Road to $1M

[NW-Bound]

I include my home's value in my net worth when I'm bragging, but for retirement planing, I exclude it.

Well, I do not gloat about NW to any relative and friend, and only "hint" about it here. But at the end of the month, after my wife has paid all bills and I have to refill the checking account, all I see is money outflow.

However, Meadbh is right. NW does include everything, meaning RE, and also my cars and the RV no matter how little they're worth. Investable assets are a retiree's lifeblood however, and the other "stuff" does not really add but draw from them.

 

[travelover]

Well, I do not gloat about NW to any relative and friend, and only "hint" about it here.........

You are missing a lot of fun, then. What is the point of having a bunch of money if you can't brag about it? (I'm pulling your leg.)

 

[NW-Bound]

The problem with gloating is that there are always people with so much more than I have, going all the way up to Warren Buffett.

But back on the "stuff" that does not add but subtract from your stash, I am glad I only have a small motorhome, bought used at that, and not a boat or a plane. Have heard that those things can "eat" more than they are worth. And of course there are things that can really eat, like Arabian horses. Even a home can drain your coffer in taxes and maintenance.

Oh, money, money... How I like to see my Quicken bottom line... The gift that keeps on giving. In one click, I can see how much it has grown, in dividends, in capital gains. I look at it this way, and that way, and I am so pleased.

It's just so nice to be invested in a bull market. But of course everybody here knows that.

 

[Fermion]

It just doesn't make sense to not include a home in both net worth and invested assets. I could sell my home tomorrow for $200,000 to one of those "we buy homes outfits" (even though it is worth $350,000). I should at least include that $200,000 figure in all calculations.

 

[Options]

I consider my paid-off home part of my net worth. But net worth is very different from the portfolio that must provide my future cash flow, and from which withdrawal rates, etc. are calculated from. That portfolio includes only very liquid investment assets.

Net worth is really little more than an interesting curiosity. Portfolio number is the thing that really matters.

+1
NW number is perhaps a personally fun number at best. Beyond that, I tend to avoid any "my pen is bigger than your pen" discussions (although I do have a very smart looking pen .

I too include the substantial equity of my debt free home for reasons I've posted elsewhere (price protected R/E in a nauseatingly trendy, highly desirable Los Angeles neighborhood, intention to downsize considerably in near future, future housing needs already accounted for, etc). This is a highly personal decision, and one undertaken only after considering many factors particular to my situation.

 

[RetireAge50]

I am sure everyone here calculates net worth the same (it is not complicated).

How one chooses to categorize the components is based on how they like to think or plan.

 

[traineeinvestor]

For the Nth time....



Investopedia explains 'Tangible Net Worth'
In terms of a consumer, tangible net worth is the sum of all your tangible assets (cash, home, cars, etc) less any liabilities you may have.





People are entitled to use any measure they wish in planning their financial lives. Excluding one's home means that one is using not Net Worth but Investment Portfolio. It's a perfectly reasonable variable to use based on the assumption that one's home will not be sold. But the fact is that a home (minus any mortgage owing) is a financial asset and by any country's GAAP (generally accepted accounting principles) MUST be included in the definition of Net Worth.

Whenever this topic comes up on the forum, there is a variety of interpretations of the term "Net Worth". No valid comparisons can be made unless there is agreement on the definition of the term.

another +1

We include it - it's an asset, it has value and (although we don't intend to rely on it) we can tap that value to support ourselves should the need arise.

Excluding a home from a net worth calculation is like ignoring SS or defined pension entitlements

 

[tuixiu]

It just doesn't make sense to not include a home in both net worth and invested assets. I could sell my home tomorrow for $200,000 to one of those "we buy homes outfits" (even though it is worth $350,000). I should at least include that $200,000 figure in all calculations.

Exactly. I've never understood the argument that an asset with a certain (estimated) value that could be converted to cash should not be included in your net worth because you are using it functionally. Heck I could get a home equity loan and have it formatted as a pile of cash, if loan cancels out the home would that make my net worth increase just by virtue of changing the format of the asset?

If I have one of those old-school Disney stock certificates worth a million bucks and it is framed on my office wall, that would count too even if I'm using it as decoration.

 

[Fermion]

I keep a sack of $100 bills and use it as a door stop to my garage, so I don't include that money in my net worth.

