Assessment of Net Worth

[Musicwhiz]

I know many websites have formulae for computing net worth, but I realize there's a difference between net worth and total assets.

I guess most families will have mortgage debt if they buy an HDB or private apartment, and my understanding is that this debt SHOULD be factored into net worth computations IF it is used as your primary residence (i.e. not as investment property for capital gains or rental income). Some friends have advised me to include the market value of my HDB as part of my total assets but I feel it would be misleading as I cannot sell it and "realize" the market value (or else I will be sleeping on the streets).

So to give an example - say I have $200,000 worth of total assets, which includes mainly cash and equities; and $100,000 left in my mortgage. Does this mean my net worth is then $100,000?

This may sound like a "newbie" question but would appreciate some help on this as I am actively monitoring my "net worth" and want to make sure I do it correctly.

[yeokiwi]

For myself,

I will deduct the mortgage loan from my net worth.
I will not factor in the market value of my primary residence into my net worth since the value of the residence will be permanently lock-in and will not be able to be used for other investment.

I suppose it is a safer approach to the estimate of the actual net worth that is required for retirement (especially if you want early retirement )

[karlmarx]

i think net worth is the equity portion of your personal balance sheet? not sure too

[kazukirai]

Hi all,

Not sure if this helps but blogger 'Mr Wang' had a post on this some weeks back. (link here)

In his post, his definition of 'Net Worth' is really Total Assets less Total Liabilities or Equity. This is what we're used to seeing on a company's Balance Sheet. I believe this is the one of the most widely used measures although I think this isn't what the banks use for determining HNWIs- they are using Net Investible Assets which is the amount of monies one has for investing.

The big question as others have also pointed out is whether to count the value of the primary residence is the sticking point- after all, if you sell your house, where are you going to live?

My take
Although I think it's a less accurate measure of one's Wealth. I personally prefer to NOT include my primary residence if I have family (i.e. kids, spouse, parents ) staying with me as this means that the option of temporary housing a.k.a rental or bunking in with relatives is a less feasible one. I'm not sure how to include the mortgage liability into the equation though (expense it on a yearly basis so that it appears as a reduction in cash/CPF?).

If I were single, I would include the primary residence that I own as my options would be wider. I could sell my place if the price was good and take the proceeds (after deducting the remainder of the mortgage and accounting for housing expenses in the near term) and reinvest into some other asset class.

[d.o.g.]

Logically speaking, net worth should include the primary residence because you can sell it and rent. This would be true regardless of whether or not you have a family. Expat families, for example, often rent instead of buying.

Choosing to ignore the equity in the primary residence is conservative but unrealistic. Consider the extreme case of 2 people, where, ignoring the market value of the home, their assets and liabilities (including mortgage debt) are all the same, except that one lives in a home valued at $2m and the other lives in a home valued at $400k. They clearly have different net worths.

A home can always be sold and traded in for something else (dearer, cheaper or a rental). Just because it is not easy to sell quickly or cannot be sold without the spouse's consent does not mean it has no dollar value. So the most sensible way to count net worth is to include the market value of the home - with a discount if desired to reflect poor liquidity.

[flinger]

Hi All.

What D.O.G. said makes sense, but I think it depends on what you are using the "Net Worth" data for isn't it ?

If you are using it as a gauge for retirement, then adding it might not make sense as there is no way you would be able to use the equity in the house for income for retirement ( unless reverse mortgaging...that's a different topic) and that can lead to false assumptions that you can retire etc....

In the case that D.O.G. pointed out, the 2 million house, you can sell it and downgrade to lower level house, but humans been humans generally don't like to downgrade their lifestyle in general...so a lot of decisions need to be made.

If you are using it for other purposes to get a loan, where a bigger net worth would be beneficial for you to show then adding the house make sense.

That is what I have been pondering for my own net worth.

[Musicwhiz]

Hi All.

What D.O.G. said makes sense, but I think it depends on what you are using the "Net Worth" data for isn't it ?

Hi d.o.g. and Flinger,

Thanks for your views and responses. In my case, I want to measure if my net worth has been increasing over the months/years so that at least I know that my wealth level is moving up (and not stagnant or decreasing!).

If I use the market value of my home (discounted with an appropriate discount like what d.o.g. suggested), then this means that when market values continue to climb, my net worth climbs too. But since I do NOT plan to sell my house anytime soon, I wonder if this distorts the picture of how well I have been growing my total assets?

[freedom]

using cost less depreciation? or market valuation?

just like how financial report value fix assets?

[iisterry]

The amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act has addressed the issue extensively.

http://www.sec.gov/rules/proposed/2011/33-9177.pdf

[d.o.g.]

If I use the market value of my home (discounted with an appropriate discount like what d.o.g. suggested), then this means that when market values continue to climb, my net worth climbs too. But since I do NOT plan to sell my house anytime soon, I wonder if this distorts the picture of how well I have been growing my total assets?

For most people the home does double duty as both residence and investment. Ultimately since the home CAN be sold for cash its market value cannot be ignored.

And if the home appreciates faster than the general market, there is an opportunity to realize the profits by selling and moving to a home that represents better value e.g. same size/location but lower price, or same price but bigger size/better location. This can save the homeowner precious dollars since he didn't have to put up the extra cash - the house helped out.

If the house appreciates at the same rate as the general market then of course the homeowner is no better off - sell high buy high, sell low buy low. It is when the house appreciates (or depreciates) at a different rate that things get interesting.

If the owner bought poorly his house will almost certainly appreciate more slowly and depreciate faster. While a pure owner-occupant might not care, the house is also an extra source of cash, whether by outright sale or (for private properties) as collateral for a line of credit. Paying careful attention to the possibility of capital appreciation during the initial purchase can pay off later on should there be a need or desire for extra cash.

Perhaps the sensible thing to do is to compute net worth both ways:

1. Ignoring the house and mortgage; and
2. Including the house and mortgage

#1 would reflect the choices made with respect to consumption habits and investment skill.

#2 would take into account the choice of housing.

It doesn't take any extra work and you can then see things both ways.