include home equity in net worth

[Anonymous]

Net worth equals assets minus liabilities.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

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.

This same idiotic drivel pops up every 6 months or so. Net worth has a definition. You don't get to make up a new definition. And your reasoning is weak (particularly since you assume that owning a house is the only means of maintaining shelter).

If you are poor, you need to include your measly home equity in net worth. Go ahead and shelter under your umbrella in your old age.

[Anonymous]

Anonymous wrote:I'm the one in "Net Worth Jail," a few comments above. While your home equity is an asset and officially counts towards net worth, I don't count it because I have no plans to ever draw money out of my house. I'm not going to borrow against it, use it as an investment property, or sell the property to increase my cash flow. The only thing I might do is sell it and invest the money in another primary residence which will be around the same or slightly higher price.

I see my home more as an avoidance of a cost than an asset. Without the mortgage, I will spend $1,500 a month on the condo fees, HOA, insurance, maintenance and repairs. To rent a similar place, it would cost $2,700 a month, so I've reduced my monthly expenses by $1,200 a month by owning.

not everyone is the same. I absolutely see my home as an investment. I have a few rental properties with sub 3% rates accross 3 states and will choose one to live in when I retire. I absolutely will be taking the 1.2M in equity I Will have in my current home and use it towards my nest egg. As a matter of fact this along with some other taxable investments and rental income will carry me from my target retirement age of 55 until I want/need to draw on my retirement accounts.

[Anonymous]

So if I have a suitcase of 1 million dollars I can’t count it in net worth because it’s not making interest?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

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.

This same idiotic drivel pops up every 6 months or so. Net worth has a definition. You don't get to make up a new definition. And your reasoning is weak (particularly since you assume that owning a house is the only means of maintaining shelter).

If you are poor, you need to include your measly home equity in net worth. Go ahead and shelter under your umbrella in your old age.

I kind of get the feeling you’d also have an issue with a billionaire claiming their $100M mansion is part of their NW too.

[Anonymous]

Anonymous wrote:I don't count my fully paid off $500K condo in my net worth because even if I sold it, I'm likely to spend at least that much on another property to live in.

FFS, it's still part of your net worth. By simple definition!

I do agree you have to live somewhere, but you could sell, and rent.

[Anonymous]

Anonymous wrote:

Anonymous wrote: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.

529s are kind of a gray area to me.

I'm glad most here have rejected the OP's stupid "your house doesn't count" argument - and frankly, I'm surprised because I had the impression that this asinine view had more support here. However, 529s are a little different. They absolutely count as part of your net worth when following the strict definition. But they are essentially just pre-paying an expense and for a good which has no resale value.

Prepaid expenses are also an asset. Just fyi.

[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.

No.

[Anonymous]

I think OP phrased it poorly. It’s not about asset making income or not, it’s about having to allocate the asset for personal consumption. You cannot be homeless. But this idea of OP still doesn’t hold because there is not definition of what shelter must be and how much it must cost. You absolutely should count your equity in a house you live in because you CAN sell it and exchange it for something less expensive or rent something instead. In this case this equity becomes a part of your NW in the definition OP wants to follow, as it is now investable. Investment income from this may go towards covering your living costs in a rental with the rest saved/reinvested. But according to the definition it is a part of your asset portfolio capable of earning income.

[Anonymous]

Anonymous wrote:I think OP phrased it poorly. It’s not about asset making income or not, it’s about having to allocate the asset for personal consumption. You cannot be homeless. But this idea of OP still doesn’t hold because there is not definition of what shelter must be and how much it must cost. You absolutely should count your equity in a house you live in because you CAN sell it and exchange it for something less expensive or rent something instead. In this case this equity becomes a part of your NW in the definition OP wants to follow, as it is now investable. Investment income from this may go towards covering your living costs in a rental with the rest saved/reinvested. But according to the definition it is a part of your asset portfolio capable of earning income.

