Net worth. Assets minus liabilities. Seems pretty simple, right? Yet there are so many different methods for calculating this seemingly elementary metric. We’ve started an online net worth tracker to keep tabs on how we are doing each month. We’re keeping this pretty straightforward. Included in assets are cash (our checking account), retirement investment accounts (Roth, 403b, 457b), taxable investment accounts (Vanguard), and property (our house). Debts are our credit cards plus our mortgage. I can thankfully get every single one of those values from the summary page on Mint.com, which makes keeping track easy and expedient. The only problem is that Mint occasionally barfs on me, like today when I logged in and it had decided to count our mortgage TWICE. Kinda looks like Mint is giving us the middle finger. What did we ever do to you??
Anyway, our info is all there for you to sate your financial voyeurism each month. I recently discovered the Net Worth Tracker on Rockstarfinance.com where J. Money is tracking the net worth of over 200 financial bloggers. We are late to the game!
So, do the categories listed above including everything we own? Of course not. What about our two cars, our wedding rings, Mr. Paradise’s collection of Magic cards (he swears we can’t get rid of them because they are valuable), our $1,000 coffee table that we bought during a brief moment of insanity but still love, and Apollo – he’s probably worth something right? How about debts? If you read our January spending review, you know we have a *gasp* car loan. You won’t see that in our net worth either. Why not? Read on for our opinion on this.
Bankrate has a net worth calculator that is free to use, although I highly suggest that you just use a spreadsheet so you can save your work and review it any time you want. You don’t need help adding and subtracting numbers. The interesting thing about the Bankrate site is that they list a detailed array of items to include in your assets. Included are appreciated jewelry and household items like furniture, electronics, and silverware. I respectfully disagree. I’m going to go out on a limb here and say that, unless you sell (or are 100% going to sell) something, it has no inherent monetary worth.
Let’s be real here – you can include or not include anything you want in your net worth. Nobody’s grading you on how well you did. Your net worth calculation is just for you (or for everybody if you post it online…). When deciding what you want to include, you need to ask yourself what is the purpose of the calculation? Are you tracking your progress toward retirement? Are you trying to motivate yourself to increase your savings and decrease your spending? Or, and be honest, are you just trying to make the number bigger?
Personally, I don’t agree with including “stuff” in our net worth. I think this is a dangerous habit, because it hides the fact that we actually spent that money. Let’s say you drop $1000 on a coffee table (who would do that??) and you pay for it out of your cash reserves. If you include the coffee table in your net worth, you’ve achieved a net zero change as a result of the purchase. If you are using your net worth to track your savings, you’ve just fooled yourself into thinking you didn’t spend any money at all. Alternatively, you could attempt to be more realistic and list the value of the table at what you think you could offload it for, say $500. Now you’ve got a -$500 change in your net worth, but you’ve also got $500 tied up in coffee table investments. If you are tracking toward retirement, how does including this asset help you? Are you really going to sell the table when it comes time to retire? Also, do you really want to factor in coffee table depreciation and demand for expensive coffee tables when you calculate the value of this asset each month?
What about the cars? We have two cars that combined I believe are worth about $35,000. I actually have no idea what they are worth, although I could go look them up and get a reasonable idea. There are a couple of reasons why I didn’t include them in our net worth calculation. The first is that I don’t have much interest in looking them up every month, and the value isn’t included in our Mint summary. Making your net worth calculation as simple as possible is key to getting it done very month. Next, and most important, is that unless we wreck one of the cars, we aren’t planning on getting rid of them for a long while. So, keeping track of the depreciated value of these assets on a regular basis serves us no purpose. By the time we sell them, they’ll only be worth a fraction of what they are “worth” right now.
Not including the car loan is probably the most controversial thing I left out of the net worth calculation. I feel somewhat justified in leaving it out because I also didn’t include the value of the cars. However, if the purpose of the calculation is to track savings / spending and progress toward retirement, it actually makes no difference whether I include the debt or not. We pay $353 / month toward the loan at 0% interest. That $353 comes out of our cash reserves, which decreases our net worth every month. If the loan was included, the $353 would have no effect on the net worth, because the loan amount would go down (sorta like what happens with our mortgage). My preference is for the former way because it acknowledges that we are spending $353 every month on the car, as opposed to ~$20k at the outset and then $0 after that. If there’s interest on the loan things get slightly more complicated, but in the end all that means is that the car was more expensive. But guess what, no matter how it’s included, we’re spending exactly the same amount, and the end result for our net worth is identical.
In my opinion, the house is the most difficult asset to deal with. Like the car, we have a loan that we are paying off each month, but unlike the car, the house (hopefully) appreciates over time whereas the car eventually depreciates to zero. If I’m being honest with myself, the main reason I included both the house value and the mortgage in our net worth is because I didn’t want our net worth to plummet by our down payment amount. By including them both we get to include the home equity we have which presumably grows every month. The hard part is evaluating what the house is worth. Yes, there are lots of sites online that estimate home values. However, when we were shopping around for houses last summer, the “Zestimates”, etc., almost never matched the selling price of the home. Sometimes they were vastly different. For that reason, it seems that the best estimate of what our house is worth right now is what we paid for it. I’m thinking that we’ll use the percent change in the taxable value of the house to appreciate it each year (conveniently this came in the mail today), but I’m not sure what we’ll do yet if we do renovations on the house. But, one step at a time!
Oooookay, that was a long diatribe. In the end, there are only a couple of rules you need to remember when calculating your own net worth:
- Before writing down anything, figure out what the purpose of your calculation is. How will you use the result? What does that tell you about what you should include in your bottom line?
- Be consistent every time you recalculate. Whatever you decide is right for you to include, include it every time!
Easy! And now here’s something less serious, Apollo post-bath time!