Personal Finance

What Belongs in Your Net Worth (& What Doesn’t)

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
132 Articles Written
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Every month, there are three ratios I track to measure my progress toward financial freedom.

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I first check my savings rate. Savings rate is simply the percentage of income that goes toward savings, investments, or debt reduction.

Next, I check my FIRE ratio (FIRE is an acronym for financial independence, retire early). It’s a less common term, but a simple concept: It’s the percentage of your living expenses that you can cover with passive income from investments. If you spend $4,000 per month, and bring in $1,000 in passive income, your FIRE ratio is 25 percent.

Finally, I track my investable net worth. While net worth is an everyday term, I actually recommend you instead calculate your investable net worth, as a far more useful and realistic measurement of your wealth.

Here’s what to include, what not to include, and more importantly, why you should exclude a few key numbers.

Assets Included in Investable Net Worth

Bank Accounts

This one is obvious, so let’s get it out of the way. All the funds in your checking account, savings accounts, certificate of deposit (CD) accounts, and money market accounts all count toward your investable net worth.

These are the most liquid of your assets. In an emergency, these serve as your first line of defense, and you should keep one to six months’ expenses in a liquid emergency fund. Exactly how much depends on your risk tolerance and whether you’ve created other layers in your emergency fund.

Stocks/Equities

Your equities portfolio, including stocks, ETFs, mutual funds, public REITs, and other publicly traded shares, all count toward your net worth of course.

And while many real estate investors get high and mighty about how real estate investments outperforms the stock market, the simple fact is that real estate comes with its own limitations, and stocks help you build a more rounded investment portfolio. Real estate is notoriously illiquid, and it requires massive cash up front, which makes it difficult to diversify.

Female hand with smartphone trading stock online in coffee shop , Business concept

Equities are liquid, and ETFs and mutual funds make it extremely simple to diversify your investments. It’s also far easier to invest in tax-sheltered accounts such as IRAs, 401(k)s, and HSAs using equities.

Besides, an investment portfolio made up of only real estate is hardly a balanced portfolio, is it?

Bonds

Bonds may be boring and low-yield in today’s market, but they’re a staple of retirement security and income-producing assets. They belong in your investable net worth.

Related: What’s the Yield Curve and How Can It Help You Recession-Proof Your Investments?

Retirement Accounts

All retirement accounts—no matter what’s in them—count toward your investable net worth. You may not be able to access the funds until reaching age 59.5, but they’re still investments, still compounding for you every year, and still belong in your investable net worth.

Equity in Investment Properties

You bought a rental property five years ago for $160,000 and put down $32,000. Today it's worth $200,000, and your mortgage balance has dropped to $115,000.

You have $85,000 in equity, which adds to your net worth.

Technically, the entire $200,000 value of the property goes into the “assets” column when adding up the numbers for your net worth, and the $115,000 mortgage debt goes into the “liabilities” column. But you know what equity is, and let’s just cut to the chase and say your equity adds to your net worth.

Be careful here though. Real estate equity exists only on paper, and there are only two ways to access it: by taking on debt or by selling the asset. The value of rental properties lies in their ability to generate income, not in their equity—at least not on a month-to-month basis.

Even worse, not all of that equity is really yours. If you were to sell that $200,000 property, you'd probably rack up $15-20,000 in closing costs. Again, real estate equity exists only on paper, and in the real world, you'll incur hefty expenses to realize it.

Private Notes

A private note is a private loan that you’ve made to someone else. It could be a friend, family member, or perhaps a real estate investor.

For example, there’s a real estate investing couple that I’m friendly with who invests in the Midwest. I spend most of the year overseas and have been pumping most of my income into my online business for landlords, so I’m not doing much direct real estate investing these days. But I’ve lent this couple some money as an indirect way to invest in real estate and earn a strong return.

Investments in Real Estate Syndications

If you’ve invested money in a real estate syndication, it counts toward your net worth.

Unfortunately, only accredited investors can invest in most real estate syndications. To qualify as an accredited investor, you need to have a net worth of at least $1 million (not including equity in your primary residence) or an annual income of at least $200,000 ($300,000 if you’re married).

Some people get indignant about that requirement, yelling that the rich have access to investments that ordinary Americans don’t. But they’re the same people who put that limitation in place originally—to protect ordinary Americans from high-risk investments. You can’t have it both ways!

All right I’m back off the soap box.

looking up at a multilevel apartment building from the ground blue sky with clouds in backdrop

Private Equity Funds & Hedge Funds

Similarly, most private equity funds and hedge funds are only available to accredited investors. The SEC considers them high-risk, high-reward, and inappropriate for the common folk.

Perhaps they’re right, perhaps not. But if you’re successful enough to have money invested in a private equity fund or hedge fund, congratulations! And include it in your net worth.

Private REITs and Crowdfunding Investments

Not long ago, crowdfunding investments and private REITs were also reserved for accredited investors only.

