|It is 6 AM on Monday morning and I am writing those lines right after I shovelled my driveway. We received 11 inches of snow on Sunday but it really felt like it was 5 foot! All that to say that sometimes, I really wonder why I am living in Québec, Canada!
There was recently a debate on MillionDollarJourney’s Blog as to know whether or not we should include our property value in the calculation of our net worth. Some people say no, I say yes 😉 I’ll explain why today:
Let’s say that you have a 300K house with a 200K mortgage on it. Technically, if you do not count your property value in your net worth calculation, you will start with a negative net worth of -200K. An individual should not be penalized in his net worth calculation because he has a property. In fact, any assets linked to an important debt should be included in a balance sheet. This means that cars should be put on your balance sheet if you have a loan attached to it (I would approximately include the same amount of the debt as cars are considered to be a depreciating asset). On the other hand, your plasma TV should not be included even if you paid with your credit card 😉
Let’s compare 2 situations; #1 Peter who had bought a 50K house 20 years ago and decided to concentrate on paying down his mortgage instead of contributing into his RRSP / 401K or investing in the market. Today, he has no investments whatsoever but his property increased in value to 250K. Let’s say that he has no other debts and no other assets. #2 : Sandy is 20 years old and she is a very responsible student. She has no debts and she was even able to put 5K aside in a money market fund. She lives in an apartment and as no other assets. If you do not calculate the property value in both situations, Sandy will be the one with the biggest net worth (5K) while Peter will be left with nothing to show on his balance sheet. I am asking; Does it make sense? While Peter did not necessarily made the best move ever when concentrating all his income into his property, he is still richer than Sandy.
What is the purpose of calculating your net worth? According to a banker’s point of view, it is to know one’s financial situation if he has to liquidate all his assets and pay off all his debts (more likely a bankruptcy scenario). Banks will look at tangible assets such as money in bank account, registered and non-registered investments along with properties and (maybe) cars. If you are looking at it with a retirement planning perspective, it will really depends on your financial plan. One can sell his property and move into an apartment, another one could leverage against his property to invest in the market or to buy a rental property.
In the end, a property should be considered for what it is : a semi-liquid assets. When calculating your net worth, you should include your property value based on an appraisal or the purchase price plus the inflation rate for every year that you had it. One must keep in mind that this is not money that you can access right away as the sale process is much longer than selling mutual funds or withdrawing money from a bank account. Therefore, it should not count as being part of a emergency fund but it is surely worth something!
|How I Suck at Not Paying Debts||Hitting 6 Figures Income at 28|
|How I Get a Huge Income Raise Each Year||Making $125K Online in 12 months|
|How I Buy Blogs||Most Debated Articles: The Primerica Saga|
|How I Have Survived My MBA||What is So Wrong With Making Money?|
|How I run multiples blogs and makes money without burning out|