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Re: How do YOU figure your Net Worth
Old 12-11-2006, 05:48 PM   #41
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Re: How do YOU figure your Net Worth

if you own a house and count its worth because somewhere in the future you may sell it, if you dont own a house should you subtract years of rent off of your net worth that you will pay in the future??
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Re: How do YOU figure your Net Worth
Old 12-11-2006, 06:01 PM   #42
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Re: How do YOU figure your Net Worth

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Originally Posted by mathjak107
if you own a house and count its worth because somewhere in the future you may sell it, if you dont own a house should you subtract years of rent off of your net worth that you will pay in the future??
aaah, No.
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Re: How do YOU figure your Net Worth
Old 12-11-2006, 06:31 PM   #43
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Re: How do YOU figure your Net Worth

well why not? i think by the same logic of counting a house you live in and may continue to live in you should subtract out future rents if you dont own a house
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Re: How do YOU figure your Net Worth
Old 12-11-2006, 08:20 PM   #44
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by justin

Right now, my house+cars are equal to approximately 100% of my net worth (I'm 26). I anticipate by the time I'm FIRE'd, my house+cars value will drop to ~10% of my net worth. If I omit the house+cars from my net worth calculation today, my net worth changes dramatically. If I were to omit the house+cars value from my net worth calc after reaching FIRE, the change in net worth would not be substantial (greater than 20%).
If my primary house ever becomes only 10% of my total net worth I will be happy. Today my house is worth 800 -850k. If my home never appreciates another penny and if my net worth ever reaches 8 million bucks then I would be a happy camper....... I don't think it's realistic to look at it in terms of percentages.
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Re: How do YOU figure your Net Worth
Old 12-11-2006, 10:20 PM   #45
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Re: How do YOU figure your Net Worth

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Originally Posted by mathjak107
well why not? i think by the same logic of counting a house you live in and may continue to live in you should subtract out future rents if you dont own a house
Because your house has a current economic benefit to you that was derived by your hard work and/or luck in the past. You earned a dollar at work or inherited a dollar and elected to transfer that dollar to another asset, your house. It has real current value that you could liquidate and use for another benefit (such as buying food for yourself).

When you take a current snapshot of your net worth at any given moment, you only apply present economic events as they exist at that point in time.

Future expenses, such as future rents, have no value (positive or negative), nor do they cause you to sacrifice any of your current wealth until such time as you may enjoy the benefit of that expense. Therefore, you do not subtract from your current wealth any future potential obligations that are not a result of past or current economic events.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 03:44 AM   #46
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Re: How do YOU figure your Net Worth

well again depending on for what purpose you are figuring net worth decides wether the house carries any value for that purpose. whether a house is a millon dollars or a 100,000 is meaningless if you live in it forever or sell it and buy one of equal value.. it may mean something to your heirs, it may mean something to the bank for a loan and it may mean something to you making you feel better about owning something . but except for saving future rent payments it really dosnt count much in planning. the savings in rent though would be classified as cost of living expenses. its conceivable a renter could pay less to live in a different area or lower tax area or smaller house than an owner of a more expensive place of residence
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 07:28 AM   #47
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by mathjak107
well again depending on for what purpose you are figuring net worth decides wether the house carries any value for that purpose. whether a house is a millon dollars or a 100,000 is meaningless if you live in it forever or sell it and buy one of equal value..
I don't understand why we always have this argument. People are defining net worth for their own purposes but net worth has a definition already. Here it is expressed by American Century Investment Glossary: Dollar amount by which assets exceed liabilities. An individual's net worth equals the total value of all possessions (house, stocks, bonds, etc.) minus all outstanding debts (mortgage, credit cards, etc.). For a corporation, net worth is also known as "net assets"

Think of net worth as "my financial value to my heirs if I die today." All of this other stuff is something else like "net spendable assets" or something. For that this argument is very fitting and a house may or may not be part of "net spendable assets." Mathjac is correct that it would be wrong to value the house in that case if you plan to stay in it until you die and are averse to reverse mortgages, moving to an apartment, etc. On the other hand, if you are sitting in a $1M house and are considering moving to an apartment, the house can be part of your "net spendable assets" but the cost of rent over existing property tax and maintenance will then become part of your expenses.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 08:02 AM   #48
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by mathjak107
...whether a house is a millon dollars or a 100,000 is meaningless if you live in it forever or sell it and buy one of equal value...but...it really dosnt count much in planning...
I've said that too numerous times in past posts. As you and I describe it, a house under that scenario is a sunk cost that should not be part of your assets for SWR-planning purposes.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 08:15 AM   #49
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Re: How do YOU figure your Net Worth

I'm lazy -- my net worth is what Vanguard's Cashedge software can reach. Since that doesn't include my house or a few other things, I don't think about them so much.