 

[nash031]

For the Nth time....



Investopedia explains 'Tangible Net Worth'
In terms of a consumer, tangible net worth is the sum of all your tangible assets (cash, home, cars, etc) less any liabilities you may have.





People are entitled to use any measure they wish in planning their financial lives. Excluding one's home means that one is using not Net Worth but Investment Portfolio. It's a perfectly reasonable variable to use based on the assumption that one's home will not be sold. But the fact is that a home (minus any mortgage owing) is a financial asset and by any country's GAAP (generally accepted accounting principles) MUST be included in the definition of Net Worth.

Whenever this topic comes up on the forum, there is a variety of interpretations of the term "Net Worth". No valid comparisons can be made unless there is agreement on the definition of the term.

Or you can just be specific when you're talking about something. For example, "I have >$500,000 in my portfolio."

I know this: I don't care enough to get upset about it. If you all want to talk about your NW including the Zillow estimate of your house, have at it. I'm worried about invested assets to retire. When I sell my house and pull the equity, THEN I'll talk about that cash. There are plenty of people out there of the mind that your home is not an asset, but an expense, so declaring something a certain way on this forum isn't going to change much (unless you just make it a forum rule: THOU SHALT INCLUDE HOME EQUITY IN YOUR NET WORTH.)

 

[NW-Bound]

As I have said, people still in the accumulator phase tend to have a larger portion of their NW in their home which they are still paying off. It is natural to include the increasing home equity to measure one's progress in wealth building.

On the other hand, people who have retired tend to have their home already paid off. As they are already settled and do not plan to sell to raise cash, they are more concerned with their investable portfolio or income-producing assets, which must generate the cash flow to support their home among other living expenses.

It is not really about NW definition, but rather the different mindset. The point is not at all about NW definition.

My NW does include my homes, but the truth is that I pay a lot more attention to my Quicken screen bottom which has only my investable portfolio. I did not bother to enter the home estimated values, nor that of the few gold coins that I have, nor the sacks of cash used as door stops.

Just joking about the door stops. The sack of cash is well hidden.

Joking again.


PS. If I buy homes to flip or have rental homes, I am sure I would include their values on my Quicken screen along with the income they generate.

 

[daylatedollarshort]

I finally realized my 90% asset allocation put an unnecessary risk or as William Bernstein wrote in one book, "When you've won the game it is time to stop playing." I went to 60% equities in August 2007. That helped dampen the hit but it still hurt. Fortunately, it has all come back and more. In 2010 I went down to 40% equities.

So, why am I still coming in here?

We figured out the same thing. We had won the game in 2007. We are trying hard not to make the same mistake again. We lowered our stock allocation and hope to downsize the house in the current housing bubble market before we see another $300K drop in the home price.

If we buy a house for ~$300K even if the bubble pops again I don't see its price going to zero, so our paper losses won't be as great as they were during the last housing bust.

 

[nash031]

As I have said, people still in the accumulator phase tend to have a larger portion of their NW in their home which they are still paying off. It is natural to include the increasing home equity to measure one's progress in wealth building.

...
It is not really about NW definition, but rather the different mindset. The point is not at all about NW definition.

Agree on both counts. When I look at my "number" to try to be FI at 42, I don't include the equity in my home. Sure, if I sell the house and start renting, all of a sudden that's $300K closer to my "number", but since it's not there yet, I am just not counting on it.

All that matters to me is making that "number" (since it's based off of expenses and desired savings/income generation). The equity in my home doesn't factor into that since I'm still paying it off.

 

[Fermion]

So all people who rent should subtract 300 x monthly rent from their net worth. How many do this?

 

[Ronstar]

All of the business classes I took specified net worth as total assets minus total liabilities. House value net of mortgages, loans, is included in net worth. However, I tally house value separately and only use portfolio value as my pool of retirement $, and in figuring withdrawal rate

 

[47]

So all people who rent should subtract 300 x monthly rent from their net worth. How many do this?

My apologies.. I was the OP who started this wild fire unwittingly with this NW question.

May be we can come to a compromise as per Fermion

Say your life Expectancy = L;
Rent of a place you would like to live in ( or comparable to your house) = $R
Current equity in your house = (Cash value - Mortgage) = $H
Maintenance + Mortgage during remaining life expectancy = $M
L*R = cumulative rent payments in current $

Renters should consider L*R as their implicit liability.

