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Message
Calculating Net Worth Question with Home
Posted on 1/16/23 at 12:28 pm
Posted on 1/16/23 at 12:28 pm
I think this is simple to sort out, but I'm looking for an answer. What's the appropriate way to determine net worth when owning a home with a mortgage. Scenario:
- Retirement: $100,000
- Savings: $25,000
- Debt (Loans/credit card): -$5,000
Current net worth = Retirement + Savings + Debt
Current net worth = $120,000
Throw home into the mix:
- Home value: $250,000
- Mortgage: -$200,000
- Equity: $50,000
How does one arrive at total net worth here. Is it Current net worth + Home Value + Mortgage equaling $170,000?
I always wonder if some people just add home value and ignore the mortgage.
- Retirement: $100,000
- Savings: $25,000
- Debt (Loans/credit card): -$5,000
Current net worth = Retirement + Savings + Debt
Current net worth = $120,000
Throw home into the mix:
- Home value: $250,000
- Mortgage: -$200,000
- Equity: $50,000
How does one arrive at total net worth here. Is it Current net worth + Home Value + Mortgage equaling $170,000?
I always wonder if some people just add home value and ignore the mortgage.
This post was edited on 1/16/23 at 12:29 pm
6
Posted on 1/16/23 at 12:34 pm to RickAstley
Assets minus liabilities is how I've always calculated Net Worth.
Posted on 1/16/23 at 12:38 pm to RickAstley
"I always wonder if some people just add home value and ignore the mortgage."
---
They're just fooling themselves.
Yes, add your home equity to the equation.
---
They're just fooling themselves.
Yes, add your home equity to the equation.
Posted on 1/16/23 at 12:39 pm to RickAstley
Net worth is simply major assets minus liabilities
So yes, include the current estimated equity in your home
So yes, include the current estimated equity in your home
Posted on 1/16/23 at 12:44 pm to thunderbird1100
And I can tell you if you’re doing it for a commercial loan, not much need to worry about the illiquid stuff you own. Paintings, furniture and all that crap. All banks want to know is what kind of cash can you get to if you get into trouble. That typically comes from liquid assets (stuff you can truly liquidate, not a 401k unless you’re over 65) and equity in properties (unless you’re a partner on a property.
But to answer your question, line up all the asset values on one side, line up all the liabilities on the other. Total the two and subtract liability’s from assets and that’s net worth.
But to answer your question, line up all the asset values on one side, line up all the liabilities on the other. Total the two and subtract liability’s from assets and that’s net worth.
Posted on 1/16/23 at 12:45 pm to RickAstley
I think there is a lot of personal choice is how you want to treat home equity in your net worth statement.
Personally, I take a 'book value' instead of a 'mark to market' approach:
- Book value method: Value of our home when purchased less the mortgage remaining equals equity. This method accounts for down payment plus whatever principal has been paid off being counted into net worth statement. This method intentionally ignores change in market value that would produce a deviation versus what was originally paid.
- Mark to market method: Current value of home (based on comps in the area) less remaining mortgage equals equity.
With the rapid increase in home values in the last couple years, I found a 'mark to market' approach of using current values would create more noise in my net worth tracking than I wanted. Over time, the book value method is under representing net worth (house has appreciated) but it smooths the net worth tracking over years making it cleaner for me to see net worth changes driven by investments and free cash flow.
Mark to market will provide the truest view of net worth at any given point in time but will increase the fluctuation year-to-year.
Cannot ignore the mortgage as that is a liability that needs to offset some of the asset value.
Personally, I take a 'book value' instead of a 'mark to market' approach:
- Book value method: Value of our home when purchased less the mortgage remaining equals equity. This method accounts for down payment plus whatever principal has been paid off being counted into net worth statement. This method intentionally ignores change in market value that would produce a deviation versus what was originally paid.
- Mark to market method: Current value of home (based on comps in the area) less remaining mortgage equals equity.
With the rapid increase in home values in the last couple years, I found a 'mark to market' approach of using current values would create more noise in my net worth tracking than I wanted. Over time, the book value method is under representing net worth (house has appreciated) but it smooths the net worth tracking over years making it cleaner for me to see net worth changes driven by investments and free cash flow.