i also think OP and others who agree don’t really have much net worth to begin with and can’t see that this board skews wealthy. Many people have 2nd homes and have investment properties. People like myself purchased an investment in our early 40s with the intent for it to be a retirement home so our primary home in indeed money we will be able to cash in tax free and not need to use for another home. My retirement home is currently being paid down by renters. And if I decide I don’t want to live in that home? Who cares, I will 1031 exchange it into something else, but I’m definitely not using the funds from my primary home. Thats hitting my pocket. I’m certainly not alone in this.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I think OP phrased it poorly. It’s not about asset making income or not, it’s about having to allocate the asset for personal consumption. You cannot be homeless. But this idea of OP still doesn’t hold because there is not definition of what shelter must be and how much it must cost. You absolutely should count your equity in a house you live in because you CAN sell it and exchange it for something less expensive or rent something instead. In this case this equity becomes a part of your NW in the definition OP wants to follow, as it is now investable. Investment income from this may go towards covering your living costs in a rental with the rest saved/reinvested. But according to the definition it is a part of your asset portfolio capable of earning income.

i also think OP and others who agree don’t really have much net worth to begin with and can’t see that this board skews wealthy. Many people have 2nd homes and have investment properties. People like myself purchased an investment in our early 40s with the intent for it to be a retirement home so our primary home in indeed money we will be able to cash in tax free and not need to use for another home. My retirement home is currently being paid down by renters. And if I decide I don’t want to live in that home? Who cares, I will 1031 exchange it into something else, but I’m definitely not using the funds from my primary home. Thats hitting my pocket. I’m certainly not alone in this.

Not sure if you read all the posts but several posters clarified that it's equity in a 'normal' primary residence that should be excluded and not investment property. I'm one of those that lives in a normal house (i.e. not a $5M house while I can easily live in a $1M one) and I don't include the equity in my assets for the purpose of retirement planning. The one rental I own, I certainly do.
Also, I think it's the relatively poor that clamor to include their primary home equity in their net worth so they appear rich. Someone whose home equity is less than 10% of their total worth won't need to.

[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.

Investments that generate money are called “investments thar generate money” not net worth. Any way you slice it, you can’t call it net worth.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I'm the one in "Net Worth Jail," a few comments above. While your home equity is an asset and officially counts towards net worth, I don't count it because I have no plans to ever draw money out of my house. I'm not going to borrow against it, use it as an investment property, or sell the property to increase my cash flow. The only thing I might do is sell it and invest the money in another primary residence which will be around the same or slightly higher price.

I see my home more as an avoidance of a cost than an asset. Without the mortgage, I will spend $1,500 a month on the condo fees, HOA, insurance, maintenance and repairs. To rent a similar place, it would cost $2,700 a month, so I've reduced my monthly expenses by $1,200 a month by owning.

not everyone is the same. I absolutely see my home as an investment. I have a few rental properties with sub 3% rates accross 3 states and will choose one to live in when I retire. I absolutely will be taking the 1.2M in equity I Will have in my current home and use it towards my nest egg. As a matter of fact this along with some other taxable investments and rental income will carry me from my target retirement age of 55 until I want/need to draw on my retirement accounts.

Not everyone is the same. I couldn't wait to sell two properties that were had bought for living. Sold them few years ago, put the money in the market, and I retired as every stock 4x'ed. I could buy a home now, but not interested at all.
Renting would have been cheaper and we missed out on the money not being in the market already.
Third home was sold last year and that money is inherited by young kid. Relatives offered to rent it out for the child's benefit;
I thought they crazy.
To PP, I know you are saving $1200 a month, but the money stuck in the condo ($300-$500k my guess) could be used to make $20k few times a year in the market and that's me being conservative.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I think OP phrased it poorly. It’s not about asset making income or not, it’s about having to allocate the asset for personal consumption. You cannot be homeless. But this idea of OP still doesn’t hold because there is not definition of what shelter must be and how much it must cost. You absolutely should count your equity in a house you live in because you CAN sell it and exchange it for something less expensive or rent something instead. In this case this equity becomes a part of your NW in the definition OP wants to follow, as it is now investable. Investment income from this may go towards covering your living costs in a rental with the rest saved/reinvested. But according to the definition it is a part of your asset portfolio capable of earning income.

