Key Points
Home equity is typically included in net worth.
Whether you choose to count it is up to you.
You shouldn’t necessarily count on your home as a source of income.
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Your checking account balance is something you probably check often. The same holds true for your savings account and credit cards.
Some people check up on their net worth as often as they do their bank account. And if you’re working hard to grow your net worth, you may be very in tune with that number.
In this Reddit post, we have someone who’s wondering whether to count the value of their home equity in their net worth. And the answer is, while that’s typically part of the equation, home equity is not the same as assets that are more liquid. So it’s smart to treat it differently in your head.
What goes into net worth?
There’s a simple formula you can use to calculate your net worth. It’s basically the total of your various assets minus your liabilities.
Here’s an example of how to calculate your net worth. Let’s say your assets are as follows.
IRA – $1 million
Brokerage account – $100,000
Savings account – $100,000
Home value – $800,000
Let’s also say that you only have one liability, and it’s your $300,000 mortgage balance. That brings your net worth to $1.7 million. If you were to take out your home equity, your net worth would fall to $1.2 million.
It’s perfectly accurate to include your home equity in your net worth. But you should treat it differently from your other assets.
In this example, to access your $500,000 net worth, you have two options. You could either borrow against it or sell your home.
But you may not want to borrow more money. And you may not want to sell your home because you enjoy living in it, or need to keep it so you have access to your job.
You may therefore want to differentiate your net worth goals from your savings goals. They don’t have to be one and the same.
For example, say you’re aiming to save $2 million for retirement, and you currently have $1.1 million for that purpose (we’ll assume your $100,000 savings account is for emergencies and near-term goals). In that case, you should work on accumulating another $900,000 in assets rather than say that you’re halfway there thanks to your home equity.
It’s good to keep tabs on your net worth
Your net worth is a broad snapshot of how you’re doing financially. It’s not something to obsess over, but it is something to track.
However, if you see that your net worth is growing rapidly, and that much of that growth is related to your home value, you may want to continue to focus on growing your savings and portfolio.
It’s nice for your home to gain value. But that won’t necessarily translate into usable money the same way a savings or brokerage account might.
That said, if you end up nearing retirement with a larger home, downsizing could help you convert home equity to usable money. That’s an option you can keep in the back of your mind for the future. It just may not be an option during your working years.
The post Should I Include My Home Equity in My Net Worth Calculation? appeared first on 24/7 Wall St..
