Comments on: Why My Net Worth Is Now Negative Again

By: goldsmith

goldsmith — Sun, 10 Oct 2010 06:21:29 +0000

Just found this article – I think this is an excellent idea. Just the other day I was thinking that my mortgage is the main financial millstone remaining around my neck, and that if I was ever made redundant from my job, I would be in deep trouble apropos of it. I live in a fairly small condo from which it would be difficult to downtrade any further.

So now I have taken the home out of my net worth calculations, leaving me with close to 50k Euro in the negative. Ouch! I left the car in, because I lived for 14 years without a car and could do so again if necessary, so the car IS a liquid asset. However, it contributes too much to the quality of my life that I would propose to sell it – it’s fully paid and not worth that much anyway.

Thanks for this article!

By: Chris

Chris — Sat, 18 Sep 2010 00:07:30 +0000

I applaud this decision for the very fact that it now provides you more compelling motivation to improve your net worth as quickly as possible. However, you do want to keep track of this also given that you have a mortgage that is not paid off. With the pop in the over-inflated real estate market one must always keep track of a realistic number on what their house is worth vs. what they owe to the bank.

I have just started keeping track of my net worth. I am 27 and JUST got out of grad school with one baby and another on the way. My net worth?? -$94,000. Yes, that is a negative sign. Boy do I have a long ways to go.

By: Henry

Henry — Sun, 22 Aug 2010 10:12:25 +0000

I calculate my liquid net worth on a monthy basis. In the calculation that I record in my day planner, I do not include the value of my house or my cars. However, I do track the estimated value of my house on an ongoing basis and I do include it in my net worth. While I will probably be living in this house for a few more years, I will eventually sell it and move to a less costly area. The difference will become liquid net worth. This number is an integral part of retirement planning. Cars are best left out of such calculations because their value will eventually drop to zero.

By: Jessica

Jessica — Sat, 21 Aug 2010 17:34:30 +0000

This makes a lot of sense. You never know how much your home is truly worth due to the current market conditions.

By: Kristi

Kristi — Tue, 17 Aug 2010 18:40:53 +0000

Lurker Carl, I understand the logic completely. His main point is that if they ever had to live off of less, selling the house or the cars would not be a realistic move unless they want to go homeless. Suze Orman also suggests calculating your net worth without your necessities to wrap your mind around what you would need to do if something drastic happened. She still suggests that you know your total net worth, but that you throw out the necessities when figuring out what you would do in a crisis situation. Now if you live in a huge home and you could downsize, that’s an option. But if you live in a modest home and selling it would just put you upside down in another mortgage or rent payments, it doesn’t make sense. Same with a car. If you have a modest car that will get you to work or job interviews, selling it would be idiotic.

By: Joseph Librero

Joseph Librero — Sun, 20 Jun 2010 17:35:02 +0000

You know if you are negative or not just by looking at your spending and income flow.

Taking a sip,
Joseph

By: dspkid

dspkid — Thu, 04 Feb 2010 01:23:05 +0000

While I do understand your reason for doing so, this really is not calculating your net worth. You should be including all of your assets in your net worth – including long term assets (which cannot be converted to cash within a year)

I currently have 470k worth of debt – Follow my journey to financial freedom

By: steve

steve — Sat, 12 Sep 2009 18:49:36 +0000

At least half of the commenters reveal a basic lack of understanding of what the term “net worth” actually refers to.

By: steve

steve — Sat, 12 Sep 2009 18:38:59 +0000

Do what you’re doing, Trent, but stop calling a “net worth calculation”, because the fact is that the only reason you are negative is because you took out a loan to get cash that you converted into a house, which is worth approximately the outstanding value of your mortgage plus any equity that you have developed.

Take the value of the mortgage out as well and set a target for “working capital” which would be all your money in the bank and your investments, excluding the house. Then you will be positive again and you can set a target for the amount of “working capital” you want to acquire.

1.5 – 2.5 million would be a good amount.

By: Sara

Sara — Mon, 31 Aug 2009 20:00:52 +0000

Trent, you make me feel good about my own net worth by doing this. I do not own a home, nor a car, but I do have massive student debt. I am steadily increasing my net worth, but it is CERTAINLY negative. By making your net worth negative when you excluded these assets, you made me feel like it’s okay to be in my situation as long as I continue to make some progress. Thank you.

By: Funny about Money

Funny about Money — Fri, 28 Aug 2009 18:11:37 +0000

I used to figure my net worth irrespective of the house (and certainly of the car, which is at heart a rolling pile of junk).

However, with the house paid off, it does represent an asset and should be counted as part of one’s net worth. A mortgage or equity loan represents a liability. Ignoring either produces a distorted picture. Equity in the house does have value, in that you could borrow against it, or you could sell the house, move into a cheaper property, and pocket the difference–a strategy many people engage at retirement. So, in figuring my net worth now, I credit a conservative estimate of the house’s equity and debit any loans against it.

By: Robert M

Robert M — Wed, 26 Aug 2009 18:03:31 +0000

Net Worth is a vague term with no universally agreed upon definition. The important consideration in how you decide to calculate net worth is how you intend to use the number that you come up with. If you are looking at retirement calculations, it is generally conservative to exclude the value of the house and the mortgage from your net worth (viewing that you need a house to live in) and to include the house payment and property taxes in the annual expenses that need to be funded from your retirement income (generated from investing your net worth excluding home and mortgage values). Unless you are looking at a reverse mortgage or a home equity loan, the money invested in your house is not generating retirement income so it is not meaningful to your net (income generating) worth (even though it is an asset). If you are interested in what your grown children would inherit if you were to die today then by all means include the value of your net home equity.