Money is like potential energy -- it's to be converted into something else eventually. What you're going to convert it into determines how useful it is. Your home equity is right now providing shelter. If that's all it will ever do (while you live), then you're not converting it into something else and so it's not part of your net worth -- in this life.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 09:18 AM   #50
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Re: How do YOU figure your Net Worth

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Re: How do YOU figure your Net Worth
Old 12-12-2006, 11:55 AM   #51
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by Azanon
BTW, houses thought of as consumption items is so Kioyaski. If i'm consuming it, then why 1. is it still there. 2. going up in value
It is both an asset and an expense. Assets depreciate or appreciate in value too.

A building depreciate over 40 years or so, legally speaking. Most buildings also loose tremendous value if you don't keep them up. The house is still there but you bought a new roof, new windows, redid the kitchen and bathrooms... So it is really consumption(s) over very long period of time that allows for the price of the structure not to go to $0.
Now the land itself is another thing: it is a real asset but over time land doesn' t seem to go in value faster than economic conditions.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 11:58 AM   #52
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Re: How do YOU figure your Net Worth

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Originally Posted by perinova
It is both an asset and an expense. Assets depreciate or appreciate in value too.

A building depreciate over 40 years or so, legally speaking. Most buildings also loose tremendous value if you don't keep them up. The house is still there but you bought a new roof, new windows, redid the kitchen and bathrooms... So it is really consumption(s) over very long period of time that allows for the price of the structure not to go to $0.
Now the land itself is another thing: it is a real asset but over time land doesn' t seem to go in value faster than economic conditions.
I tend to view homes the way gummont economists (don't get me started) view them: It is an asset, but if you live in it, you consume the "dividends" it throws off in the form of foregone rent.
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Re: How do YOU figure your Net Worth
Old 12-12-2006, 06:07 PM   #53
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Re: How do YOU figure your Net Worth

owning around here is trading foregone rent for the joy of 10-12,000 a year in property taxes and maintaince costs.
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Re: How do YOU figure your Net Worth
Old 12-13-2006, 10:59 PM   #54
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Re: How do YOU figure your Net Worth

Thanks again everyone!!

Quote:
Originally Posted by Ron'Da

I don't need a "bigger home" to make me happy

- Ron
I feel the same, although a "smaller" house will make me much happier when I retire!!!
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Re: How do YOU figure your Net Worth
Old 12-14-2006, 09:43 PM   #55
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Re: How do YOU figure your Net Worth

I think it's quite important to remember that the term "Net Worth" is an accounting term with a very precise definition. Clearly, forum members are choosing to use their own definitions, which are quite variable. That being the case, we can no longer do any comparative valuations of net worth on this forum.
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Re: How do YOU figure your Net Worth
Old 12-14-2006, 09:49 PM   #56
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Re: How do YOU figure your Net Worth

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Originally Posted by Meadbh
I think it's quite important to remember that the term "Net Worth" is an accounting term with a very precise definition. Clearly, forum members are choosing to use their own definitions, which are quite variable. That being the case, we can no longer do any comparative valuations of net worth on this forum.
That should do it...

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Re: How do YOU figure your Net Worth
Old 12-14-2006, 09:49 PM   #57
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Re: How do YOU figure your Net Worth

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Originally Posted by Meadbh
I think it's quite important to remember that the term "Net Worth" is an accounting term with a very precise definition. Clearly, forum members are choosing to use their own definitions, which are quite variable. That being the case, we can no longer do any comparative valuations of net worth on this forum.
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Re: How do YOU figure your Net Worth
Old 12-14-2006, 10:23 PM   #58
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by Meadbh
I think it's quite important to remember that the term "Net Worth" is an accounting term with a very precise definition. Clearly, forum members are choosing to use their own definitions, which are quite variable. That being the case, we can no longer do any comparative valuations of net worth on this forum.
Besides "assets minus liabilities", what is the definition? And nobody seems to be able to answer these questions for me, with respect to calculating net worth:
  • What is the value of my vested non-COLA pension that I can't touch for 14 years (at reduced benefit...19 years for full benefit) that has no value if I die before then?
  • What is the value of my SS benefits due at 62 (early) or 67? (I have over 40 quarters of work, so unless laws change drastically I can expect a benefit)
  • Since my IRA and 401(k) assets have taxes and penalties due upon immediate withdrawal, taxes only due on withdrawals after 19 years from now, do I count their full value today?

