As we mentioned before, net worth is an excellent way to measure how well you are doing with your money. One of the components of net worth that many people get confused about is what defines as income and expenditure.
Net worth includes all of your assets (property, savings accounts, etc.) along with the amount owed for loans attached to those assets. This includes mortgages!
Income can be made from several sources, such as wages, investment returns, dividends, and royalties. Expenditures include monthly bills and loan payments.
This article will talk more in depth about real estate as an asset and how to include it in your net worth calculation. We will also discuss why having a higher net worth than average is important and how to achieve this.
Real estate has been proven to be a powerful wealth builder. It is not only something rich people have, but it is a good thing to have if you want to invest in property or improve upon what you currently have.
There are many ways to add real estate to your portfolio, so do not feel like you need to only buy or sell houses when calculating net worth.
Why is net worth important?
While most people associate “net worth” with having lots of money, it actually has more to do with how much you have compared to what you don’t have.
Net worth takes into account all of your assets (property, cash, savings) and liabilities (debts). It excludes things like consumption goods (e.g., food, clothing, transportation), which can be traded in or out for something else.
By including both debt and asset values, we are able to determine how well off or poor you are relative to just one part of this number — income!
I see many people who consider real estate an investment, but they never include the value of their house in their net worth. They may also not have any credit cards, so they exclude those from the equation too.
This makes it impossible to calculate true monthly spending, making it difficult to determine if they are overspending or saving. If they estimate investing $1,000 per month in their favorite stock market site, then they should probably add that to their net worth.
Another way to look at it is thinking about it as adding to your equity instead of increasing income. A person with no car likely doesn’t take loans to buy a new vehicle, so there isn’t a deduction for depreciation.
They may decide to keep their current ride until it breaks down, though, reducing its value.
Calculating net worth
When calculating your net worth, there are three main components: real estate, financial assets, and debt.
Real estate is considered part of your wealth if it increases in value consistently compared to what you paid for it. For example, if you bought a house two years ago for $200,000 and now it sells for $250,000 then your investment has doubled!
This is how most wealthy people calculate real estate as an asset. They recognize that their home will continue to increase in value over time, and thus include this in their net worth.
However, not all homes increase in value every year like my first property did. This isn’t always the case, which is why some experts exclude residential properties from the net worth calculation.
Another important factor when calculating whether or not a residence counts as an asset is how much equity (the difference between the price you buy and what you sell it for) you have in the property.
If the market value of your home is higher than what you paid for it, your equity is negative! This means you sold your house for more than what you spent on it, which is very common these days given the rising cost of buying and selling a home.
Negative equity can be quite stressful, but it doesn’t necessarily mean bankruptcy unless you also have significant debts. More likely, it suggests someone who spends a lot on a house they probably don’t pay off on.
Look at your assets
A common way to assess net worth is looking at how many things you have access to that can be used for income or savings. These include house, car, boat, retirement accounts, etc. This includes tangible assets such as furniture, cars, and boats, but also intangible ones like retirement accounts.
Net worth numbers typically exclude the value of debt because they consider debt money we owe others or institutions. However, if you include credit card debt in your net worth number, it may overstate your wealth.
By including non-housing asset values in net worth calculations, there are some who feel excluding real estate negatively impacts how wealthy people are perceived. While this may be true to an extent, doing so does not accurately represent what someone has truly accumulated.
Assessing net worth correctly should include all major categories: housing, vehicles, retirement benefits, and other personal property.
Look at your liabilities
Another way to determine if you have enough equity in your home is looking at your other debt obligations. More importantly, are these debts payable immediately or do they have a grace period?
If you have small monthly payments that last for several years, this can help mitigate risk. However, keep in mind that longer term financing may not be as friendly when it comes to getting a good deal.
Does it matter if you are not a real estate investor?
Including or excluding real estate from your net worth can have significant effects on how well you do with your financial life. It’s like buying apples and oranges both of which cost $1 per piece, but one costs twice as much as the other!
Including or excluding real estate from your net worth depends on whether you make your home your primary residence or if you use it for investment purposes only.
For example, if you owned a house that you lived in and rented out, then your net worth would include the value of the house because it is considered an asset. But if you used the house to generate income by renting it out, then this would be excluded since it is a depreciable (or losing) asset.
Net worth statements typically exclude assets such as cars, cash, and bank accounts due to limited availability of data. However, most people include the value of their homes when they update their net worths. This is because almost everyone includes their home as part of their overall wealth even though it may not be held in name of investement.
Yes it does
Having a house is definitely a valuable asset, but counting it as part of your net worth can be confusing.
When calculating net worth, you should include all assets (property or not) minus all debts. This excludes any additional loans or credit cards that you may have so they do not affect your net worth.
Many people exclude their house due to the fact that they pay for monthly utilities like electricity and water. These costs are typically done through your lease, your mortgage holder, or both!
By including your home as an asset instead of debt, this takes stress off of your financial situation and helps you focus more on improving your other assets. It also helps you identify how much wealth you have compared to others with the same income level.
Consider a Roth IRA
Another way to assess your net worth is by including real estate as a component. While this may seem like an odd choice, it makes sense when you think about it!
Real estate can be included in personal net worth if it is owned outright or if you have a mortgage that you own along with a house. If you are able to pay off both of these items, then your net worth will include the value of the home!
This is very important to remember since many people make a habit out of buying a new house every year. It would cost you more in fees to do so without counting the current property as part of your net worth.
By adding real estate to your financial assets, you give yourself a better picture of just how wealthy you are. It also helps to show that even though you’re spending money rapidly, you’re still investing in yourself.
Consider using a life insurance policy
Another way to include real estate in your net worth is by considering what kind of life insurance you have, how much coverage you have, and if it is convertible.
Convertible life policies are ones where you can choose to either keep the policy as non-converting or converting (paying out more money as time passes). This is very important to note because most standard term life policies are not convertible!
The reason why is because these policies do not have mortality rates that rise over time, only rising cost-of-living costs. Because of this, the value of the policy drops as the price of living rises. If investing was about keeping up with the trends, then this would be disastrous for overall investment success.
By having a convertable policy, you get to decide whether to pay higher premiums now or invest the cash instead. The best option will depend on your personal goals and values.
