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Calculating your net worth
Old 06-22-2005, 09:57 AM   #1
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Calculating your net worth

I saw a post a few minutes ago inquiring about how to calculate one's net worth and ways to treat different types of assets on your balance sheet. The post went away, but I thought I'd make a new post because I had questions similar to those of the original poster.

I've started preparing a quarterly balance sheet showing my assets and liabilities and net worth. I have been listing the account balance of my taxable accounts and pre-tax accounts without regard to their future tax liabilities. I don't know if this is proper accounting-wise, or that it really matters that much. However, I do know a $100,000 balance in a Roth IRA is worth a lot more today and in the future than $100,000 in a traditional IRA or 401k. 100k in a roth is even worth more than $100k in a taxable account. It seems spending much time computing the potential tax liabilities on your different accounts with varying tax treatments is sort of an overly complicated process. Even your taxable accounts will have built-in capital gains tax liabilities (unless you are doing something wrong...).

I think when ER time gets here, we will have some tax planning flexibility with all our different account types to be able to keep taxes to a minimum.

For pension and accumulated leave, I have been listing my unvested ESOP on my balance sheet, but I tabulate 2 bottom line net worths - one with the unvested ESOP amounts included, and one net worth with unvested balances excluded. I haven't listed my accrued time off, but the value of this is small compared to my total net worth.

Generally speaking, the net worth that I compute is what I could get if I liquidated everything I own over the next few months and got cash for it. I don't include personal property (clothes, electronics, toys, books, furniture, etc.) because the market value for these are small and it would be burdensome to liquidate most of these items.

I also have fairly large student loans with fixed APR's around 1% or so for a 30 year term. The interest payments are also tax deductible and the principal balance is taken care of in the event of my death (so it is like life insurance). I have been toying with listing the amount of these loans as less than the principal balance that I owe, because the loan rate is so low and the other benefits. If I could transfer this liability to someone else like an investor, I'm sure I would be able to pay the transferee significantly less than what the principal balance is. So far I have kept the principal balance as the liability amount because I want to keep a conservative accounting of my net worth.

Do any others have any opinions on the way I have treated my assets or does anyone else do their balance sheet a different way?
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Re: Calculating your net worth
Old 06-22-2005, 11:07 AM   #2
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Re: Calculating your net worth

Justin, you are working at this too hard. But really, if you look at net worth as what you are left after you sell assets and pay debts, you can't discount the debt just because you got a great interest rate.

Especially if you are not going to discount the value of assets by the costs of sale (like real estate commissions) and taxes you will owe on the sale.

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Re: Calculating your net worth
Old 06-22-2005, 11:16 AM   #3
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Re: Calculating your net worth

I just started doing the quarterly statement 12/31/04. When I first set up the list of assets and liabilities is when I had all the questions. Since then, I have simply kept the same conventions as those that I used when I started tracking net worth. It usually doesn't take more than 30 minutes to round up the data to get my net worth figure, and I will use an estimate for some amounts if getting the exact amount would not increase accuracy much and is time intensive.

I think tracking net worth is a good way to look at personal finances. I get to see how much I have saved and how much debt I have paid down. It is also motivating to see how saving more money makes my net worth increase.

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Re: Calculating your net worth
Old 06-22-2005, 11:20 AM   #4
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Re: Calculating your net worth

I have tracked net worth off and on for a number of years. It is motivating when it goes up. A bit harder to handle in times of stock market or real estate price declines. It does help in making you think twice about spending money if you have to look at your net worth decline as a result.

I just wouldn't try to make a science out of it.
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Re: Calculating your net worth
Old 06-22-2005, 11:47 AM   #5
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Re: Calculating your net worth

I have a lot of small amounts of money here and there that add up. I find that one consolidated statement of what I have and what I owe - a snapshot- helps me make decisions going forward. It also allows me to look at the balance sheet and do what-if calculations. What if I move the trad. IRA into a Roth. What if I sell the rental unit and put the proceeds in the stock market.

I am many years away from retirement, but I know that the amount of net worth I'll need to accumulate before I get there probably has seven figures in it. I can see where my net worth is relative to my long-term goals.
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Re: Calculating your net worth
Old 06-22-2005, 12:44 PM   #6
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Re: Calculating your net worth

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.