Okay, the last one people may agree on, but I like the question because it helps show how your net worth is not necessarily a meaninful number to know even for today.

As seen earlier in this thread, I now sidestep the question of how to calculate net worth and instead concentrate on what one is really trying to find out. I'm thinking common questions are "how do I compare to my peers financially" and "do I have enough money to retire/buy a car/get that mail order wife/etc".
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Re: How do YOU figure your Net Worth
Old 12-14-2006, 11:07 PM   #59
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Re: How do YOU figure your Net Worth

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Originally Posted by BigMoneyJim
Besides "assets minus liabilities", what is the definition? And nobody seems to be able to answer these questions for me, with respect to calculating net worth:
  • What is the value of my vested non-COLA pension that I can't touch for 14 years (at reduced benefit...19 years for full benefit) that has no value if I die before then?
  • What is the value of my SS benefits due at 62 (early) or 67? (I have over 40 quarters of work, so unless laws change drastically I can expect a benefit)
  • Since my IRA and 401(k) assets have taxes and penalties due upon immediate withdrawal, taxes only due on withdrawals after 19 years from now, do I count their full value today?

Okay, the last one people may agree on, but I like the question because it helps show how your net worth is not necessarily a meaninful number to know even for today.

As seen earlier in this thread, I now sidestep the question of how to calculate net worth and instead concentrate on what one is really trying to find out. I'm thinking common questions are "how do I compare to my peers financially" and "do I have enough money to retire/buy a car/get that mail order wife/etc".
Net worth is a snapshot of assets mnus liabilities NOW, not in the future. If you are not sure whether something is an asset or not, ask yourself: could I bequeath this to my heirs?

Let's assume your pension is a defined benefit pension. If you die tomorrow morning, your estate will get nothing. If you live another 14 years to retire and draw the pension, you will have Cash Flow, which will allow you to (a) pay your expenses and (b) hopefully save some money.....which will then add to your assets. Then, and only then, can you count those assets in your net worth.

OTOH, I have a defined contribution pension plan. Each year my employer puts a defined sum of money into a pension fund in my name. If I retired or left my job tomorrow I could draw the accumulated sum; if I died, it would form part of my estate. Therefore, that is an asset now. It just won't generate any Cash Flow after I retire.

The same principles apply to the social security benefits that you expect to receive in the future. They are not yours yet, and if you died tomorrow, your heirs could not inherit them. They are not assets at the moment.

Yes, you do include your IRA and 401K accounts. They would be in the "Registered Investments" category shown in the Canadian spreadsheet to which I previously posted a link. The Canadian equivalent of an IRA is an RRSP. The different tax treatment does not mean they should be excluded.

Your last comment is true. If your objective is to calculate something other than net worth, then by all means go ahead. Perhaps what you would like to calculate is "liquid assets", which includes all those assets that you could reasonably expect to sell within months to generate cash. Scenario building to determine whether your financial situation will enable or disable your plans is simply good managerial accounting. But comparing your custom calculations with somebody else's is comparing apples and oranges.

Hope this helps!

Disclaimer: I'm not an accountant, just an MD-MBA with a Canadian Securities Diploma.
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Re: How do YOU figure your Net Worth
Old 12-15-2006, 11:09 AM   #60
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Re: How do YOU figure your Net Worth

Quote:
Originally Posted by Meadbh
Net worth is a snapshot of assets mnus liabilities NOW, not in the future. If you are not sure whether something is an asset or not, ask yourself: could I bequeath this to my heirs?
The problem with this is that you would like net worth to be an accurate measure of financial health. Perhaps this is not the correct way to use net worth, and we need to come up with a new term and new definition, but you'd like to be able to say: if this increases my net worth it is good, and if a decision decreases it then it is bad. If a healthy 50-year-old has $1M in assets, and then spends half of it to buy a life annuity that pays them $100k a year with CPI adjustments from a AAA rated company, well I think they made a pretty shrewed move, but their "net worth" would plummet! Perhaps we should start talking about our "divorce net worth." Divorce lawyers probably have a term for this, but I know they will sometimes include lump-sum value of future pension payments in a settlement.
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