i also think OP and others who agree don’t really have much net worth to begin with and can’t see that this board skews wealthy. Many people have 2nd homes and have investment properties. People like myself purchased an investment in our early 40s with the intent for it to be a retirement home so our primary home in indeed money we will be able to cash in tax free and not need to use for another home. My retirement home is currently being paid down by renters. And if I decide I don’t want to live in that home? Who cares, I will 1031 exchange it into something else, but I’m definitely not using the funds from my primary home. Thats hitting my pocket. I’m certainly not alone in this.

Not sure if you read all the posts but several posters clarified that it's equity in a 'normal' primary residence that should be excluded and not investment property. I'm one of those that lives in a normal house (i.e. not a $5M house while I can easily live in a $1M one) and I don't include the equity in my assets for the purpose of retirement planning. The one rental I own, I certainly do.
Also, I think it's the relatively poor that clamor to include their primary home equity in their net worth so they appear rich. Someone whose home equity is less than 10% of their total worth won't need to.

The problem with you and OP is that you are misunderstanding and misusing the term “Net Worth”.
We understand what you are trying to define: Assets that you plan to draw income from to fund your retirement.

Nobody will disagree with you if you say, I’m not including home equity in the assets I plan to use to fund my retirement. Someone else may even decide to not include money in their brokerage account if they won’t use it. Their choice.

Everyone is free to choose which assets they want to exclude from their retirement planning.
But everyone doesn’t get to redefine Net Worth to their liking.

Money you plan to use to fund retirement IS NOT the same as your net worth.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I think OP phrased it poorly. It’s not about asset making income or not, it’s about having to allocate the asset for personal consumption. You cannot be homeless. But this idea of OP still doesn’t hold because there is not definition of what shelter must be and how much it must cost. You absolutely should count your equity in a house you live in because you CAN sell it and exchange it for something less expensive or rent something instead. In this case this equity becomes a part of your NW in the definition OP wants to follow, as it is now investable. Investment income from this may go towards covering your living costs in a rental with the rest saved/reinvested. But according to the definition it is a part of your asset portfolio capable of earning income.

i also think OP and others who agree don’t really have much net worth to begin with and can’t see that this board skews wealthy. Many people have 2nd homes and have investment properties. People like myself purchased an investment in our early 40s with the intent for it to be a retirement home so our primary home in indeed money we will be able to cash in tax free and not need to use for another home. My retirement home is currently being paid down by renters. And if I decide I don’t want to live in that home? Who cares, I will 1031 exchange it into something else, but I’m definitely not using the funds from my primary home. Thats hitting my pocket. I’m certainly not alone in this.

Not sure if you read all the posts but several posters clarified that it's equity in a 'normal' primary residence that should be excluded and not investment property. I'm one of those that lives in a normal house (i.e. not a $5M house while I can easily live in a $1M one) and I don't include the equity in my assets for the purpose of retirement planning. The one rental I own, I certainly do.
Also, I think it's the relatively poor that clamor to include their primary home equity in their net worth so they appear rich. Someone whose home equity is less than 10% of their total worth won't need to.

The problem with you and OP is that you are misunderstanding and misusing the term “Net Worth”.
We understand what you are trying to define: Assets that you plan to draw income from to fund your retirement.

Nobody will disagree with you if you say, I’m not including home equity in the assets I plan to use to fund my retirement. Someone else may even decide to not include money in their brokerage account if they won’t use it. Their choice.

Everyone is free to choose which assets they want to exclude from their retirement planning.
But everyone doesn’t get to redefine Net Worth to their liking.

Money you plan to use to fund retirement IS NOT the same as your net worth.

Chill dude! Get your head out of your pedantic a**. Everyone is aware of textbook definitions. This is not a classroom discussion and goes beyond that. I use net worth to exclude primary residence and will continue to do so in future discussions on here because it makes sense to ME. Don't like it, don't use it. GTFO!