Updated on 08.06.09

Why My Net Worth Is Now Negative Again

Trent Hamm

That’s probably pretty shocking. “WHAT DID TRENT DO?” I can already sense the regular batch of critics in the comments cracking their knuckles over this one.

Actually, the change is pretty simple. I made the decision to stop counting the value of my home as an asset in my net worth calculations. I also did the same with our automobiles.

Let’s back up a bit. I’m a big believer that calculating your net worth – which is your total assets minus your total debts – is the best way to keep track of your overall financial progress. If you’re making good progress, your net worth will go up each time you calculate it (or at least have a strong general positive trend, since you can’t control the short term fluctuations of the stock market).

It’s pretty easy to calculate it. You can either use a personal finance tool like Quicken or, better yet, build your own net worth calculator in a spreadsheet. I calculate mine every month using a spreadsheet (though I’m considering giving Quicken a serious try when the new Mac version is released later this year).

As I mentioned in the past, I was using the assessed value of my home and property as an asset for calculating my net worth, and that pushed me well into positive territory overall. By including the value of my home as an asset, it was a big fat net positive – $175,000 worth.

But every time I calculated my net worth, I asked myself about the home and the automobiles. Could they actually be liquidated without really altering our life? Is it even realistic at all that we would just sell our house if we needed cash?

Our primary resident is an asset we need to use. It’s where we live. It’s something that would be very difficult to liquidate from our current position because it would require us to move elsewhere. Similarly, an automobile is something we need to use and to liquidate it would require us to make major life changes.

To put it simply, our home and our car aren’t liquid assets. Yes, of course, we could get cash value for them, but it would involve major life changes and significant effort.

Instead, they’re tools. They’re things we utilize to live our life. If we lost those tools, our lives would radically and severely change, something that wouldn’t happen with any other assets we hold.

So we just made a simple change. We’re no longer counting our “tools” – our not-very-liquid assets – in our net worth calculations, and that means we just dropped about $200,000 from our net worth.

And this put us right back in the negative. Our debts, including our mortgage, significantly exceed our other assets.

Many people might say, “Wow, that’s painful.” And in some ways it is. But what I see each month is that our net worth is going up. We’re heading in the right direction each and every month. That negative net worth is getting smaller and smaller.

I have a nice new goal now. I want us to have a positive net worth without our home or our automobiles as assets as soon as possible. That’s a further psychological carrot to live lean and look for more ways to earn money.

What about you? Do you calculate your own net worth regularly? Do you include your home as an asset?

Loading Disqus Comments ...
Loading Facebook Comments ...
  1. almost there says:

    I don’t count the house, cars, or contents of the house except cash that is in the house. It may cost a lot to outfit and furnish a house but it is worth next to nothing at an estate sale. A family member is out of work with no unemployment and makes his living by going to estate sales and selling what he buys on ebay. People almost give things away. I have a Pos net worth but in my thinking it should be 4 times larger for my age and just having retired.

  2. Amanda says:

    I think that’s a very smart move. It gives you a real picture of where you are, & what you should set your goals for. I’m sure you’ll make it to wherever you want/need to be. I’d give yourself a big, fat reward when you’ve reached the goal… 6 months in a real, Euro. cooking school? :) And, something for your family for their contribution towards achieving the goal.

  3. almost there says:

    Trent, google “Table Scraps”. It is on of my family member’s blog about food. She makes a living at it, but it is hard work and since she takes her own photos, she doesn’t have the photographer expense. On the plus side, trying out different eating places must be a business expense in my thinking.

  4. lurker carl says:

    I understand the psychological aspect of this net worth exercise but not the logic you are using. After all, the home and automobiles definately have value and can be sold if necessary, not right this very minute but easily within a few months. When liquidating an estate, the home and automobile are often the assets with the most value.

    I do like the idea of not counting on the house (or car) as a source of cash or even part of a retirement portfolio. The primary residence and transportation are tools rather than investments, things to make life easier and comfortable.

  5. Chris says:

    Trent, I agree with your concept of removing these items from you r net worth. If you think about it your primary residence and cars are laibilities. You have to pay taxes on them, you have to maintain them and they do not have any cash flow. They are worthwhile sure, but assets hummm…

  6. 2million says:

    While I think your new approach is is a good way to to track your progress, we have maintained my home’s value in our net worth at its cost basis. I feel it gives us a more accurate snapshot of our progress and I have adjusted our financial goals to reflect the cost basis of our home. Good Luck!

  7. Trent,

    I agree with you, I stopped calculating my home’s equity and the value of my vehicles in my net worth also.

    Partly because it was too difficult to get an accurate representation of what my home and cars’ “true” value was.

    Their value is not definative like a savings account balance, or stocks.

    I also stopped tracking the value of my personal items as well like musical instruments, sporting equipment, etc.

    I figure if you are adding these into your “portfolio” you are just kidding yourself!

  8. Ace Davis says:

    I prefer more data to less, so I count home equity, though with a painfully huge grain of salt these days. I divide my assets into low or high liquidity, then subdivide further (low: dual-purpose or retirement; high: cash/bank accounts or non-retirement investments). Seeing each subtotal helps refine the overall picture. So home equity counts as a low-liquidity, dual-purpose asset (along with life insurance cash value and the kid’s 529). But it’s at best a placemarker, since it depends on finding a buyer and bears real transactional costs.

    Cars I don’t bother with, as they’re both old and paid off. Their maintenance/repair logs are more relevant to their (depreciating) value.

  9. Gabriel says:

    I think that’s a fantastic idea, and one that is of much more use in seeing how you’re progressing. Book keeping, like statistics, can tell either truth or lies. I actually decided this morning that I needed to revamp my current business books. Thanks for the inspiration! Congratulations on the great trend, we know that you’ll succeed!

  10. Sharyn says:

    Excellent post. What really matters is finding what keeps you motivated to keep going in the right direction. As someone with a young family like you, I can understand that having positive net worth without including the house is getting you much closer to your long term goal of security.

  11. Ray says:

    I can see it as a good motivator but don’t think that one should not count their home in their networth calculations. You are in negative most likely due to your mortgage which is due to the home you purchased so it does not make sense to take the loan on the asset but not the asset in your networth calculations. If you really want you can use the original cost of your home and not the appreciated value that will make more sense.

    But like I said I see how it can motivate one.

    Good luck!

