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November 19, 2009


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I'm not sure why you would entirely eliminate assets or investments in 401ks and IRAs. This is still money available to you in case of an emergency. If you really feel strongly why not include it minus the early withdrawal penalty?

Otherwise, my method of determining net worth sounds very similar to yours. I always work up two numbers -- one includes the house and the other doesn't.

The second measure may have some value to give you an indication if you are accumulating assets that can be used to grow your net worth more easily. However that's the only thing its useful for. As a measure of wealth it's basically stupid.

Why on earth would you just eliminate house value and house debt.

It is so easy to show how that can create rediculous comparisons.

For instance, individual A has 200K of stocks and a 800K house with no mortgage. He is only do so/so, perhaps not even considered wealthy for his age/profession because only 200K of investable assets. And one could argue he is house rich and asset poor because he has too big of a house. And that may be a valid claim. But this formula of calculating net worth isn't what show you that.

As proof, the next day he goes to the bank does a cash out re-finance (and because this story takes place in 2005 he can pull out 100% of the value). So what has materially changed in his life now? Nothing. He has the same house, same stocks, same other assets, same everything. Except that now his house has an 800k mortgage on it and his investable assets just went to 1 million. Now using the second formula, he is no longer house poor. We throw out the value of the house, just like before, but now we get to also throw out the cost of the mortgage, but we get to keep the extra 800K in cash he got from the re-finance. Thus he is now a millionare and he is no longer house poor. Clearly this makes no sense at all.

What this second formula actually does is punish people who have small or no mortgages and rewards people who keep their house fully financed. Are we supposed to assume then that this means that buying a really expensive house is a wise financial decision as long as you leverage the heck out of it? Because thats what this formula rewards. No penalty for over spending on your house as long as you buy it with debt. Should it be true that the only time it's safe to buy a really expensive house is if you don't have to buy it with debt? In addition the person with the house paid off can put a huge amount of his income towards savings for investment, the person with the 800k mortgage can probably put about zero towards savings, so that is a big factor in net worth growth too. Ignoring the debt/equity ratio of your home is a big mistake when measuring financial health and the second formula completely ignores it.

I think the reason for this formula is because they assume people will live in their house mostly forever and never truly get access to that capital and that's why they want to exclude it. And while that may be an ok thing to try to measure, this formula does a poor job of it for 2 reasons.

The first is that it doesn't make any mathematical sense to throw out the liability when different people have leveraged their houses so differently. So if someone asks you which business do you want to invest in and I am just going to tell you about their investment capital used for growing the business. They have considerable Assets that they own to run the business as well but the level to which they are leveraged and the debt serviced required on them are really irrelevant. You should be able to get a complete health picture of their long term growth prospects simply by reviewing the level of their investment capital. This would have been a good plan for reviewing financial institutions like Washington Mutal and Bear Sterns. It's really so rediculous on it's face that is embarassing to point it out. Clearly someone with 200K in investable assets and an 800k house fully paid for is in a very strong financial position and someone with 200K in investible assets and an 800K house with 800K mortgage is probably sitting on the potential cusp of forclosure if they lose their job.

The second reason its a poor formula is why assume you will never tap your house equity. I have a family with kids right now. My house is too big to retire in. I plan to downsize to something half its size 20 years from now. So yeah, the value in my house is very important to my net worth and retirement plan. You can't count on that asset growing at the same rates you might plan for investment funds but over time its value generally does grow and most people will extract that value.

So people who argue that the second formula is the true measure of net worth are just wrong. The are wrong technically cause the dictionary definition is clear. And they are wrong in practice because it just doesn't make sense that the debt/equity ratio of your home is irrelevant to your net worth and future investment earnings potential.

I don't consider my house in my net worth. I mean I realize it has value and that I do own it. But to tally it in when your counting how much you have to fund your retirement or something like that, I don't think you should include it. Several reasons. You have to live in your house. If you sell it, you'll have to buy another or rent. Also its really hard to say how much your house is really worth. You know... the million dollar house that sold for 600k, or something like that. That said. I suppose that when my investments and such start to tickle the 900K mark.... I might quietly think to myself.... I'm a millionaire!

Personal Home, cars, jewelry, unimprovd land, Tv's etc., DON't count, most "stuff" isn't worth .10 on the dollar anyway and your personal residence isn't liquid, the SECOND definition, less ALL debts of course is the one as a financial planner I've used for years...