By: Jared

Jared — Mon, 24 Aug 2009 21:33:25 +0000

I have to agree with trent on this one. If you are forced to sell the house, then you don’t get to control the sale and wind up losing a lot of value on it. On the other hand, if you are forced out of the house you still have to make the payments whether you can or not. Although it isn’t really the proper “net worth” it makes more sense.

By: Giorgio Sironi

Giorgio Sironi — Sun, 23 Aug 2009 16:27:56 +0000

You are not calculating Net Worth, but more a sort of biased Acid Test. If you exclude long-term liquidable assets, you should also exlucde long-term debts like mortgages.

By: Michele

Michele — Fri, 21 Aug 2009 10:23:51 +0000

Put me in the column with those who think it is ridiculous not to count your home’s value as an asset. Let me give you an example. Suppose, a couple are saving up to buy a house in 3 years. At the end of each year they put $10,000 in a savings account to use as a down payment on their house. They also have a $5000 emergency fund. For sake of simplicity they have no other money (or assets) and nothing earns interest (well in savings accounts that is pretty much true these days). At the end of year they have $15,000 ($10,000 they’ve saved for the house plus the $5,000 emergency fund) in assets. At the end of year two they have $25,000 in assets. At the end of year three they have $35,000 in assets. In year four they buy a $150,000 house with the $30,000 that they have saved. Their mortgage is the same as their rent was before they bought the house. You’re saying at the end of year 4, they are worth $5,000 becuase they bought a house. But if they were still renting, their assets would be worth $35,000? Sorry, but that makes no sense whatsoever.

By: moom

moom — Thu, 20 Aug 2009 11:48:19 +0000

I haven’t looked at any of the comments but it makes no sense to exclude your home and include your mortgage. You have a number which might be useful to you but it’s definitely not “net worth”. If you didn’t have the house you’d have to pay rent. So you would be worse off…. OTOH from an economic perspective we should really include our human capital – our earning power – in a measure of our wealth. But no-one I know does.

By: American Banking News

American Banking News — Wed, 19 Aug 2009 23:32:19 +0000

I would say that your net-worth would include your non-liquid assets as well. Your house and cars have a value to them whether or not you think you plan on selling them or not. I think it’s okay to calculate both your “Net worth” and your “liquid net worth.”

By: Finance Nerd

Finance Nerd — Wed, 19 Aug 2009 10:04:11 +0000

If you leave in the mortgage, because you will always have an expense for shelter, shouldn’t you also establish a liability for the present value of the amount you will have to spend on groceries over the remainder of your life? No, because you will presumably be paid again at some point in your life, and those costs will be paid from future paychecks.

Guess what — so will your mortgage. Unless you are planning to pay your mortgage off with cash in the near future, your mortgage payment will come from future earnings. So, it might make sense to reflect the current payment as a liability, but not the entire balance.

Governmental fund accounting does not account for long-term assets, or the related liabilities, so there is precedent for ignoring both. But, it’s hard to find a good argument for keeping one in, and not the other.

By: Bill K

Bill K — Wed, 19 Aug 2009 00:56:53 +0000

I think the Anti-Budget post (http://www.thesimpledollar.com/2009/08/18/the-simple-dollar-podcast-12-the-anti-budget/) is excellent sequel to this post. It clarifies the context quite a bit.

I agree with Trent’s intent, but I don’t agree it should be called “Net Worth”. I like Allen’s (#75) focus on cash-flow for monthly reviews, and filter out the rest. Looking at Net Worth (meaning the true accounting term) on too frequent a basis is recipe for emotional decisions that detract from longer term goals.

That said, I include Net Worth calculation at quarterly reviews, where I update approximate asset worth (i.e. home market value, car’s depreciated value, etc). I also include review of retirement and long term assets to see if anything needs tweaking, or if my plan can remain on auto-pilot. I also evaluate other non-financial home assets as to whether I should keep, sell, or donate.

Having accurate picture of Net Worth also is critical for life events, like estate planning, wills, relocation, tax planning, etc, where all assets are accounted for. This is completely separate purpose than monthly review.

By: partgypsy

partgypsy — Tue, 18 Aug 2009 22:05:37 +0000

I agree from accounting principles this would drive me crazy to both not include the worth of the house but include the mortgage.

Realistically speaking my house is my biggest investment. In addition we have spent the last 10 years investing sweat equity into it, turning it into a more valuable asset than it was before. You need to put the nitty gritty of what the outcome is money-wise of your actions to be honest and learn from it. Was it worth the time and money and happiness, or would it have been better to put that money/time into a side business or into investable accounts? Second as in life and money, everything is connected. You need to see the relationship. By not including the cost of your house so to speak, you are making assumptions about your life, for example that your standard of living house wise is unchangable, giving you less options and imagination about all the potential ways things can play out.

When the time comes that the house is paid off, it DOES give you more financial freedom compared to someone who was renting all the while. You can live in it “rent free”. You can sell it and move to a nicer place in a less desirable location, or downsize to a smaller house and get money back. You could sell our house and become a world traveler.
What I’m trying to say it doesn’t matter if you are fudging it better or worse, it is best that you are completely honest about your money situation, in order to value what you have done with your money and to understand whether it was worth it or not.