Home owners can do one of the following:
consider H-(L*R) as an asset (willing to sell and rent)
consider H-M as an asset (willing to live in the house till the end)
or some combination that includes renting their current home out and living elsewhere.

 

[Keim]

Sometimes this discussion board makes me feel like such a simpleton.

I see a term like "net worth" and I say to myself "That's simple: assets - liabilities=NW." BAM! Done.

It never occurs to me to add in all the caveats and wherefore's, etc. of some of the other posters.

An investment portfolio is a different beast, thus a different number.

 

[Surewhitey]

Got married in 96. We had $5k in debt and an 11 yr old DD. Fast forward to 05 to our first $500k. 2013 was our $1mil mark. We now live on this and occasional w*rk.

Put DD through & married along the way. Living in Mexico on a modest amount. Still traveling a couple times per year for renewal of our visas. Nice to travel to visit with no necessity to return back until our DD or friends get tired of us. :-D

 

[Surewhitey]

Sometimes this discussion board makes me feel like such a simpleton.

I see a term like "net worth" and I say to myself "That's simple: assets - liabilities=NW." BAM! Done.

It never occurs to me to add in all the caveats and wherefore's, etc. of some of the other posters.

An investment portfolio is a different beast, thus a different number.

I just take my monthly expenses and add inflation and look at the amount I'm bringing in to cover it. Simple minds think a lot less...

If I stay cash flow positive, I'm good.

 

[Fermion]

Ok, I think we finally have a consensus and we can live and let the poor horse die. (I used to say live and let the horse live, you know I did!)

Net worth includes the value of all of your assets, including grandma's false teeth you inherited minus the liabilities (such as getting said teeth cleaned).

Invested worth might include your house as an asset, depending on your view of real estate. If you think real estate generally keeps up with inflation the same way I-bonds, TIPs, and precious metals do, then you would include it in your invested worth minus the investment expense of the loan.

For the people who like to fool themselves or others into thinking they are poorer than they really are, they should not include the value of their house as an asset.

Sound about right?

 

[Jsore13194]

The road from $250K to $700K was extremely fast for me. Too fast, as I had about 95% of my portfolio in equities, so I rode the stock market all the way to the top. Diversified? That was a hedge against ignorance, I thought. So, needless to say, the market crash brought me back to earth in a painful way. After 2008, I balanced my portfolio with a 60/40 (equities/bonds and cash) allocation. I hit the $1 mil mark earlier this year, and call it greed or passion, but I am ready to go back to work, and start working on that 2nd million dollars.
Biggest lesson I learned was, the single biggest driver of your portfolio performance is asset allocation. Don't try to time the market, as more money has been lost by investors trying to time the market, than what they would have lost had they just stayed the course.

 

[meekie]

I bought my first house in 1999 for $279k. It was worth $750k before the housing bubble burst and it went down to $500k. It's slowly worked it's way back up to $600k or so. Personally, it's just way too much to track and it's way to volatile for an asset that I don't plan on realizing any gains on.

Yes, I know it's worth something, and yes, we keep loose track of what it's worth every few years. In my backup plans, it is something I depend on. But my goals for my invested assets do not include my house equity.

To the original topic, I was at 500k in 2007, and hit 1 million at the end of 2012. So far the path to 2 million is looking good, since we got up to 1.24 million last month. Investment gains are starting to be WAY more important than contributions.

 

[Donzo]

You are missing a lot of fun, then. What is the point of having a bunch of money if you can't brag about it? (I'm pulling your leg.)

There is a guy at the place I volunteer that often discusses how he is a self made millionaire.....and how he got rich in the early days of plastic manufacturing - everyone avoids him...not a good ploy to impress and make friends!

PS I know you were kidding - but we need to send this gentleman the memo

 

[Fermion]

and how he got rich in the early days of plastic manufacturing

Ok, I have to ask...was his name Benjamin Braddock?

 

[RetireAge50]

If all houses increase to 3 million does that mean you are financially independent and can retire? No, not unless you want to live on the street or in a home-made RV.

Likewise, if your investments go up to 3 million you can retire and use the money to live independently.

Therefore although the house increases your net worth it does not provide independence which in my opinion is the destination of The Road to a Million.