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Re: Calculating your net worth
Old 06-22-2005, 04:06 PM   #21
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Re: Calculating your net worth

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Originally Posted by retire@40
I call it nothing.
I think this is why we disagree. I see owning a house that yields rent-free living as something, you see it as nothing.

Hypothetically speaking, what would you say about a paid in full health insurance contract (sort of like whole life ins. but for health insurance) that doesn't require any additional premiums, but will provide health insurance for the rest of your life. Let's say 100% of all medical expenses. This hypothetical policy would keep you from paying any costs for your own private health insurance, medical care, prescriptions, etc. You would never pay a dime the rest of your life. Would you consider this paid in full health insurance contract to have any value on your balance sheet? What if it retails for $50,000? What if you know it will save you $300/month for the rest of your life?


FYI for others reading this thread, I found this old post on calculating net worth that may be of value.
http://early-retirement.org/forums/i...hp?topic=820.0

It looks like there are 2 distinct sides to the "is a house an asset" issue.
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Re: Calculating your net worth
Old 06-22-2005, 04:15 PM   #22
 
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Re: Calculating your net worth

I look at my house as kind of an 'ace in the hole'. It's an asset as far as the bank is concerned but I really don't include it in my retirement planning, other than not having to make a mortgage payment. So it does reduce expenses.

On the other hand, I know that it being around $500K, I can easily get a reverse mortage about 20 years from now that should net about $135K in todays dollars. - So, that is my ace in hole.
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Re: Calculating your net worth
Old 06-22-2005, 04:31 PM   #23
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Re: Calculating your net worth

Quote:
Originally Posted by justin
Hypothetically speaking, what would you say about a paid in full health insurance contract (sort of like whole life ins. but for health insurance) that doesn't require any additional premiums, but will provide health insurance for the rest of your life.* Let's say 100% of all medical expenses.* This hypothetical policy would keep you from paying any costs for your own private health insurance, medical care, prescriptions, etc.* You would never pay a dime the rest of your life.* Would you consider this paid in full health insurance contract to have any value on your balance sheet?* What if it retails for $50,000?* What if you know it will save you $300/month for the rest of your life?
If you don't have to pay for health insurance, it's an expense you don't have, not an asset.

If you paid $50K for health insurance for the rest of your life, it's a pre-paid expense that will be amortized over whatever lifetime expectancy was used. A prepaid expense is an asset, but it just replaces the cash asset that you had before you made the prepayment, so you don't have an increase in your total assets.

You are getting caught up with this "saving is an asset" thing. Not paying for something is just not included in your expense budget, it's not something you add to your assets.
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Re: Calculating your net worth
Old 06-22-2005, 04:32 PM   #24
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Re: Calculating your net worth

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Originally Posted by retire@40
Second, just because you live rent free doesn't give any worth to the rent you are not paying. *In other words, a non-expense is not an asset by any definition.
Finally someone says something definite enough that it can be tested.

What you said above is interesting, but certainly Justin's house is an asset by most rational tests. *Both accounting and economic sense would classify this as an asset. First accounting. Look at any balance sheet and under assets you will find a category "Prepaid Expenses". These are carried at whatever amount was paid, less amortization over the period of prepayment. A house owned free and clear and that one lives in is also obviously an asset by the same reasoning. Some portion (probably an increasing portion) of ones shelter expense is already paid for. That is what an asset is. An under market apartment lease under rent control is an asset.

Owner-occupied houses also fulfill other definitions of assets- something that can produce cash flows. It can be sold, rented, partially rented, or encumbered... all in various ways producing cash.

Justin mentioned another good way to look at it. You take the value provided (in his example $600/mo.) and capitalize it at some reasonable rate. This can get very complicated, but what I would do is use an "adjusted SWR" of 5%. So if he gets $7200 worth of shelter from his home, multiply that by 20 to give an asset value of $144,000. As his house is burdened by a mortgage, he has to list the value of that note in his liabilities.

Assuming $7200 a year in benefits is very modest and conservative. If in addition he has an attractive, long term fixed mortgage on it, it is hard to see how this could not be a boon to his financial status and security, and thus obviously an asset.

It also requires a bit of care when you decide how much net worth is needed to retire, because since you capitalized a future service, you have to include the offsetting imputed rent in your budget.

The main benefit I can see to doing this is that although it requires some judgment, it won't mislead you into putting too little value on relatively non-liquid fixed assets.