I include my home's value for the same reasons apex mentioned, and I do not include any other stuff for the reasons jeff mentioned. I was making triple payments on my mortgage for a while, so should my net worth not increase by $5,000 per month when I do that?

I am the hypothetical person who has paid off the expensive house and has less in investable assets. My cash flow is great without a mortgage, and I am saving the difference.

The housing market I live in did not see the appreciation or loss in this bubble so I lucked out in the grand scheme of things. I do consider the home value in my net worth as well as my retirement savings. There is value among all these assets.

I think it makes sense to track net worth including net home equity (house value minus mortgage debt) and non-mortgage debt. Failure to account for a house and mortgage leads to the sort of inaccuracies Apex outlined above. Now, given your net worth tracking, be aware of what percentage of your net worth comes from any given asset or category, and understand the effects a drop in that category can have on your overall net worth. Keep in mind that having a large percentage of your wealth in one item or category makes you extra-susceptible to market swings.

I think it makes sense to separately measure sub-parts of your net worth, such as liquid investments, retirement investments, home equity, etc. But calling any of those things "net worth" is misleading.

I track my investments in an excel spreadsheet, with a graph of my month-by-month net worth displayed as a stacked area chart. I use different colors to show different assets (IRAs, 401ks, unrestricted Vanguard stocks, cash, bonds, etc; I'll add home equity when I buy a home.) This allows me to see, at a glance, both my whole net worth and any specific portion of it. I find it a great tool for tracking net worth.

Apex - I haven't read the book; however, when I looked up the definition of the millionaire on wiki. Their definition suggest substracting all debts (presumably including mortgage) and not including primary residence:

A related definition is that of accredited investor which in the US includes value of primary residence, but not in Canada. But it does says that all debts are to be subtracted.

As to me, I only add the value of my paid off home when I want to boast - either to myself or in some blog post. Normally though I look at 2 numbers: total amount of investments/savings and amount of investments/savings in taxable accounts. Then I further subdivide into savings and investments. I also have vested rights to a small pension (the amount depends on when I decide to take it - $1880 a month at 55 or $2880 a month at 65), but I don't normally include it except for when I estimate income in retirement.

This is a pretty easy one. Net worth = CASH. Nothing else should be considered.

If you consider everything, your networth is an illusion, sorry!

You can calculate NW any way that makes most sense to YOU - it matters not one jot whether or not you include your house value.

What matters is dNW/dt

You also need to look at what stage in your life-cycle you're at - while working you should have a +ve dNW/dt. When you retire, dNW/dt = 0 is sustainable indefinitely, +ve is great, and -ve is typical.

Assets minus liabilities. I don't count cars or other small possessions, I only count my house.

Here is another way to think about net worth - suggests some complex fomrulas:

@POP If you pay 5000 a month on your home and you are including that in your net worth. You really should only count the principle that was paid with that 5000. The rest was just interest on the loan. Not your money...the bank gets that.

Maybe the house should be a liability due to the ridiculous property taxes you have to pay on them. You still can lose your paid off home if you don't pay your taxes!! What a joke/scam.

@Kitty, I didn't say definition of millionare, I said defintion of Net Worth which is Assets - Liabilities. Its accounting 101. Houses are assets, Mortgages are Liabilities. Cars are assets. Both cars and houses are easy to value. Open the paper and see what they are selling for. Every other asset like furniture is pretty hard to value, and its usually worth very close to zero after a few years so its fair to exclude those because as an asset they have almost no re-sale value. But cars and houses are easy to value and easy to sell. Some have said here they are illiquid. To that I say Bull! Houses and cars are very easy to sell. You just have to price them at actual market value, not what I would like to get or what I could have gotten 2 years ago. You price a house today for the price people are willing to pay and it will be sold in 1 month. That is the price you can use in your net worth calculation. The reason houses don't sell is they aren't priced at market.

For everyone who thinks houses don't count especially financial advisors, I would love to hear how you justify treating the person with an 800K house and 800K mortgage as being in the exact same financial shape from a wealth standpoint as someone with an 800k house and no mortgage assuming similiar non-house assets. And if you say you don't, then you do count houses in a net wealth assessment. And if you say you treat them exactly the same, I say .... Next!

FMF you might like this story about a young kid with a $900,000 net worth ... I'm sure it upset most of us working schlubs dragging ourselves to work on the subway this morning!

Apex, I think your right on w/ this one!

