# Calculating Net Worth: Should Home Values Be Included?

By Staff

For most of my adult life I have avoided calculating my net worth, mostly because the number at the bottom of the calculation was always red. The thought of owing more than I owned depressed me. Looking back, I wished I had tracked net worth to show the positive gains we made over the years.

Now that we are debt free, and that small, but ever-so-slowly growing number at the bottom of the net worth calculation is black, I am committed to calculating our net worth once a month and tracking it over time.

### Assets Minus Liabilities

The basic definition of net worth reveals the number is essentially the difference of liabilities, or debts, subtracted from your assets. Seems simple enough. The problem is, there are many different classifications of assets.

In corporate finance, assets are generally classified by their liquidity. That is, how easily can they be converted to cash. Cash saved in a bank account is obviously the most liquid form of asset, while equipment might still be counted as an asset, but since it would have to be sold for a depreciated value to convert to cash, it is considered less liquid.

The same goes for most households. For example, our emergency fund is our most liquid asset. The two vehicles we own, and their estimated private sale value, could also be listed as an asset. However, knowing what a pain it can be to sell a car, I’m reluctant to include their value as part of our net worth.

And then there are houses. Assuming your home’s value wasn’t decimated in the recent housing market bubble, or you have been diligently making a mortgage payment for several years, chances are you have equity in your home. For example, if you own a home worth \$200,000 and only owe \$170,000, listing both the house and the mortgage as an asset and liability, respectively, would net increase your net worth by \$30,000.

A more extreme example, after a couple decades of making a mortgage payment, might lead to a \$100,000 bump in net worth. But to realize that money, you would have to sell your home, something you might be unwilling to do.

### Calculating Two Net Worths

We simply calculate two net worth figures. The first, I call our “Total Net Worth,” is calculated by subtracting all of our liabilities (mortgage) from all of our assets (savings, house, etc.).

I then calculate a second net worth figure I call our “Liquid Net Worth.” This only includes assets that can be quickly converted to cash, or are already in cash form. This calculation would account for any stocks, bonds, CD ladders, and cash-based accounts such as our emergency fund, goal-oriented accounts at Smarty Pig, and various sinking funds, but would not include “hard assets” like cars and houses.

In most cases, this second net worth calculation is much lower, but is, in my opinion, a more realistic look at your current financial situation. Imagine someone \$20,000 in credit card debt with negligible savings, but \$35,000 in equity in their home. A \$15,000 positive net worth presents a skewed view of their real financial shape. A more accurate, and sobering, liquid net worth calculation would show them nearly \$20,000 in the red, and would hopefully motivate them to work on getting out of debt.

Ask the Reader: Do you currently track your net worth? What method do you use? Do you include all assets and liabilities, or some assets and all liabilities, or some other combination?