  12. I can see what you mean about the car, since they depreciate so quickly. But this means that most people who have a substantial mortgage will be underwater, and probably for a long time. Psychologically, that’s a huge negative!

    Maybe it would be more constructive to cancel out the mortgage with the house–not count either–if you have at least 20% equity. So you don’t count the equity, because you don’t intend to sell, but to count the mortgage as a live debt without recognizing the asset it’s based on sounds a lot like beating yourself up.

    If you got into a tight enough spot, you MIGHT sell the house.

  13. Kiran says:

    I have always counted my car and I regularly calculate net worth. I simply aggressively depreciate its value. I had depreciated it down to 5500 by the time it got totalled, and the insurance company valued it at 6500.

    I like aggressively depreciating my vehicle because I have to raise my ‘non-vehicular net worth’ by more than the rate of depreciation to show positive net worth growth.

  14. I don’t count our house or vehicle. After all, we wouldn’t sell them unless we REALLY, REALLY had to — and who knows what they would bring us then? Counting chickens before they’ve hatched is what gets soooo many people into financial trouble. It’s much easier to spend like the Joneses when you think you have a networth so high because of a house!

    Kind of nice to know, though, that some people do count their homes! Makes me feel a little better knowing that I wasn’t comparing apples to apples!

    And I don’t think putting that big fat negative in your network count is so masochistic as some seem to think. We have a big fat negative and, while we’re working hard to get it gone, we find it more inspiring than depressing (at least 99% of the time). It’s just facing the facts! And denial never helped anyone get wealthy!

  15. Walt says:

    I like that you’re taking the guesswork out of it (the value of your home is only an estimate, but what you owe is exact)

  16. This doesn’t make sense to me from an accounting perspective. I can see the merits of not including your house and cars in your networth calculation. But, why would you exclude the value of your house from the calculation and keep the mortgage debt as part of it? It throws the net worth calculation out of whack…. the balance sheet is uneven.

    -Gen Y Investor

  17. Paul says:

    If you are not including all of your assets, you are not calculating your net worth.

    It is critical that you include everything to get the full picture, especially the impact of appreciation and depreciation of assets. If you don’t, you’ll be making choices without all the information you need.

    For example, if you ignore your automobile depreciation, your choice to finance a car is made without a critical component of the impact to net worth.

    It also doesn’t make any sense to include the liability that corresponds to the excluded asset. If you are ignoring your house, you should ignore the mortgage.

    I strongly suggest you include everything to get the most accurate picture possible.

  18. Chris says:

    Why count the amount of the mortgage debt if you are not also going to count the asset attached to it? Seems like you are short-changing yourself Trent. You could sell the house if you had to, maybe not quickly, but likely within a few months to 6 months.

  19. spaces says:

    It just seems wrong to include the mortgage in debts but exclude the house from assets. It’s not balanced. I don’t think it reflects the economics of the situation, either.

    IMO, if you’re going to exclude equity in the house from assets, then the mortgage ought to be excluded from liabilities, too.

    Or, you could include the mortgage payment in liabilities as a recurring, periodic expense, rather than at the balance of the principal of the note.

    Whatever it is, the economic way to account for the mortgage should 1) be one that can be compared to the situation of someone who rents their home, and 2) be on the same basis that you account for property taxes and insurance on the home.

  20. George says:

    So for the sake of continuity, why not track both measures of net worth? It’s just another couple of columns in the spreadsheet, right?

    Home equity becomes important when you no longer can care for yourself. Then the house gets sold and you use the proceeds to pay for the new living arrangements. Usually (and hopefully) this will be many years in the future after retirement.

  21. Ram says:

    Agreed – I had never included our home as an asset until recently when I read the definition of net worth although i still don’t include my 401K account – well, I entrolled in 401k only 2yrs ago.

    As you said, we’ve considered ones that can be converted into cash right away – including all my bank accounts and stocks for asset. for Liabilities, I include everything item i owe (house, car loan, credit cards) – so likewise, I would know exactly how much I owe and the amount I have in hand (svg/chkg/MM accounts, CDs, stocks)

    After we moved to another house close to 2yrs ago, ihave included house under asset now to see the change, i have considered the purchase price (basis) instead of ongoing appraisal value – which I think has gone down now. It is hard to adjust it everytime I compute the net worth.

    I use Microsoft Money as a tracking tool for my personal finances.

  22. George says:

    And home equity is important if there’s a need to disperse assets, such as a bankruptcy or divorce.

  23. Sara A, says:

    I count the value of the house if sold (market value minus 6% for real estate fees and minus 2% more for various other sale costs such as repairs).

  24. chessiq says:

    At mint.com, I include my non-liquid stuff; In my spreadsheet(s), however, I only include “cash & cash-equivalents”, and my balance sheet “plug-in” figure is “CASH NET-WORTH”. This is more useful to me.
    I have not seen the benefit of tracking non-liquid assets on a daily or weekly basis, I let the banks and mint do that.
    The liquid items, on the other hand, change quite a bit, and I see the need to track them as soon as I know/expect/suspect that a change has occurred.

  25. Gail says:

    I totally agree with Paul’s comment above. Home equity is a valid number to include in calculating net worth, especially since you can borrow against it using a home equity loan/line of credit or reverse mortgage. And although it’s a notoriously depreciating asset, your car will most likely have some residual value when you decide to replace it.

    That said, I think your new method (provided you ignore your mortgage/car loan as well home/car value as as Paul suggests) provides a useful 2nd measure for net worth since it only counts “hard value” liquid assets that you don’t have to guesstimate the value of. PS: Quicken is FANTASTIC and really simplifies keeping track of your net worth if you’re into this…

  26. Anthony says:

    I put the historical cost of our housing under non-current assets, right where it should be on the balance sheet.

    I do, however, flag certain categories as purely financial assets or liabilities and can look at a financial-only view if need be.

  27. I think that when calculation Net Worth you should include the value of your home and cars. These items do add to your net worth.

    I think that the problem you are having is that a net worth calculation is not what you are really looking for. It is a definition problem. You want to know the net value of your liquid assets.

  28. Brad says:

    I also track my net worth monthly. I do think it is important to track all of your major assets to get a full picture. On my net worth tracking I only include my house and car as the other assets would be too difficult to estimate.

    I did make a big improvement in my net worth tracking a couple of months ago. I added a new calculation called ‘Liquidity.’ It is my non-retirement cash/investment holdings divided by my total net worth. I find this metric helps to put focus on available cash in the event of a life change.