It also allows you to see when the market value of your house is way out of line with its use value, and possibly it should be sold.

\Ha
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Re: Calculating your net worth
Old 06-22-2005, 04:40 PM   #25
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Re: Calculating your net worth

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Originally Posted by HaHa
What you said above is interesting, but certainly Justin's house is an asset by most rational tests. *Both accounting and economic sense would classify this as an asset. First accounting. Look at any balance sheet and under assets you will find a category "Prepaid Expenses". These are carried at whatever amount was paid, less amortization over the period of prepayment. A house owned free and clear and that one lives in is also obviously an asset by the same reasoning. Some portion (probably an increasing portion) of ones shelter expense is already paid for. That is what an asset is.
Show me a balance sheet that has a house listed under "Pre-paid Assets."
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Re: Calculating your net worth
Old 06-22-2005, 04:43 PM   #26
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Re: Calculating your net worth

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Originally Posted by HaHa
Owner-occupied houses also fulfill other definitions of assets- something that can produce cash flows. It can be sold, rented, partially rented, or encumbered... all in various ways producing cash.
You must like it better when you say it. A few posts ago I said...

Quote:
For ER purposes, my net worth calculation only accounts for assets that will give me a stream of income. Homes don't count unless you are going to sell it, rent it, do a reverse mortgage, or anything similar.
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Re: Calculating your net worth
Old 06-22-2005, 04:49 PM   #27
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Re: Calculating your net worth

If an asset is listed in the forest and nobody is there to see it, is it still an asset?

I can't imagine why anyone cares what someone else includes in their list of assets. *

Before you can answer the question, you need to state the purpose of computing your net worth.
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Re: Calculating your net worth
Old 06-22-2005, 04:58 PM   #28
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Re: Calculating your net worth

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Originally Posted by - SG
Before you can answer the question, you need to state the purpose of computing your net worth.
Exactly.* That why I said initially,
Quote:
There are 2 kinds of net worth.* There is the classic kind that includes all assets, and there is the kind that only accounts for assets that produce revenue for you.
So, if you just want to know what your net worth is, then it's just Net worth=Total Assets - Total Liabilities.

If you want to know how much net worth you have to live off in retirement, you will need to subtract out those assets that will not provide an income stream for you.
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Re: Calculating your net worth
Old 06-22-2005, 05:11 PM   #29
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Re: Calculating your net worth

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Originally Posted by retire@40
Show me a balance sheet that has a house listed under "Pre-paid Assets."
You are either really dense, or you really like to argue. Neither applies to me, so ta-ta.

Ha
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Re: Calculating your net worth
Old 06-22-2005, 05:31 PM   #30
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Re: Calculating your net worth

Quote:
Originally Posted by retire@40
Show me a balance sheet that has a house listed under "Pre-paid Assets."
Easy. Mine.

Neeeext??
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Re: Calculating your net worth
Old 06-22-2005, 05:32 PM   #31
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Re: Calculating your net worth

I calculate my net worth every year and keep a log. I simply add up everything and subtract what I owe. I donít worry about the taxes. I use the value of the house, 401, savings, cars, ect. I fully understand that all my assets will not provide a cash flow. But some things are necessary to life. You either own a house or you rent. You have a car or walk. The main value of the net worth calculation to me is I can see how I am doing over time. I expect it to go up every year, and it has except for one. Never has went down. As long as I do it the same way every year it serves my purpose. When you start thinking in terms of net worth you make decisions that improve it rather than just spending randomly. (I buy what the TV tells me to.) Every major purchase will make you think what will this do to my net worth? I just wish I had figured this out when I was younger.
I consider tracking net worth critical to wealth building.
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Re: Calculating your net worth
Old 06-22-2005, 05:37 PM   #32
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Re: Calculating your net worth

