Net worth

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  • IlliniGopher IlliniGopher 
    Status: Physician
    Posts: 107
    Joined: 05/03/2017

    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?

    "Comparison is the thief of joy." - Teddy Roosevelt

    #204244 Reply
    fatlittlepig fatlittlepig 
    Status: Physician
    Posts: 1307
    Joined: 01/26/2017

    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.”

    #204248 Reply
    Avatar Peds 
    Status: Physician
    Posts: 4695
    Joined: 01/08/2016

    One with, one without.

    #204252 Reply
    ENT Doc ENT Doc 
    Status: Physician
    Posts: 3571
    Joined: 01/14/2017

    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.

    #204254 Reply
    Liked by CM, hatton1, Zaphod
    Status: Physician
    Posts: 616
    Joined: 06/23/2018

    I am not the expert in this however I think there are a few ways to calculate your net worth…

    This is what 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?

    #204255 Reply
    CordMcNally CordMcNally 
    Status: Physician
    Posts: 3059
    Joined: 01/03/2017

    There is no correct method. It shouldn’t really change your plan, anyway.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #204256 Reply
    Liked by Vagabond MD
    Lordosis Lordosis 
    Status: Physician
    Posts: 2186
    Joined: 02/11/2019

    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.

    “Never let your sense of morals prevent you from doing what is right.”

    #204262 Reply
    Liked by MPMD, docnews
    Avatar orthodds 
    Status: Dentist
    Posts: 152
    Joined: 11/07/2017

    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.

    Avatar ajm184 
    Status: Other Professional
    Posts: 661
    Joined: 07/14/2017

    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.

    #204275 Reply
    Avatar MnSaver 
    Status: Other Professional
    Posts: 65
    Joined: 01/04/2018

    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.

    #204277 Reply
    Avatar burritos 
    Status: Physician
    Posts: 536
    Joined: 04/23/2018

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

    #204291 Reply
    ENT Doc ENT Doc 
    Status: Physician
    Posts: 3571
    Joined: 01/14/2017

    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.

    #204294 Reply
    Liked by Olórin
    Avatar XX17P 
    Status: Dentist
    Posts: 45
    Joined: 09/10/2018

    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.

    #204303 Reply
    jfoxcpacfp jfoxcpacfp 
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8366
    Joined: 01/09/2016

    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.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only ~ [email protected]

    #204312 Reply
    White.Beard.Doc White.Beard.Doc 
    Status: Physician
    Posts: 965
    Joined: 02/06/2016

    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.

    #204313 Reply

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