  29. Stephen says:

    I have been using Quicken to keep track of my finances for a long time, and have always included the house and vehicles in my net worth. Not including them would put me so far in the red I would be so depressed I wouldnt want to get out of bed in the morning. Not including them makes it look like the 10k I had saved up for the house I blew on a weekend bender in Vegas. Poeple make unplaned lifestyle changes all the time. If I lose my job, and have to move, the equity I have in my house will make a nice down payment on a house somewhere else. The current economy has put unplanned lifestle changes into high gear.
    Thinking long term , do you plan to stay in your house till you are dead. Both my parents and grand parents downsized in their retirement. The grand parents went from a very large house in Washington DC to a 2 bedroom house in Florida, and finally a Condo. That house paid for a lot of years in retirement.

    Most people need a car, but do people need 2 or 3. Does one need a Hummer when a Honda Civic would do. Selling some or reducing the size of the vehicle wouldn’t radically change ones lifestyle.
    The trucking company I work for the trucks and trailers are their tools. They use the equity they have in their tools to buy more tools. They use the equity in their tools to get loans from the bank to buy more tools, and at favorable rates. When the job changes, they sell some off and buy different tools. When their tools depreciate, they get to write them off against theire taxes.
    My house and vehicle maybe tools, but I will continue to include them in my net worth.

  30. leigh says:

    we don’t own our home, but we don’t figure any solid assets into our net worth. sure, it’s negative, but i feel it’s the most real way to figure your situation based on the things you really count on using.

    if i included the value of our cars, our net worth would be positive too. and it would be an artificial sense of security.

  31. Steve says:

    It makes absolutely no sense to not include your home and vehicles in your net worth. Liquidity is not the measure of net worth, it is cash, investments, debt and *assets* which give you a total picture.

    Have you been watching the scourging scene from The Passion of the Christ?

  32. Matt says:

    I disagree. The equity you have in your house is indeed an asset. Your point seems to center around the fact that you need a place to live. This is true, however, there are rental options as well. You could sell the house, pocket the equity, and then rent without too much of a dramatic lifestyle change.

  33. Joe says:

    If you sought the advice of a financial planner, they would definitely include the value of your home when computing your total net worth even if you never intend to sell it. Otherwise, why not extend the logic to your retirement accounts? You don’t intend to sell those either do you? (at least not until retirement). Your net worth statement is meant to include the totality of items that have value both positive and negative.

  34. Tyler Karaszewski says:

    This is like a store owner not including his inventory as an asset — it makes no sense. When a store manager at old navy orders 1,000 pairs of jeans, it’s not the same as flushing the $10,000 he spent on them down the toilet, and when customers come in and buy these jeans, it’s not the same as a donation to the store.

    It would be if you were doing the accounting, though.

  35. nickel says:

    It sounds like you’re moving more toward relying on “net investable assets” as your financial measure du jour. To me, this is a much more valuable measure than net worth per se.

  36. David R. says:

    I include my car’s estimate sale value (in a private transaction) because there is a real chance I might sell it in the near future (I’m joining the Army).

  37. Aly says:

    As an accountant this approach makes no sense to me. If you aren’t going to include the house that’s fine, but then you should also exclude the corresponding liability (mortgage) from the equation as well. You’re out of balance. ;)

  38. SteveJ says:

    I do include house and car, but I take very pessimistic values.

    I use zillow.com to get a market value for my house, drop that by 10% and then take 6% for fees and 5% for other costs. Or I just subtract 20% from the zillow.com price :)

    Likewise I take the kelly blue book value for trade-in on my cars in good condition and drop it by 20%.

    I get my retirement account statements and slap on a 35% drop for taxes.

    I might get desperate enough to sell my house or car, but I won’t be shopping for market value at that time.

    I do like your idea though Trent, I might add it to my spreadsheet. Would you liquidate retirement before selling a car? I don’t know if I would. If one is looking at it from an estate perspective do you add in life insurance?

    I look at it this way, if my kid were going to have a complex procedure that wouldn’t be covered by insurance, what wouldn’t I sell? I think just about anything is fair game for true net worth. I agree, it’s just important that you get a boost to watch it go up month by month.

  39. Debbie M says:

    I am a big fan of finding numbers that help motivate you to do the things you really want to be doing. So this is a good number for you to track.

    That said, I wouldn’t call this net worth. Maybe “net savings” or chessiq’s “cash net worth.”

    You don’t have to publish this information in a government-regulated forum or anything, so who cares, but “net worth” has a meaning, and someone with your newly calculated net worth without a house would be in a lot worse shape than you are, because they would be doomed to paying rent even after your mortgage is paid off.

    I do include my house and my car in my net worth calculation (but not any of my other stuff, I admit). This helps me keep a big perspective. Even if my stocks are plummeting, other categories are hanging in there.

    I also track just retirement savings and monthly spending (looking forward to the crossover point). These are numbers that really matter to me, although I have very little control over the savings since lots of it is in stocks.

    Finally, I also keep track of extra savings that have come from spending less than budgeted on food and short-term fun and from getting rewards checks and other windfalls. This number is best at letting me know how well I did last month.

  40. Amy says:

    ResiDENCE. A resident is a person who lives IN a residence.

    Instead of hiring an assistant, you need to hire an editor.

  41. Steve J (30)–That reduction for taxes (and 10% penalty for early withdrawl) on retirement accounts makes more sense to me than excluding the house and mortgage. The tax reductions on a withdrawl from a retirement account are certain if you’re under 59 1/2.

  42. NYC reader says:

    As an urban dweller, I own neither a house nor a car. I evaluate my net worth two ways.

    First, I calculate the overall value of my taxable investments, bank accounts, and cash on hand. This is my “cash-and-cash-equivalent” net worth, i.e. what funds I actually have available to spend. I have no outstanding debt. If I had debt, I would subtract the total outstanding debt from the cash-and-cash-equivalent net worth.

    Next, I calculate the overall value of my tax-deferred retirement investments (401k and IRA). I then reduce the value of my tax-deferred retirement investments by the taxes and penalties that I would have to pay if I accessed the funds today.