I believe it is important to have a common methodology for calculating net worth. *Unfortunately, there doesn't seem to be a consensus on how it should be done. *As for myself, most of my assets are relatively liquid. *So, I keep a spread sheet with three columns. *The first is a total of all my accounts/assets without any adjustment for taxes. *I call this my "gross net worth" or my "assets under management." *In the second column I calculate net worth adjusting for taxes at a tax rate of 15 percent. *I assume it is realistic to assume that some of my accounts (such as my 401k) will be taxes at 15% after I retire and start withdrawing from them. *The third column is like the second, only I calculate net worth based on the assumption that taxes will take 28 percent (my current tax bracket). *There's roughly a 100k spread between the first column and the third column. *My retirement goal is to accumulate a net worth of $1M, using the most conservative estimate of net worth, i.e., the third column. *It may sound complicated, but it isn't --- the spread sheet does all the work. *It also gives my three different ways to look at my nest egg. *Frankly, I believe it is rather naive to calculate net worth without making any adjustments for taxes and any other costs that you will experience in order to convert you assets to dollars you can put in your wallet free of all encumbrances.
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Re: Calculating your net worth
Old 06-22-2005, 05:57 PM   #33
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Re: Calculating your net worth

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I believe it is important to have a common methodology for calculating net worth.
What is this, a competition? Do it any way that makes sense to you.

Quote:
Originally Posted by robert
Unfortunately, there doesn't seem to be a consensus on how it should be done.
And that's why GAAP is such a big, complicated system.
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Re: Calculating your net worth
Old 06-22-2005, 07:14 PM   #34
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Re: Calculating your net worth

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Originally Posted by robert
I believe it is important to have a common methodology for calculating net worth. *Unfortunately, there doesn't seem to be a consensus on how it should be done. *As for myself, most of my assets are relatively liquid. *So, I keep a spread sheet with three columns. *The first is a total of all my accounts/assets without any adjustment for taxes. *I call this my "gross net worth" or my "assets under management." *In the second column I calculate net worth adjusting for taxes at a tax rate of 15 percent. *I assume it is realistic to assume that some of my accounts (such as my 401k) will be taxes at 15% after I retire and start withdrawing from them. *The third column is like the second, only I calculate net worth based on the assumption that taxes will take 28 percent (my current tax bracket). *There's roughly a 100k spread between the first column and the third column. *My retirement goal is to accumulate a net worth of $1M, using the most conservative estimate of net worth, i.e., the third column. *It may sound complicated, but it isn't --- the spread sheet does all the work. *It also gives my three different ways to look at my nest egg. *Frankly, I believe it is rather naive to calculate net worth without making any adjustments for taxes and any other costs that you will experience in order to convert you assets to dollars you can put in your wallet free of all encumbrances.
Net worth is a moment in time. Future events (taxes, inflation, etc)
need not be considered. To be clear, you must take these future
(unknown) events into account, but they are not necessary to
figure net worth. Remember it as "a slice in time". That's the way
accountants view it.

JG
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Re: Calculating your net worth
Old 06-22-2005, 10:30 PM   #35
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Re: Calculating your net worth

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Net worth is a moment in time.* Future events (taxes, inflation, etc)
need not be considered.* To be clear, you must take these future
(unknown) events into account, but they are not necessary to
figure net worth.* Remember it as "a slice in time".* That's the way
accountants view it.
So accountants don't use future events like deferred taxes on an accrual-basis balance sheet to determine net worth in accordance with FASB 109?
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Re: Calculating your net worth
Old 06-22-2005, 10:42 PM   #36
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Re: Calculating your net worth

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Originally Posted by Notth
Easy.* Mine.

Neeeext??
Then you put it in the wrong place, my friend.* Your home is not a prepaid asset.* On the balance sheet it goes in the "Real Estate" or "Fixed Asset" category.* An example of a prepaid asset would be your car insurance that you prepay for the year instead of paying it on a monthly basis.
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Re: Calculating your net worth
Old 06-22-2005, 10:44 PM   #37
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Re: Calculating your net worth

Oh jeeze louise dude, give it up.

You're a noodge.
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Re: Calculating your net worth
Old 06-23-2005, 12:30 AM   #38
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Re: Calculating your net worth

I've included my Myers-Briggs personality test score, my feelings about peaches, and the hole in my left ear (for an earring) as assets in my net worth calculation. And there's nothing any of you can do about it. :P
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Re: Calculating your net worth
Old 06-23-2005, 02:06 AM   #39
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Re: Calculating your net worth

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Originally Posted by - SG
I've included my Myers-Briggs personality test score...
Asset or liability?
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Re: Calculating your net worth
Old 06-23-2005, 07:59 AM   #40
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Re: Calculating your net worth

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Originally Posted by retire@40
So accountants don't use future events like deferred taxes on an accrual-basis balance sheet to determine net worth in accordance with FASB 109?
Picky picky FASB? We don't need no stiiiinking FASB.

JG
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