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.* Same applies to fur coats, diamond rings, and the pencil on your desk.
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Re: Calculating your net worth
Old 06-22-2005, 12:48 PM   #7
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Re: Calculating your net worth

Quote:
Originally Posted by retire@40
There are 2 kinds of net worth.
There are 3 billion kinds of net worth.

Some people think owning their own home is worth a million dollars, even though it only cost $200k.

Some people think not working for a living is worth living off half of their prior income.

Some people think you should include the house, not include the house, include the stuff, not include the stuff, include the cars, not include the cars.

I think at the end of the day, net worth is the collective grouping of stuff that matters to you, minus the stuff that doesnt or that you dont like. And thats worthless as any measuring stick except one that has worth to the beholder...
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Re: Calculating your net worth
Old 06-22-2005, 12:48 PM   #8
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Re: Calculating your net worth

Hey, ya have to come up with something poetic to offset the Klingon and chipped teeth posts...
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Re: Calculating your net worth
Old 06-22-2005, 01:29 PM   #9
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Re: Calculating your net worth

I (sort of )do include my home value, simply because DW and I have agreed that if it came down to going back to work or moving some place cheaper, we'd be packing our bags! Our theory is the house equity is the safety net, which will enable us to be on the high end of what Firecalc says we can spend from our retirement accounts. Company pension and SS is gravy and not counted on for income in our FIRECalculations. The fact that we'll probably see something from one or both of those plus the equity in the house makes me feel like I'd be running more risk of scrimping too much rather than not enough.

Geez, I just can't write right now, so forgive me if I lost ya there.
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Re: Calculating your net worth
Old 06-22-2005, 01:32 PM   #10
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Re: Calculating your net worth

Quote:
Originally Posted by Laurence
I just can't write right now
Right now?
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Re: Calculating your net worth
Old 06-22-2005, 01:36 PM   #11
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Re: Calculating your net worth

I would say a house is a pretty important asset to have. While I agree it doesn't produce an income stream in the conventional sense, you have to live somewhere. Living rent-free is the benefit of owning a house. I know you still have taxes, insurance, maintenance, etc. But knowing that you won't pay rent that will be subject to inflation is worth something. In addition, most people could rent out a room or two if they got in a pinch financially.

I suppose someone with a lot of time on their hands could figure out the present value of a future stream of rent payments to see what a house is "worth" in terms of not having to pay rent.


For your net worth calculation, you use the definition of asset as being something that will give you a stream of income. Things like a zero coupon bond or growth stocks with no dividends produce no streams of income, yet are almost certainly assets. I guess it all boils down to how you define what your assets are. I know my house is an asset (sometimes it seems like a liability though).
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Re: Calculating your net worth
Old 06-22-2005, 01:51 PM   #12
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Re: Calculating your net worth

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Originally Posted by Notth
Right now?
Have at you, churlish knave!
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Re: Calculating your net worth
Old 06-22-2005, 01:53 PM   #13
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Re: Calculating your net worth

Ah, your mother was a hampster and your father smelled of elderberries! :P
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Re: Calculating your net worth
Old 06-22-2005, 01:53 PM   #14
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Re: Calculating your net worth

Quote:
Originally Posted by justin
...I suppose someone with a lot of time on their hands could figure out the present value of a future stream of rent payments to see what a house is "worth" in terms of not having to pay rent...
First of all, I don't think you figure out the "worth" of a house *by figuring out the present value of a future stream of rent.

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.
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Re: Calculating your net worth
Old 06-22-2005, 02:02 PM   #15
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Re: Calculating your net worth

Quote:
Originally Posted by justin
For your net worth calculation, you use the definition of asset as being something that will give you a stream of income.* Things like a zero coupon bond or growth stocks with no dividends produce no streams of income, yet are almost certainly assets.* I guess it all boils down to how you define what your assets are.* I know my house is an asset (sometimes it seems like a liability though).*
I have a hard time following your thinking.* Zero coupon bonds and even growth stocks with no dividends do produce a stream of income when they are sold.

Your house is an asset, I never said it wasn't.

