Welcome to Q & A Wednesday on Millionaire Habits, where I answer one of your weekly questions for everyone’s benefit. Have a question?
💡 Question: “I’ve heard I shouldn’t include my home in my net worth. Is that good advice?”
Your net worth is critical when determining your financial independence number (the point where you no longer need to work). Some include their primary residence. Others don’t.
The difference can be huge.
Should your net worth number include your home?
Is Your Home A Part Of Your Net Worth?
Quick answer: Yes. Your home equity is a part of your net worth.
Longer answer: Yes, but there’s a big caveat.
First, let’s define net worth. Your net worth includes all assets minus all liabilities. The answer is your net worth.
For instance, if you have $650,000 in assets (including your home equity, stocks, retirement savings, cars, etc.) and $125,000 in liabilities (including your home mortgage and student loans), then…
650,000 – 125,000 = 525,000
Your net worth is $525,000.
But that doesn’t mean you have $525,000 in liquid assets, or assets quickly exchangeable for cold hard cash.
For instance, you need to live somewhere, right? If you sell your home, you’ll need to buy another one. Therefore, the equity you have in your home, while it is an asset, is tied up in an unavoidable life expense.
This is why some don’t include their home equity as part of their net worth. I don’t agree with this philosophy, but I get why some don’t.
Consider this: While you do have to live somewhere, you can live in a less expensive home. Or rent instead of own. Or become some rich guy’s live-in butler and get paid to live in his house (hello zero mortgage!).
You get the idea. You have options.
This is why your home equity should be included in your net worth.
If push comes to shove, you can sell real estate to recover at least a portion of the equity, then spend less replacing it with another home.
However, calculating your liquid net worth separately from your overall net worth might still be good. This is money you can convert into cash and spend however you like.
Examples of liquid net worth include:
- savings accounts
- stocks and bonds
- money market accounts
- collectibles (coins, jewelry)
These are assets you can sell and use the cash immediately.
Let’s return to our example from above. If you have $100,000 remaining on your mortgage, your liquid net worth is $425,000.
525,000 – 100,000 = 425,000
Bottom line: If it makes you feel better to separate liquid net worth from your total net worth, do it. Then use your liquid net worth as a more conservative number when calculating when you can quit your job and live the rest of your life in jobless bliss (aka financial freedom).
But (this is a hill I will die on): Your home equity is an asset. Therefore, it should be included in your overall net worth.