    For my real net worth calculation, I add the cash-and-cash-equivalent net worth to the reduced value of the tax-deferred retirement investments. This is my current working net worth. This is the only net worth that really matters, since it’s not possible to avoid taxes on the tax-deferred investments. Penalties can be avoided once one has reached the appropriate age to withdraw funds (currently age 59 1/2).

    For my imaginary net worth calculation, I add the cash-and-cash-equivalent net worth to the unreduced value of the tax-deferred retirement investments to arrive at a “feel-good” net worth. It makes me feel good to see the total amount, which does not account for taxes and penalties on the tax-deferred investments, but it’s not a reflection of fiscal reality.

  43. Orion Lawlor says:

    Accountants, one way to balance out Trent’s “house is not an asset” net worth is to treat our human need for shelter as a built-in liability. Think of housing as a debt we all owe since birth. Owning a house is just one way of converting that liability into a mortgage, a monetization of that original debt. If you sell the house and rent, your shelter liability doesn’t go away, it’s just converted to an indefinite series of rent payments.

    A guy that owns a barely-adequate house, and nothing else, has thus paid off his lifetime shelter liability, but (from some point of view) his net worth is still exactly zero. You need more than a house to have positive net worth. And the whole point is that Trent finds this accounting method helps keep him in the frugal zone!

  44. Laura in Seattle says:

    For everyone who said that including the mortgage but not the presumptive home value leaves the balance sheet out of whack:

    If you owe credit card debt or money on a HELOC, do you count the money owed as a liability and the amount of credit available as an asset?

  45. It is strange. You include mortgage but don’t include the house value. Maybe you should include both or none of them. In my case, I not a house owner, but I will include it when I buy one!

  46. Rosa says:

    I figure it exactly that way in my head, Trent.

    In the spirit of fiscal conservatism I don’t count the house equity when I think about our financial position – among other things, houses are sitting on the market for months or years in our neighborhood right now, and foreclosures within blocks of us have sold for under $10K this summer. Our car only cost $8K and that was a couple years ago, so the blue book value is pretty negligable at this point.

    So when the combination of all our other assets (including retirement accounts) matched the mortgage value, I was *ecstatic*.

    Still, I do a proper balance sheet – short term and long term liabilities and assets matched against each other – every year or two. But that’s not emotionally satisfying – what I’m looking for is “what resources do I have if there’s a serious catastrophe?”, not “what’s our technical net worth.”

  47. Orion Lawlor (34)–Except that if you own a mortgaged house, the liablity–the mortgage–is offset by the asset–the house. Rent is an expense, and you’re right, we’ll always have a shelter EXPENSE, but there’s no liability attached to a rental.

    The one exception I see is if you’re underwater on the house, or close to it. Then you might carry the negative equity, plus an allowance for selling expense, as a “debt”.

    (We’re getting too deep into accountant-speak here! ;-) )

  48. Marsha says:

    Do what works for you, but if you start selectively deleting certain assets or debts, you’re calculating something other than net worth.

  49. haapai says:

    I agree with your decision to ignore the assessed value of the house but I disagree with your decision to stop carrying the car as an asset.

    Having said that, I must confess that I once did exactly the same thing with my car. I carried the loan as a liability but did not include the car as an asset. My primary reason for doing this was not trusting myself to make the appropriate depreciation entries in a timely manner.

    I felt pretty foolish when I figured out just how easy it is to kick out a depreciation schedule and plug in all of the entries in Quickbooks. You can make all of the depreciation entries at once, with their appropriate dates and pretty much forget about it until you destroy or sell the vehicle.

  50. paul says:

    i agree with the philosophy, BUT you are only looking at 1 side of the equation if you consider your mortgage as debt without considering the value of the house as as an asset.

    i look at “overall” net worth and “liquid” net worth separately.

  51. Randy says:

    I guess it depends on your purpose. If all you’re looking for is a number and a graph, then it makes sense. As you pay off your house, your net worth should go up at the rate of your mortgage. If you include the house as an asset, you have very little control over it’s value, so it’s not a true representation of how well you’re doing. But then, the stock market is the same to a degree.

  52. JF says:

    It’s called Real Estate for a reason. It’s Real! Liquid net worth != Net worth.

  53. KellyB says:

    I keep a tally of my liquid net worth, then add in my sons’ education savings and total that, and finally add in my home equity, cars, and other “non-liquid” asset to get a full picture of my net worth at all stages. I like that I then know my full net worth as well as other assets I could use if needed from different asset classes. Works for me!

  54. AnnJo says:

    As several people have commented, your calculation may be useful to help you meet your goals, but it isn’t a “net worth” calculation. “Net worth” has a generally accepted meaning, and what you are now calculating is not it. You will confuse yourself and others if you apply that term to something it’s not.

    Quicken offers different centers in which to include accounts; I like this because I can include all of what I regard as my financial assets in my Investing Center and see at a glance where I am, but my total net worth is still going to be consistent with what my banker, broker, financial planner, accountant, divorce lawyer, estate planner, lender, etc., would understand that term to be.

  55. Kirk Bond says:

    Although I appreciate the psychological logic in it, I don’t think that keeping the loan in without the associated asset makes any sense. If you have some equity then I’d see it reasonable to maybe just count it as a wash, but I think it diminishes the value of the assets you actually do have.

  56. Michael says:

    The only thing I’m criticizing is your silly introduction. You’re not very good at guessing which of your decisions will be controversial.

    I calculate my home in my net worth as an expense. So much for the mortgage, so much for taxes and so much for maintenance.

  57. If you believe in networth as an indicator of your financial well-being, include it.

    Far more interesting is your debt/asset ratio. For instance, if you have $200000 in networth but $100000 in debt, that’s not that impressive.

    Also interesting is your investment cash flow or your personal and pragmatic version of return on equity. If your house is a large part of that equity, your return is small relatively speaking and again that is not so impressive.

    I believe I have the importance of ratios described in a post sometime ago.

  58. @JF – It’s called real estate for historic reasons, specifically because real is Spanish for royal meaning that the government is the ultimate owner. This is the reason you pay property taxes.

  59. Juli says:

    I include my retirement accounts in my calculation which can’t really be accurately calculated when you think of it. If I needed the money, I would have to deduct a 10% fine along with keeping in mind I’d be paying taxes on it as well.

    If you went bankrupt and had to sell the house, you would realize it as a being an asset, so I can’t see not having it in your calcs.