I just 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.
If your only asset is your home with an equity value of $1 million, you will not be able to use that value for early retirement unless you plan on doing what I said in my quote above.
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Re: Calculating your net worth
Old 06-22-2005, 02:17 PM   #16
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Re: Calculating your net worth

I guess I am looking at the house being an asset that will factor in to my retirement plan. Let's say I have my house where I have no mortgage. I pay $300/month in taxes, insurance and maintenance. I could rent a similar place for, say, $900/month. My house saves me $600/month given these assumptions. This is $600 per month that I won't have to get from somewhere. By virtue of owning a house instead of renting, I have reduced my expenses by $600/mo which means I can reduce my retirement income by $600/month. And like I said before, I could always rent out a couple of rooms to make some income from my house.

I guess I should also say that my house is rather modest cost-wise compared to objective measures. Maybe $150k (I think I have it listed on my balance sheet at $140k). Currently I don't have much equity in it. Listing my house in my 'assets' column won't inflate my net worth too much. If I had a $1 million house with no mortgage on it, then my net worth would consist almost exclusively of my house. Of course, if I had an unencumbered $1 million house, I would probably do what you said. Sell it, invest most of the proceeds and buy a reasonable house to live in during ER.

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Re: Calculating your net worth
Old 06-22-2005, 02:50 PM   #17
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Re: Calculating your net worth

Quote:
Originally Posted by retire@40
In other words, a non-expense is not an asset by any definition.
Love it! This reminds me of my uncle who loved to buy stuff on sale and brag about how much he saved. And then he would take the "savings" and buy something else.
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Re: Calculating your net worth
Old 06-22-2005, 03:02 PM   #18
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Re: Calculating your net worth

Quote:
Originally Posted by justin
I guess I am looking at the house being an asset that will factor in to my retirement plan.* Let's say I have my house where I have no mortgage.* I pay $300/month in taxes, insurance and maintenance.* I could rent a similar place for, say, $900/month.* My house saves me $600/month given these assumptions.* This is $600 per month that I won't have to get from somewhere.* By virtue of owning a house instead of renting, I have reduced my expenses by $600/mo which means I can reduce my retirement income by $600/month.
Am I being punk'd?

I don't think you understood a word I said.

I know a place that rents for $8,000 a week.* Since I only pay $8,000 a year for my home expenses, I'm living rent-free for 51 weeks a year.* No, No, even better.* I know of a house that sold for $2 mil.* My house is worth $500K.* I don't need any investments since the SWR on the difference of $1.5 mil is $60K and that is more than what I need to retire.*
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Re: Calculating your net worth
Old 06-22-2005, 03:41 PM   #19
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Re: Calculating your net worth

Quote:
Originally Posted by retire@40
Am I being punk'd?

I don't think you understood a word I said.

I know a place that rents for $8,000 a week. Since I only pay $8,000 a year for my home expenses, I'm living rent-free for 51 weeks a year. No, No, even better. I know of a house that sold for $2 mil. My house is worth $500K. I don't need any investments since the SWR on the difference of $1.5 mil is $60K and that is more than what I need to retire.
you've been punk'd.

Let me rephrase what I stated earlier. If I were to rent the same house that I live in now, it would cost $900/month. If I own the same house with no mortgage, just taxes, insurance and maintenance, I would pay $300/month. Having this asset, my own house that I own, would cost me $600/month less than renting the exact same house. Not the house up the road that rents for $8000/week, but rather the same house. I'm comparing apples to apples, not apples to elephants (or whatever that $8000/wk house is!!!).

I don't know if you would call the $600/mo less that I have to pay "income" or "reduced expenses" or "nothing". In my opinion, not paying $600/mo for housing that I have to have is worth something. This is why I would argue a house is an "asset". In any event, I'll do my balance sheet with the house on it. You don't have to do yours the same way.

I would have to have an extra $180,000 in my portfolio to yield $600/month at a SWR of 4%. I'm not saying my house is "worth" $180,000. But from this example, I hope you can see that the house is worth something to a retiree. In this case a very substantial something.

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Re: Calculating your net worth
Old 06-22-2005, 03:49 PM   #20
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Re: Calculating your net worth

Quote:
Originally Posted by justin
..I don't know if you would call the $600/mo less that I have to pay "income" or "reduced expenses" or "nothing"...
I call it nothing.
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