Understanding Why I Exclude My House from My Net Worth
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When defining "Net Worth," it is commonly described as the total value of an individual's or corporation's assets minus any liabilities owed. However, a perplexing aspect arises: while a mortgage is classified as a liability, a house is typically categorized as a positive asset in your net worth.
Consider the example provided by Investopedia:
At first glance, this seems logical. Yet, the key issue lies in the fact that a house is only deemed an asset if you can actually sell it.
The House
If the couple in the example sells their home for $250,000, having $100,000 remaining on their mortgage, they must pay off that mortgage first, leaving them with a net amount, but this figure isn’t so straightforward. You also need to factor in taxes, closing costs, and other expenses.
This assumption also relies on the fact that they will successfully sell the house and actually have cash in hand. This can be a significant factor in determining net worth, but it's not guaranteed and can take time. Some homes can sit on the market for years.
If you aren’t in the process of selling your home, how can it be classified as an asset simply because it might become one in the future? Speaking from personal experience as a homeowner, I view my house as a liability from a financial perspective. While it does provide tax benefits and is likely appreciating in value, I will continue to incur expenses until it is sold:
- A mortgage
- Interest on that mortgage
- Taxes
- Utilities
- Home Insurance
- General Maintenance
- Costs for any major repairs or updates
How do these expenses contribute positively to my net worth? They are all costs, not income.
I understand that I will likely sell my house for a profit eventually. But we purchased this home for personal reasons as well. It has ample space, proximity to good schools, a backyard, and is located in a quiet neighborhood near NYC.
While it brings its own challenges, it also offers stability, peace, and a forced way to save money. However, those savings will only be realized upon sale.
Do I believe the property will appreciate significantly over the coming decades? Absolutely.
But was appreciation our primary motivation for buying? Not entirely. We considered resale value, yes, but that’s not immediate. We intend to stay here for quite some time.
This means we will continue to pay for:
- A mortgage
- Interest on that mortgage
- Taxes
- Utilities
- Home Insurance
- General Maintenance
- Costs for any major repairs or updates
For many years to come.
The Car? Seriously?
And what about a car? Are you really counting a vehicle as part of your net worth?
A car is often one of the worst investments you can make. It depreciates rapidly, requires fuel that fluctuates in price, and demands maintenance. As someone who just invested in brake pads, tires, and other repairs, I can confidently say my car is not an asset.
While many people need a car, just as they need food, it doesn't mean food counts as an asset. Food is a consumable that serves a purpose (nourishment) without any expectation of recouping the cost.
In contrast, a home can be resold—usually for more than the purchase price if held long enough. However, unless your car is a classic in mint condition, you will likely never recover its full value. And even if the vehicle is paid off, you still have insurance, fuel, and maintenance costs to consider.
Not to mention the potential costs associated with accidents. Unless one party takes responsibility, you may face repair expenses (partially covered by insurance) and increased premiums.
In summary: Cars are a poor investment.
A Better Way to Assess Net Worth
Reflecting on the previous example, I propose an alternative approach to calculating the couple’s net worth.
#### Assets
- Primary residence valued at $250,000
- Investment portfolio worth $100,000
- Vehicles and other assets valued at $25,000
#### Liabilities
- Mortgage balance of $100,000
- Car loan of $10,000
#### The Result
In an ideal scenario, liabilities would also account for mortgage interest and taxes, but let's simplify. The variable remains the “other assets.”
Do these assets account for $20,000 of the $25,000? Or just $1,000? Assuming the car consumes half that value, we might estimate the total value of other assets at $12,500, which could include jewelry, art, etc.
Therefore, the updated net worth calculation is: ($100,000 + $12,500) - ($10,000 + $100,000) = $2,500.
This might be a sobering realization for some, but it likely reflects a more accurate picture of your net worth under these circumstances.
This can change, but only once you successfully sell your home.
Until then, your house is a liability, not an asset, and thus should not be factored into your net worth.
You can also sell your car, but it’s almost guaranteed you won’t get back what you invested, especially considering interest, insurance, and other costs. Therefore, I believe it’s prudent to exclude that financial drain from your net worth assessment as well.
Does this imply you should avoid purchasing a home or a car? Not at all. If you can afford both while maintaining your investments and other financial responsibilities, go ahead.
I explain why owning can be more beneficial than renting in a prior post.
However, don’t purchase a house or a car with the expectation of selling it for profit—unless you are flipping properties or using them as investment vehicles.
Acquire a car for safety, reliability, and affordability.
Choose a home that meets your needs without exceeding your financial limits, allowing you to create a happy environment for you and your loved ones.
The potential to sell or transfer ownership later is merely an added benefit.
What else do you think should be excluded from your net worth? What should be included but often isn't? Share your thoughts in the comments!
For a deeper look into the calculations underlying this philosophy, I explore the topic in an accompanying post.
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Edits
- 08/05/2024: Clarified that “A house is only an asset if and when you sell it” to “A house is only an asset if and when you find a buyer,” highlighting the distinction between homes and other asset classes like stocks, which can be sold more readily for cash.
- 08/22/2024: Added links to the accompanying post, “Why I Don’t Include My House In My Net Worth (The Math).”
References
Net Worth: What It Is and How to Calculate It
Net worth represents the value of assets owned by an individual or corporation minus their liabilities. It provides a…
www.investopedia.com
What Is an Asset? Definition, Types, and Examples
An asset is a resource with economic value that an individual or company owns or controls with the expectation that it…
www.investopedia.com
Liability: Definition, Types, Example, and Assets vs. Liabilities
A liability is an obligation a person or company owes, usually a sum of money. Payment can be either near- or long-term…
www.investopedia.com
Why I Don’t Include My House in My Net Worth (The Math)
The Math Behind the Philosophy
matt-croak.medium.com