    I have my prop value just a bit up from what I bought it at 10 years ago, so I think it is somewhat accurate. Once a year, I update the principal balance on my spreadsheet to account for the decrease in the loan. I only count the principal in the loan in my net worth calcs because I consider the interest to be more of the expense. In addition, I plan to pat down the principal a little more in the future and the interest totals will change.

    Yes – I even have my 10 year old car as valued by kbb.com (at the lowest value: dealer trade in).

  60. Elizabeth says:

    I count my retirement account but not my car in my net worth calculations (I don’t own a home). I count the retirement account because at some point in the far future I plan to cash it out a little bit at a time and I consider it to be an investment. I don’t consider my car or other material property to be an investment.

  61. sasha says:

    It sounds like you are using (whether you are aware of it or not) a very arcane bit of SEC accounting which is called a “wasting asset” in regards to your house valuation.

    I can understand you point and agree with it completely. A house actually has no real “market value”. Homes in the area we live in may well have a “median” value…but our home has no set value until we sell it and that value exists merely for that particular sale. If put on the market the next day, it very well may sell for more or less than it previously sold.

    Do what works for you, it is after all personal finance. ;)

  62. Wade says:

    I agree…your calculation is fine but it is not what would be traditionally defined as Net Worth. Net Worth should include all assets and liabilities, regardless of their liquidity or your long-term plans for that particular asset.

    I include, home, autos, and personal property. I think of Net Worth as “if I sold everything today and moved to Mexico, give me a ballpark idea of where I sit”. Granted, there would be taxes, fees, etc. to liquidate these assets, but Net Worth should be an all encompassing glimpse of your financial world.

    I have calculated our Net Worth each month for almost 3 years, so it has been important to me to keep a consistent method in my calculations. Each month on the 15th (my Net Worth calc day) I will pull up the KBB Private Party value of each vehicle. I make sure our Personal Property inventory is up-to-date so it doesn’t skew the calculations. I include my home’s value in the calculations, but I use the value from the last appraisal. While it can vary from this, it’s the last known value of the property, so that’s what I use.

    If you want to know the liquid assets portion of your net worth, just break your assets column into categories. I have five. Cash or cash equivalents, equities/investments, real estate, personal property, and business interests. Each category has a bunch of sub-entries, but with a quick glimpse I can see how much cash I have, where my investments stand, and how much equity stance I have in my business interests.

    I think a person should treat their personal finances much like a business, and account for it accordingly.

  63. Michael says:

    Continuing #46, I don’t calculate my net worth as a balance sheet. I don’t find that useful. I think in terms of $x/year. “Mr. Darcy is worth ten thousand pounds per year,” that sort of thing.

  64. Four Pillars says:

    I agree with Nickel (#28) – You are not calculating net worth any more. “Net investable assets” is a more useful way to look at your financial picture in my opinion.

  65. Prasanth says:

    I have never included the value of my home in my net worth calculations. I need a place to stay – so my house essentially is of zero value in my calculations.

  66. Melissa says:

    Hi, this seems to be a topic that comes up now and then. I guess the important thing to do is what works for you. Do you count your mortgage in your net worth? It would make sense to not include that also.
    As an accountant, I use the standard understanding of a balance sheet and include my house in my net worth, however I also like to do a liquidity table, where I only include liquid assets and debts (I also track my liquid ratio, but I’m a bit OCD!)
    I rarely look at my net worth because it doesn’t change much, but I do keep track of my liquidity. I find using both gives a more accurate view of my finances and hey, it can be nice seeing a big juicy number on your net worth from time to time!

  67. Elizabeth says:

    You know, now that I think about it, I never once considered the assessed value of either the cars or our house when I calculated our net worth.

    I suppose I just had it in my head that if the house counted as a debt, (the mortgage), then it couldn’t also count as an asset.

    And I’ve always heard that cars tend to depreciate, not appreciate, so once they were paid off, they were simply removed from the debt column. I didn’t think to add them to the asset column because they still cost us money in budgeted things like gas and maintenance. Their benefit is that gas and maintenance on them is cheaper than the price of a new car, plus it’s gas and maintenance.

    I’ve always calculated net worth this way. That’s the main reason it’s taken us so long to get into the black. That finally happened for us last year. Currently in the 5-digit range, and growing!

  68. Tom says:

    Whatever you use as a yardstick is fine as long as it’s consistent, but I believe that if you don’t include your house as an asset, you should not include the mortgage as a debt. Suppose you sell your house for the exact amount of the mortgage plus selling fees, that would result in a net worth increase. Does that feel right?

  69. TDH says:

    Trent, even though you are no longer including the market value of your home in your net worth calculation, are you including the equity in your house as part of your net worth?

  70. Curt says:

    I’m supprised it took you this long to figure this out. I have never included my autos or primary residence in my networth.

  71. Mighty says:

    Right on! We don’t count any of our material possessions as part of our networth because if we were really in a position where we had to sell quickly, we would accept painfully low prices on things that we value more highly than that.

    Plus, like you, I think it’s helpful to see your networth go up each month and know that it is real, true progress.

    If you include a depreciating car and a house you live in, you can’t see your progress as clearly.

  72. J says:

    ZOMG tomorrow are you going to buy a latte without consulting your spreadsheet and performing a cost/benefit analysis? Maybe you’ll go hog wild, call up a sitter for the kids and take your wife out to a fancy restaurant on a whim — and you’ll disconnect the battery in the Prius so you burn gas all the way there! It’s a new, wild and craaaaazy Trent! :)

  73. Maureen says:

    The very definition of an asset is something of value that can be converted into cash — I would consider equity in a home to be an asset since it cost other assets ($$$) to acquire and could be transferred back into liquid assets upon sale (whether or not you intend to do so). I’m sure you insure your home and spend time and money on its upkeep. If you don’t consider your home an asset, why would you insure it? Indeed, why not rent a house rather than purchasing at all? You’re acting as if your mortgage payment went solely towards a consumable (as it would if you rented).

  74. k2000k says:

    I have never been a big fan of individuals calculating their home value into their net worth, not because you shouldn’t do this, but because the value that is often picked isn’t necessarily supported by historical data. The 100 year average home appreciation rate after subtracting inflation has been .4%, it can be higher in areas of Seattle, New York, or San Antonio but if you live in far out areas it should be around this rate. I have always advocated conservative estimates for anything financial and using a 3.4% appreciation rate on the value of the home when you bought it is certainly conservative.