Another thing that is troubling is the term augmented net worth to refer to the "traditional" definition of net worth.

You know, we have a language with words that have meanings for a reason. So we can understand each other.

Net worth has a meaning. Thats why it's the "traditional" definition.

How is the Augmented net worth the traditional meaning of the word. The traditional meaning of the word is its meaning unless the entire language has moved away from that meaning, which it hasn't.

Net Worth is Net Worth and that's assets - liabilities.

If you want to define a new one like Modified Net Worth that excludes Houses and other non investment assets, by all means, do that. And make it clear this is the modified net worth, or perhaps the investment net worth (which would be the accurate term for it). Then we know what we are talking about. But to suggest redefining a classical financial term like Net Worth for investment advice purposes is pretty lame. Net Worth is Net Worth. Having the investment community redefine a financial term for their purposes causes confusion and is a dis-service. If the investment community wants to create their own definition of Net Worth they should give it their own new name. Don't redefine the classical definition.

guinness416 --

That's a GREAT piece! Thanks for sharing!!!!


Like you I include the value of my residence in my net worth calculation. However, like FMF, it's only about 15% of my NW. I do think that people should look to buy a house no more than 20% of their NW as my own rule of thumb.



Absolutely. The guy with 200K in assets and an 800K house fully paid may have a nice net worth but it would seem he likely has too big of a house. The thing is that if he woke up to his poor choice he could rectify that situation in a few months. Sell his house, buy a 200k house and now have 800k in investable assets and a 200k house. Did his net worth just go up 600k overnight? Of course not. Thats just so preposterous as to be stupid, there is really no other word for it. That is why it's dumb to exclude such clearly valuable assets as houses.

Guiness, that story is awesome! But something also tells me that he has very supportive and financially-minded parents as well. After all, they are the ones setting his meeting with NHL managers. All-in-all, it's simply terrific.

I use net worth in the traditional sense as well. Basically assets - liabilities. After all, it's not called ASSET worth. It's called NET worth.

I also include house(s), including primary residences. The reason why is because one can always leverage your own home for a second mortage, HELOC, annuity, or reverse mortgage. Is it a good idea? No, but... it's still an asset to you. At the very least, you live in it right?

I can understand why some people would prefer not to include it though, and I don't fault them if they choose not to do so.

For traditional net worth calculations, you can get a decent market estimate just by going to, and you just subtract that from your mortgage.

Considering investment only is one sided view to find a person's net worth, debts must also be considered explicitly to find it.

The old definitions were far more applicable in the past when property ownership was the privilege of the wealthy. These days, the definition that my firm and most others in the wealth management industry use, is that a millionaire is someone with a million dollars a year disposable income. Having 'a million dollars in the bank' is nothing to boast of; at least 10 million dollars reasonably liquid assets excluding primary residence is required.

Wow, now the financial industry is redefining what a millionaire is? You need to make a million dollars per year in money that you can blow (er, spend I mean) and that makes you a millionaire? I am stunned.

It's true that a millionaire isn't what it used to be. So what. Millionaire is also easy to define (it's already defined for us). Someone worth a million dollars. And no, being a millionaire doesn't get you very far today (although 90% of people will still never get there). But that doesn't change what a millionaire is.

Perhaps the financial industry should quit focusing on terms like millionaire as a means of measuring success and focus on some other measure like "financial independence - aire" which stands the test of time with respect to inflation.

So in 50 years will millionaire mean having 10 million dollars in disposable income? :) See how silly you guys look? Millionaire being 1 million in disposable income per year. Thats cartoonish.

Er yeah, to be clear, I agree that the standard of what is considered "affluent" has gone up. A lot of elite banks that cater to the "affluent" require a minimum balance of $10 million... or so I've read.

Wish I could say that was based on personal experience, but I digress. :D

However, I don't think the change in standards has actually made a change in DEFINITION. The definition, to me, still holds. If your net worth is one million, you're a millionaire.

You can argue for a new category of multi-millionaires if you wish, but I would say that's still a separate entity based on the same old rule of net worth (and/or annual income)....


Finally someone with some sense. :)

I track both metrics - "classic" net worth and "investment" net worth. I also track "go to $@!!" money (investment nonretirement less liabilities) by the months (years now) that I could make it without working.

As long as the trend is good, I'm happy. I honestly went "lalllaaalallaaaa I can't HEARRRRRRRR you" to my investment statements for a while there and just tracked decreasing debt and increasing cash.

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