Comments on: Measuring Financial Progress: Net Worth vs. Net Investable Assets

By: Jake

Jake — Tue, 04 Jan 2011 06:04:43 +0000

Its true that net worth can fluctuate quite a bit if your house is a large portion of the number. Regardless, all investments can fluctuate widely including stocks and I do not see anyone suggesting pulling out stocks from the mix. Since net worth is a common measure and speaks to true worth at a given time I would not pull out anything, but under the same token I would not over inflate the equity by assuming a high market value, I use taxable value in my calcuation unless a recent market evaluation has been performed. I also do not attribute much value to personal assets unless they are large (RV, car, boat)and then I only subsribe the lowest market value. Net investable assets is kin to working capital and should be even more skinny as most would not use their retirement account (e.g., 401K) as an investment vehicle to create more wealth. Persons prior to retirement would more likely use their home equity for investment purposes (to obtain secured loans) rather than take a loan from their 401K (opportunuty cost of taking value away is too high. That is, low term real estate investments provide smaller return than stocks and bonds). Basically you should treat your net worth as if you came down to the nitty gritty what can you turn into cash within a short period of time (say < 1 year). Investment firms do not count your house equity for good reason (they want to size you up on what is free (cash, stocks) to be transferred to their control. House equity is not a freely transferable asset, but still it is most surely an asset, you would not give it away for free, right. I would suggest that if primary home equity exceeds 50% of your net worth not to take too much comfort in a "high net worth".

By: Moneyreasons

Moneyreasons — Fri, 04 Sep 2009 01:05:51 +0000

I count 80% of my estimated value of my house as an asset, and the current value of my mortgage as a liability.

IMHO, a house is worth too much to not be considered, vs say your sofa…

Why 80% you might ask… Well, I’d rather understate the value of my house instead of overestimate it. And I figure, 80% is the home owner equity I could get from a bank if the house was paidoff.

By: Save Money Hound

Save Money Hound — Thu, 03 Sep 2009 23:18:06 +0000

I think both measures are useful for different purposes. The second one takes into consideration the liquidity of your assets. It all links back to your financial goals and which measures are most appropriate to use for measuring your financial goals. I like net worth as it is the most commonly understood measure.

By: CardMaster

CardMaster — Thu, 03 Sep 2009 18:28:22 +0000

That’s an extremely good point – I feel like everyone I talk to figures their house into their wealth. But it’s kind of like a having your cake and eating it too kind of thing. Realistically, you wouldn’t really sell your home without buying another one. The only time factoring in your equity is really applicable when you are shopping around for a new home.

By: JoeTaxpayer

JoeTaxpayer — Thu, 03 Sep 2009 16:12:23 +0000

I think I follow Trent’s approach, basically adding up all assets and debts, but then subtracting out full value of the house. So my number is what I’d have if I paid off the mortgage in full. And this is the important number to me to track progress to retirement. I don’t want to count on the house to pull money out by downsizing or moving, so it’s not part of the retirement planning.

On the other hand, there will be a point, maybe 15 years into retirement when between the downsizing to a smaller home and moving to a less expensive area, there may be a windfall. Just not ‘counting on it.’