  75. SP says:

    I’m of the opinion it doesn’t matter exactly how you calculate it, as long as you are consistent with yourself. On a yearly basis, I track retirement contributions (though in the big picture, it is important what the return is).

    I’m a renter, so this is a non-issue. My car is not worth a whole lot (but reliable!) so that isn’t counted. I’ll have to decide what to do when I buy a new car. I feel my NW should take some hit, but maybe not the price of the car.

  76. deRuiter says:

    Trent, you’ve got me puzzled here. If the house isn’t an asset, then the mortgage isn’t a debt! Makes no sense to me. Our house is paid off in full. Rental properties paid off in full (all through prepaying on morgtages.) ARE NONE OF THESE PAID IN FULL PROPERTIES ASSETS in your mind? A property is worth the price for which it will sell, minus expenses, at any given time. If there’s no mortgage, you sell it yourself (no agent comission) and you talk the buyer into paying your share of the county’s 1% sales tax to sweeten the deal, everything you get is clear money except for income tax if applicable, so you know what the property is worth. If instead of selling, you do a property exchange, you trade your asset for another asset, with no tax consequences. A building is an asset, and if there is a mortgage, you deduct the amount of the mortgage from the actual price you would get selling the buildng, and you see where you stand. If you sold your house you could rent a place, and put the equity from your home in the bank.

  77. Dan says:

    I count house and cars, but at a severely discounted rate. As you stated, in an emergency, how liquid are they? If you needed cash in a week, what would you sell your home for (if you even could in this market?) Your cars? Anything greater than about 33% is a bonus, I feel.

  78. Megan says:

    I don’t have a house, but I do have a car, and when I calculate my net worth each month, I don’t include the car. Why? In my opinion, it’s too hard to calculate the true price of the car. As I’ve written about on my blog, things are only worth what someone will pay for it. So sure, I can get the Bluebook value, but to make it actually worth that amount, I have to find a buyer. On the other hand, there is no question about how much money is in my savings accounts or retirement accounts.

    But I think that the above posters discussing mortgages have an interesting point. My car is paid off – so at the end of the day, it has no impact on my net worth (aside from car expenses, of course). But a mortgage will have an impact.

    That said, net worth is something you’re doing for you, and I like your way of doing it. On my blog, I never post my actual net worth, just my percentage change. That’s the more important part. And yes, it will take a big hit when I finally do buy a home, but then I can watch it grow again.

  79. Kevin says:

    I’m taking the opposite approach with my household’s balance sheet. I *do* include our home’s value, but *not* the mortgage. I find this view makes me more cheerful.

    Plus, it makes just as much sense as YOUR approach.

  80. Ryan says:

    As far as actual accounting goes this is wrong, as others have stated.

    HOWEVER, being the pessimist (realist) that I am, I’d much rather understate my net worth. When I had my car loan for a while I was counting both the loan and the blue book minus some percentage. Then I decided to not count the value of the car at all. I like this approach better because worth locked into a physical asset is a lot harder to realize than liquid assets.

    A lot of personal finance is psychological, and this is just another example. While it may be “wrong” I think it’s a lot better for a person to ignore the value of their home than overstate it.

  81. Alexandra says:

    I don’t get why Trent is trying to “fool” himself into thinking he is less wealthy than he really is.

    Unless this “frugal” thing is starting to look silly given the fact he is actually quite well off now. Whatever, keep pinching those pennies no matter what the bank books say. I thought frugality was a means to an end. I guess not.

  82. This is something I was thinking of switching to as well. Our cars are paid off so we do have positive value in them if we were to sell them. But it is highly unlikely we would sell the cars and pocket the cash. We would need a way to get around so we would be looking into a new car.

    Same goes with our house. We need a place to live. If we were to sell we’d probably be buying another place and not pocketing the cash.

    However, what do I do about the mortgage we still owe on the house? While we still owe on the mortgage I feel like I can offset that with the house. I can sell the house if needed and wipe out the mortgage if worse came to worse.

  83. Tony says:

    Let me get this straight.. If you have no investments (no savings, no retirement account, and no brokerage account of any kind) and use all your dispossable income to pay off the mortgage on a house you bought for $600K it means (according to your approach) that at the end of 30 years (after the mortgage is paid off) your Net Worth is cero?

    Doesn’t make any sense to me. Networth = Assets – Liabilities. Once your house is paid off your Net Worth = House Value.

    I understand you need a place to live, but at some point in your life you might sell your house and rent. That means your networth will increase from cero to $600K in a day? It’s just not realistic.

  84. Rangzy says:

    Very good article.
    I second Trent’s idea that the primary house (where a family resides) better not be included among one’s assets. However, I agree to many of the comments here, that say Trent shouldn’t be counting the mortgage for the house.

    This is a reason I prefer not to own the house where I reside. Owning a house where it fetches good rental returns, and residing at a rented house that is practically very convenient is a better solution, IMHO. Since the own house is now not the primary residence, it can definitely be included among the ‘assets’.

    A second house should definitely be a part of the ‘assets’. Also, the vehicle(s) that are clearly in surplus, and that can be quickly sold anytime w/o hampering day-to-day activities.

  85. Rangzy says:

    And I pray to God, nothing as unfortunate as in comment #19 should happen to Trent. I am sure they are a mutually loving & caring couple, and Trent is a master of personal finance.

  86. Daniel says:

    If you’re not counting the value of your tools in your net worth, does that mean you don’t have to count anything you might owe on them, either?

  87. Erin says:

    I agree with others, this may be a useful metric to track but don’t call it net worth. That will just confuse people. Net worth is total assets minus total liabilities. Each side of the column has to balance – that’s why in business it’s called a balance sheet – if you are not including house value (asset) then don’t include mortgage (corresponding liability) in the calculations. If you are not including the cars don’t include car loans in the calculations.

    Yes, you have to have a car but you can always sell your car and get a clunker. You have to have a place to live but you can sell your house and either buy a cheaper house or rent. Another way to look at net worth – if you died what would be the net left over when everything is liquidated? That kind of calculation is the purpose of a net worth calculation – not “what can I liquidate quickly without disrupting my life too much”? Net worth is a snapshot of “if I had to pay all debts and cash out all assets today, what would I be left with at the end?”