Mark to market will provide the truest view of net worth at any given point in time but will increase the fluctuation year-to-year.
quote:
I always wonder if some people just add home value and ignore the mortgage.
Cannot ignore the mortgage as that is a liability that needs to offset some of the asset value.
Posted on 1/16/23 at 1:07 pm to lynxcat
Thanks all. My question has been answered here. I know this is a simple one, but reading net worth posts across different forums, it's not clear how people calculate net worth. This is more than likely me overthinking things.
Posted on 1/16/23 at 2:12 pm to RickAstley
I usually see people want to leave their vehicles out of their net worth, but rarely do they leave out their homes. I personally have my vehicles in mine and revalue them once a year or so using Kelly Blue Book or NADA. Makes even more sense to do so if you include a car note in your calculations.
I'd suggest putting all your accounts, assets, etc in something like Quicken, Mint, or Personal Capital. They show your net worth right there on your list of accounts. Then you can start tracking net income per month, net worth over time, etc and work on increasing it. It's also fun to see it drop $10k+ in a day whenever the market is down big.
I'd suggest putting all your accounts, assets, etc in something like Quicken, Mint, or Personal Capital. They show your net worth right there on your list of accounts. Then you can start tracking net income per month, net worth over time, etc and work on increasing it. It's also fun to see it drop $10k+ in a day whenever the market is down big.
Posted on 1/16/23 at 2:13 pm to RickAstley
I’m a baller with my house in it. 
Posted on 1/16/23 at 2:24 pm to RickAstley
quote:
Assets minus liabilities is how I've always calculated Net Worth.
This!
Posted on 1/16/23 at 2:24 pm to RickAstley
quote:
but reading net worth posts across different forums, it's not clear how people calculate net worth
People conflate net worth with invested assets all the time particularly on the reddit FIRE forums.
If you simply want to know your net worth, then yes, include your home equity.
If you're trying to plan out your retirement, then you probably just want to look at your liquid and invested assets unless you plan to sell your house and rent or downsize.
Posted on 1/16/23 at 3:56 pm to whiskey over ice
quote:
I usually see people want to leave their vehicles out of their net worth, but rarely do they leave out their homes. I personally have my vehicles in mine and revalue them once a year or so using Kelly Blue Book or NADA. Makes even more sense to do so if you include a car note in your calculations.
I'd suggest putting all your accounts, assets, etc in something like Quicken, Mint, or Personal Capital. They show your net worth right there on your list of accounts. Then you can start tracking net income per month, net worth over time, etc and work on increasing it. It's also fun to see it drop $10k+ in a day whenever the market is down big.
That's pretty much how I track.
House
Cars
Check/savings
401ks
IRAs
Brokerage
Cash pension
HSA
529 Plan
- loans
I log a monthly record of each.
Obviously, the Cars trend down (small trend up in 2021). The home is trending down (mostly up the past several years). The 529 grows and gets spent twice a year. Checking and savings ebb and flow.
This post was edited on 1/16/23 at 3:57 pm
Posted on 1/16/23 at 4:12 pm to lynxcat
quote:
Book value method: Value of our home when purchased less the mortgage remaining equals equity.
This method I never really understood because it's so far from reality in what your net worth really might be including your home. I understand using this maybe a decade or two ago when figuring out your home value was not a click away on the internet so much as it is now, but with being able to find a relatively accurate value on your home why use this method at all in calculating your net worth? What's relevant is what's right now. If you paid $250k for a home 20 years ago, owe $75k on it remaining, but it's worth $450k now. Why use the $250k instead of $450k? Huge difference there.
IF you sold the house tomorrow you would net $375k (minus real estate costs of sale), not just $175k. So if you were tracking it via book value you would suddenly have this huge amount of net worth you werent accounting for really.
quote:
but it smooths the net worth tracking over years making it cleaner
I mean investments can change wildly, but people arent smoothing those out
Guess I just dont get it, if you're taking your net worth as a snapshot in time, it should be a snapshot of things right then and there. Not a snapshot of now and 5, 10, 15 years ago what you paid for something then.
This post was edited on 1/16/23 at 4:14 pm
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