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  • Net worth

    I searched old posts to make sure this isn’t redundant. I notice that people tend to include home equity in their net worth or not count mortgage as a liability. I think that falsely increases it. So what’s the correct method?

    [All investments, liquidity (not home equity)] - [all debts (including mortgage)] = net worth?

  • #2
    According to a famous man,
    “My net worth fluctuates, and it goes up and down with markets and with attitudes and with feelings, even my own feelings, but I try.”

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    • #3
      One with, one without.

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      • #4
        The after fee, after tax price of your home minus the mortgage principal remaining is equity. That is absolutely part of your net worth. A mortgage is a liability by definition. What people were probably calling “savings” was the principal on their mortgage payment itself. But the principal balance is indeed a liability.

        But unless you have a plan for that equity for retirement draw down it’s meaningless for retirement planning. May be worthwhile for estate planning if no plans to move in retirement. The idea that homes are the best way to build (meaningful) wealth is silly.

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        • #5
          I am not the expert in this however I think there are a few ways to calculate your net worth...

          This is what Mint.com does for me:

          All cash + all investments (401K, Roth, 529, UTMA) + Value of real estate (they get from Zillow, which is falsely inflated in my area) - All liabilities (credit card payment + any debt like mortgage/HELOC, etc.)= NW

          However, many will argue (and I do the calculation in my head but like to be able to easily track the 529/UTMA so I keep it in Mint) that you should not include the 529 and UTMA accounts in your net worth.

          Does that help?

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          • #6
            There is no correct method. It shouldn't really change your plan, anyway.

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            • #7
              I see them as two different things. Net worth to me does count my home and 529 accounts. Because I could sell the home and withdraw the money with penalty from the 529. I would not do this but I could.
              Then I just subtract out the parts that don't count for my retirement fund. I do not count my efund for retirement either.
              I have not done a utma but I would not count that as anything since that money is no longer mine. O guess I would also not count a daf.

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              • #8
                If we agree to use correct definitions of words and we are all using standard english, then NW is assets minus liabilities.  An asset is something that has economic value which can be expressed in dollars.  A liability is a financial debt or obligation to pay a certain amount and it is also expressed in terms of dollars.  The rest is simple math.

                Whether you include home equity as part of your retirement planning is a different question.  Net worth is net worth.  If you don't want to include home equity in the total then you are talking about something other than net worth.  Maybe you are talking about "retirement assets" or "invested assets" or whatever.  That's a different concept and is not net worth.

                This topic has been beaten to death on other sites such as bogleheads.  Some people want net worth to mean something other than what it means.  I'm not sure why that is.  There does seem to be a strange animus toward homes--particularly "expensive" homes--on sites like bogleheads and to some extent on this forum.

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                • #9
                  Not right or wrong.  My NW calculation includes the equity on our home.  It also includes the value of my children's 529 plans.  As I utilize Quicken to track and include these items it is 'included' in NW.  I also distinguish between NW and retirement assets as I track additional items that Quicken does not such as goals and asset allocation and return projections.

                  A home represents a potentially valuable financial asset (and the primary 'savings' of most Americans), with drawback, liquidity, costs, etc.  Depends on the person/family how they view a home financially.

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                  • #10
                    We track total net worth and retirement. Total net worth only matters if we pre-decease the children and they split the estate. For retirement planning purposes, we only count non-home/529/UTMA as those funds will not be producing income in retirement. We also exclude refund value of DW pension - not sure how to account fully account for pension.

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                    • #11
                      For deductible retirement accounts, doesn't least 1/4-1/3 of those accounts really belong to the gubment?

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                      • #12
                        The strange animus re:expensive homes comes from opportunity cost and utility not realized. On the first matter you tie more assets up in a low performing asset when it could have done better elsewhere. That sacrifice has real consequences re: financial safety earlier in life, inheritance, college funding, and ability to retire when you want. The latter concept is important as well, as I’m sure any person buying an expensive home (in excess of what achieves objective gains such as putting you in a good school district) originally bought it because they perceived life would be X% better by executing the purchase. But when the reality of higher taxes, more upkeep and more expensive upkeep sets in I’d bet a fair number of people wished they had simpler lives. Do some get persistent utility from owning a big home with many rooms, a pool, tennis court and jacuzzi? Sure. But if the perceived utility doesn’t meet reality then you’ve not only sacrificed a lot in opportunity cost but purchased something at low value. And I personally look down on utility derived from status (bragging), if that has anything to do with the purchase, as that represents a misunderstanding of where individual worth is derived from.

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                        • #13
                          Knowing the general magnitude one's net worth probably has some meaning for context.... it's a moving target.  However, for me, knowing precisely my debt obligation/responsibilities was much more important.  This is to include what portion of my children's education I was willing to pay.

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                          • #14
                            Net worth should include your home equity (value - mortgage) but what really matters is that you are consistent. If you prefer not to include it, then leave out the mortgage and do this always for comparison purposes. Otherwise, your comparison/track to achievement will be squishy and meaningless. Sorry if I’m using too much professional jargon.

                            As for 529’s and ESA’s, they can go either way. Technically, they still belong to you unless they are owned by grandparents or non-custodial parents. We keep the 529/ESA’s in net worth under the theory that the parents are bearing the cost of college and the contributions are included in the budget. As you know, the funds can be distributed to the parents if not needed and the 10% penalty not assessed if the student receives a scholarship. To me, it just makes sense. However, what ultimately matters the most is that you are consistent with your definition.

                            If anyone other than the non-custodial parent owns the account, it s/n/b included in net worth.

                            As for arguments about what your $$ could be used for other than a piece of RE, how it c/b invested differently for different rates of growth, I think those are straw men that distract from the basic definition of NW. If your banker is asking for a NW statement, s/he won’t care how you could have invested your money and perhaps gained (or lost, don’t forget) more value than you would have in RE. They’ll stick to the basics.
                            Financial planning, investment management and CPA services for medical and high-income professionals | 270-247-6087

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                            • #15
                              Net worth is just a number, and it can be a tool.  But for a moment, just consider the difference in value of tax deferred retirement accounts, vs taxable accounts, vs Roth accounts.  The usable value of each of those accounts is markedly different, and different for you vs for heirs.

                              So... to get reasonable value from a net worth estimate, you have to decide how you want to use the number.  Is the purpose of the calculation to help plan retirement, to assist with estate planning, or to keep a personal score?  The purpose behind the net worth calculation will determine how best to calculate it.  Examples: if you plan to sell your home and rent in retirement, then include home equity in the net worth calculation.  If you plan to die in your home and you are planning for retirement, then don't include the home.

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