  88. SG says:

    I think it would be more reasonable to count at least part of the value of the house in. I don’t know how big your house is, but you could certainly – if need be – live in a smaller home. So I would maybe count 50 % of the value of the home for calculating your net worth, meaning that 50 % of your home is luxury and 50 % is what you really need to live in.

  89. Rosa says:

    A question for the people who count their home’s value in their net worth – do you mark it to market?

    Because another of my neighbors is going through foreclosure right now, and I think the market price of my home is not only below the historical value (what we paid) and the assessed value (somewhere between $10K over and $30K under what we paid – we’ve had the bank and the city reassess the house this year). Going just by recent sales in the neighborhood I think we may be underwater on the house, no real equity even though we’ve paid off 1/3 of our mortgage…but I think that if we wait a few years we’ll get back to about what we paid for the place.

    So if you *do* count the value of the house as an asset, how do you estimate that? Have you knocked it back during the recession?

  90. Allen says:

    My networth sheet is organized, top to bottom, by “liquidity”, then subdivided by debt / asset, and totaled within each. That way, I get 3 different networth pictures, each with a different focus.

    For example:

    Checking / Savings accounts
    Credit Card / Consumer debt
    Cash Total

    Investments (401k, IRA, other long term investments)
    Investments Total
    Investments + Cash Total

    Assets (Car, House, etc)
    Debts on Assets (Mortgage, Car Loan)
    Assets Total
    Networth Total

    If I care about whether my cashflow is positive or negative, I look just at the first total. If I want a broader picture of how I’m doing financially, I look at the second total, which includes investments. And if I want a full networth picture, I look at the final total. The most important number to me is the first total, or cashflow. This excludes the swings of the market and the unusable equity in my assets, and gives me an accurate picture of how the month has gone.

  91. Annie G says:

    I guess I do both.

    Monthly I calculate our current “money” net worth in our budget spreadsheet – just the values of all accounts minus the current credit card balance on the 1st of the month. (To break this down further, I have subtotals for “daily spending” “short term savings” “emergency funds” and “investments/long term savings”.)

    Every 6 months, I have a net worth calculation in my financial spreadsheet which also includes cars, house, and mortgage. The only reason I leave out “stuff” is that I decided it’s a fairly constant value and not all that much (maybe $10 – $20k), and, honestly, I wouldn’t want to attempt to calculate it!
    I use the property tax value for the house and the trade-in value for cars.

    For me, it’s just a snapshot and a comparison tool, not an attempt to get a true “liquidation” value of our assets/debts.

  92. While we’re debating the inclusion of houses and cars with net worth, taking it a step further, some people count the value of personal belongings, like furniture, clothing, jewelry, electronic equipment, etc. That’s probably because bank loan applications have provisions to include them.

    That’s the worst of all worlds because it’s pure net worth inflation and includes assets that are probably worth no more than 10 cents on the dollar.

    That’s why asking someone their net worth is kind of meaningless. There are so many variables and it all depends on what a person chooses to include in the number.

    I like Nickel’s (28) clarification of net investable assets. It’s not net worth strickly speaking, but it’s a more precise measure of a person’s financial picture, ie, how much cash could you produce by the end of the week if you really had to.

  93. Rich says:

    I keep two columns on my very simple spreadsheet. One is the “amount” of the item and the other is the “value” of the item. This makes it pretty simple to see it both ways. It works for many things – the amount becomes the current cold hard cash amount of the item, while the value takes into account profit/loss, interest not yet accrued, etc. My house market value (as determined by the county) is listed under value, but not under amount for the exact reasons you listed here. Also, if you have CD’s or stocks or anything that may increase or decrease in value over time, it works great because you can see your position today and what the future may possibly hold.

  94. Mike says:

    If you’re not including the value of real estate or vehicles then you’re not really tracking net worth strictly speaking. If you get into trouble with the IRS- rest assured they will include those assets in a calculation of your total net worth.

    I can understand what you’re doing in a psychological sense (kind of an inverse numbers inflation in which you intentional skew the number down rather than up)but its not a net worth evaluation.

    Interesting from a psychological perspective however…

  95. Bill says:

    I thought by the Title that Trent had gone out and financed another car.

  96. Much like you, we do not consider our home or automobile when we consider our net worth unless we’re working out a full, formal balance sheet. As you said, these are not assets we would liquidate lightly, and because we would drag our feet about liquidating them I try to avoid thinking of them that way.

  97. David Cohen says:

    Living in New York we consider our home to be an asset, or we’d never dig our way out! I have to agree though-it’s nice to see your net worth climb. I think if I would stop considering my home I would feel like I was achieving more, because I would be able to watch it grow toward that point of balance I’m nowhere near right now.

  98. Jose Obiols says:

    I don’t like to count my house and my car in my net worth, but sometimes it can be hard to discover that your net worth is so low, or even negative. I solve that probleme by calculating both. I first calcultate my “profitable” assets, and that’s my first and for me, my must important net worth. I make a second calculation, where I also include my home and car, and I called that my “utilitarian” assets, and with that I recalculate my net worth. With that, I have both pictures.

  99. Kyle says:

    Excluding the house and car doesn’t seem so strange to me. It may not be the typical “net worth” calculation from an accounting stand point, but at the same time, we are talking about personal finance for the average Joe. The audience here is not the wealthy aristocrat with a dozen vacation homes and other properties that can be liquidated with little personal loss.

    When the net worth evaluation is being done to provide perspective for the working man’s financial security, it doesn’t seem to make sense to treat essentials as a commodity as you mention in the article.

    Just ask those who have lost their homes to the housing bubble or are now working through years that they expected to be retired because they are not able to flip a property for the profit they expected. They’ll tell you how much of an asset that home is in relation to the payments that are still due when the home is sitting on the market.

  100. Kevin M says:

    In accounting terms, which is the world I live in, you are no longer tracking your net worth. In fact, there really isn’t a term for what you’re measuring. Whatever trick you need to sleep well, I guess, but to me it seems silly not to put some value on the house and cars, after all they DO have value. And you’re tracking the associated mortgage and auto loan(s), correct?

    Also, what kind of goal is this: “I want us to have a positive net worth without our home or our automobiles as assets as soon as possible.” As soon as possible isn’t really measurable, is it?

