Net worth is a common measure of wealth. At the same time, different people tend to define it in different ways.
In its purest form, net worth is calculated as assets minus liabilities. Essentially, the amount of money you’d have if you sold everything that you own and paid off your debts.
But should you really include the value of your home? Your vehicles? Your personal belongings? Where should you draw the line? People disagree widely.
What is net worth?
For a long time, I was in the “don’t include your home and other stuff” camp. We use net worth as a metric for tracking our approach to financial independence and, since our vision of financial independence doesn’t include selling our house or getting rid of our cars, it seems silly to add them in.
So really, what I’ve been most interested in tracking is our net investable assets. That is, the sum of our cash on hand plus the value of our investments — basically anything that has the potential to create income.
What about debt? The only thing we’ve ever owed money on is our mortgage. If we didn’t have a mortgage, we’d be paying rent. Thus, I viewed this more as a cost-of-living issue as opposed to a debt to subtracted from our net worth — especially if we weren’t adding in the value of our house.
But then we paid off our mortgage and my perspective began to change. At that point, we no longer had a monthly mortgage payment, nor did we have a rent payment. Surely that has value. And if we hadn’t plugged that money into the mortgage, we’d be counting as part of our investment portfolio.
So now, I track two things…
Net worth calculations
First, I track our overall “net worth,” including cash and investments. To this, I add the assessed value of our home minus 6% (updated annually). This is a somewhat conservative estimate, as assessed values are typically below market values in our area. The 6% tacked on for realtor fees.
Second, I do the same as above, but without the house. In other words, our net investable assets. In terms of reaching our number, this is what I really focus on. The fact that we no longer have a mortgage (or rent) payment just means that our number is a bit lower than it otherwise might be.
I don’t bother with anything else because, as noted above, liquidating our belongings isn’t part of our long-term plan. And, frankly, I have better things to do with my time than to track the ever-changing value of our stuff.
At the end of the day, I’ve come to the realization that it doesn’t really matter how you define it. Net worth is really only valuable as an internal tracking metric.
You should be most interested in relative changes in your net worth, no matter how you define it. Include the house or don’t. Just keep it headed in the right direction and be careful not to rely too much on outsized housing gains.