  101. Craig says:

    I do not think this makes any sense. My house is my biggest investment, I am definetley figuring it in my net worth.
    I recently spent $10k to finish off my basement (did all the work myself). This added $25k to the value of my house. But, in your mind, my net worth goes down $10k for all my work? I can’t buy into that…

  102. Richard V says:

    If you are not going to include the value of your house in your net worth, then don’t include the associated mortgage either…. same thing for the cars. Obviously, this last suggestion is not practical, because I DO owe them. A better approach would be to estimate how much you would get for any of those assets if you had to sell them tomorrow (yes, tomorrow). There are many companies buying “ugly houses”, right on the spot. Would I sell my house to one of these companies if I needed the money for an emergency? Probably not, but it is ALWAYS an option.

  103. Griffin says:

    That’s really smart actually. I don’t own a car or a house, so I don’t count them. But I don’t know if I would if I owned them. Probably.

    It gives a more accurate picture of your actual monetary worth to only include the easily-liquidated in the calculation.

  104. Nala says:

    Trent – please reconsider using the term “net worth” when talking about your calculation in this article. It can be very confusing to those who are trying to understand finance basics (I think about your tagline – “financial talk for the rest of us”).

    That’s fine if you do not wish to include it in your calculations to determine how your family is doing. Everyone should determine what calculations work best for them as motivation, etc. But please consider giving it another name or research if there has already been another name given to your calculation method.

  105. Meg says:

    If you don’t count the house you shouldn’t count the mortgage either. Even if your house is “underwater” you should either count both the asset and the loan or neither because they are tied together. It’s incredibly misleading (and pointless) to count that huge debt and not the asset. After all, you could walk away from them both so at worst they net each other out. You’d never be in a position to owe the loan but not have the house, though.

  106. Arthi says:

    I’m glad to read this piece, and am a bit surprised that you’ve had this realisation only now.

    This was the number one tenet my brother had taught me when I was becoming financially literate: Your home is not an asset.

    I guess it can be extended to anything else that is essential for continuing your current lifestyle, including automobiles.

  107. Angela says:

    *shrugs* I’m at a position in my life where I take a really simplified approach to my budget right now. I only count the money in my checking and savings account and my credit card. I don’t count my car loan, my rent, my incoming paycheck (even if I’ve already worked the hours), emergency fund, my 401K or my IRA. I’m going to start buying stock soon and I won’t be counting that either. As I currently have all my bills set up to be do right after pay day that leaves me with a lump sum for the month and I just track that lump’s progress to keep an eye on my daily spending.

  108. One major upside of excluding your house as an asset may be more a psychological one than a monetary one.

    If you don’t consider your house as an asset, you won’t be so obsessed with it’s value. You’ll be less like to think of trading up to a bigger one once the equity reaches an attractive level, or of borrowing against it.

    If you think of your house mainly as the place that you live in, you’ll be more likely to live in it for many years and pay off the mortgage on it, the way people usually did until a generation ago.

    It isn’t very exciting, but it’ll get you to financial independence faster because you won’t be increasing your carrying costs every few years by increasing the loan balance or moving up to a bigger house. You’ll also be avoiding the transaction costs included every time you buy or refinance.

  109. Erin says:

    Arthi, of course your home is an asset. It is something you own that can be sold for money. The dictionary definition of asset: “Any items of economic value owned by an individual or corporation, especially that which could be converted to cash.” A house you own is not strictly essential for “continuing your current lifestyle” even though many people like to think owning a house is a necessity. You could always sell your house and go live with family or in a homeless shelter for that matter, if you were really desperate, or rent something really cheap.

    #75 Allen, your formula is a perfect way to do what Trent is trying to do. It shows you both total net worth, and cash flow. Great example!

  110. Vicki in ABQ says:

    Trent, I agree with what you’re doing and here’s why: I used to think that I was pretty secure because my “net worth” was in the positive range. Then, financial catastrophe hit, and I needed to sell off my assets just to keep from being homeless. The thing is, when such things happen, they don’t tend to happen to you, but to the entire local economy—factories don’t just lay off one person, they lay off thousands or they just close down, etc…so the value of my assets plummeted as everyone tried to take advantage of their “net worth” and liquefy–as opposed to losing everything. All of the sudden, my assets weren’t worth enough to cover my liabilities (except for my Prius–which due to high demand kept very good value, more than I had accounted for in my net worth). Needless to say, after I sold everything that I could, I found that I was able to get so little money that my standard of living has slid back to what it was in 1992—and I’m 36 years old now. If I could go back in time, I would do things differently and not let the positive net worth fool me into thinking that I had some level of security, that regardless of what the numbers said—didn’t actually exist when push came to shove. Now, I’m starting all over again. Have moved where I live like a college student (right near the University), and have access to public transport so no longer need a car. My income is lower as well now. I’d like to have a child, but that doesn’t look possible now. Since I’m basically starting over again, this time I’m going to stay with this standard of living, and as I get more stable start putting cash away (while I continue renting cheap and miniscule–not so nice, college-style apartments) so that I can buy myself a house with cash when I retire. At least that way I would have some real security! Based on what I have lived through the last couple of years, I think excluding your house and cars from your net worth calculations and trying to make them positive without those “assets” is one of the smartest ideas that I have heard in a long time…way to go!

  111. no_sked says:

    luv that idea! the house is not worth as much in today’s market as it was assessed a few years ago.
    understimating (or disregarding) the amount of hard cash it could sell for gives a mcuh more conservative view of my portfolio.
    if i decide to sell the house (under duress or not) and actually get a buyer, then that’s just icing on the cake!
    meanwhile, i will assume that i can’t sell it and work on strengthening/increasing/diversifying my other assets.
    thanks trent

  112. partgypsy says:

    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.

  113. Bill K says:

    I think the Anti-Budget post (https://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.

  114. Finance Nerd says:

    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.

  115. 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.”

  116. moom says:

    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.

  117. Michele says:

    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.

  118. 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.

  119. Jared says:

    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.

  120. Robert M says:

    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.

  121. 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.

  122. Sara says:

    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.

  123. steve says:

    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.

  124. steve says:

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

  125. dspkid says:

    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

  126. Joseph Librero says:

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

    Taking a sip,

  127. Kristi says:

    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.

  128. Jessica says:

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

  129. Henry says:

    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.

  130. Chris says:

    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.

  131. goldsmith says:

    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!

  132. Hi! Would you mind if I share your blog with my facebook group?

    There’s a lot of people that I think would really appreciate your
    content. Please let me know. Thank you

Leave a Reply

Your email address will not be published. Required fields are marked *