But in a surprisingly reasonable move, the SEC created a special exemption for real estate crowdfunding websites. Nowadays, anyone can invest in them—or at least certain crowdfunding websites that meet the exemption.

I’ve invested some money in GroundFloor and Fundrise, and so far, I’ve been happy with them. It’s early yet though, so don’t take my word for it!

Regardless, these investments also belong in the “assets” column in your net worth.

Related: Plan Asset Rules: Read This Before Investing Your Retirement Funds!

Rare Collectables That Rise in Value

I was reluctant to include this, because every Tom, Dick, and Harry thinks they have a collection that’s worth something. Most aren’t.

Nearly all physical objects go down in value, not up. Cars, toys, electronics, whatever—these are depreciating assets, not appreciating assets.

With a few rare exceptions. Remember the 1962 Ferrari that Ferris Bueller, Cameron, and Sloane took for a joy ride? That would count toward your net worth.

If it’s a true vintage car that’s been restored, it counts. If it’s a mint condition, first edition Babe Ruth baseball card, it counts.

But if it’s your old Transformers collection, stop kidding yourself.

Assets Not Included in Your Net Worth

Equity in Your Primary Residence

In a technical sense, equity in your home counts toward your net worth—but not toward your investable net worth.

You can’t use that money to invest or build wealth; it’s just locked equity. When you sell your home, you get to keep some of that equity in cash (whatever doesn’t go to closing costs or perhaps taxes if you exceed the IRS’s residence capital gains exemption). But that day isn’t today, and the only way to pull out cash to invest with is to take on debt, which offsets the cash and then some.

So, your home equity is not part of your investable net worth. And while many people ardently disagree, I think Robert Kiyosaki had it right: Housing is a living expense (like food), which means your home is a liability, not an asset.

medium to large sized homes on neighborhood street with well manicured lawns

The less you spend on housing, the more you can invest in true investments that generate income and/or compound over time, such as rental properties and stock ETFs.

Even if you house hack for your primary residence, it helps your cash flow, but it doesn’t mean you should count the equity in your home as part of your investable net worth. But if you serial house hack, moving from one house hack to another to build your rental portfolio like this family did, the properties do become an investment once you move out.

Personal Vehicles

You’re not Cameron’s dad, and your 2001 Buick is not a vintage collector’s piece.

Again, accountants technically include equity in vehicles as part of your net worth. But vehicles are part of your transportation expenses—they cost money to maintain, they depreciate in value, and the more you spend on them, the less you’re putting toward real investments.

The one exception is commercial-use vehicles, such as trucks if you’re in the trucking business. But those aren’t personal vehicles, are they?

Personal Belongings

Likewise, everyone wants to include their jewelry and other personal belongings in their net worth. This might make you feel richer, but if you tried to sell those belongings, you’ll find out firsthand just how little value your items retain.

Even jewelry sells for pennies on the dollar if you were to try and liquidate it.

It’s not an investment. It’s stuff.

Liabilities

Your net worth is made up of more than just assets, of course. Your liabilities reduce your net worth.

After adding up all your investment assets, subtract the total of all loans, debt, and other liabilities. That includes credit card balances, personal loans, student loans, business loans, and so on.

But since you didn't count your primary residence or your vehicles as assets, you also don't need to count your home mortgage or car loan as liabilities. Unless you're upside-down—if you owe more than the assets are worth, count the negative equity as a liability.

Final Thoughts

Your net worth has little technical meaning, outside of qualifying for accredited investor status. Where I find net worth to be useful is as a yardstick for progress and a motivator to keep going.

Every month, it reinforces my commitment to building wealth and reaching financial independence to see my net worth rise. Being able to watch it happen before my eyes shows me that I’m moving in the right direction and makes me feel good.

That psychological boost may sound awfully intangible, but mindset is why most people opt to splurge on the $500 jacket rather than invest more money each month. The jacket feels real, while concepts like “financial independence” and “retirement” don’t.

As useful as net worth is in helping to reinforce good financial behavior, I find it a less meaningful measure than the FIRE ratio. Ultimately, it’s passive income that offers you freedom to quit your job and live the life that you want, not numbers in your net worth columns.

Disagree with me about including your home equity and vehicles in your net worth?

Go ahead and tell me why below!

G. Brian Davis is a landlord, personal finance expert, and financial independence/retire early (FIRE) enthusiast whose mission is to help everyday people create enough rental income to cover their ...
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    Bryan Hancock Investor from Round Rock, Texas
    Replied 9 months ago
    Non-accredited investors invest in securities offerings and private placements all the time. There are fewer opportunities to do so, but saying they can't is inaccurate.
    Darius Ogloza Investor from Marin County California
    Replied 9 months ago
    Alright here is THE answer. Investor A lives in a home in SF worth $4 million with a mortgage of $1 million and owns $1 million in investable assets. Investor B lives in a $300,000 home in Austin TX (with a $25,000 mortgage) and owns $1.5 million in investable assets. Who would you rather be?
    Tyler Bobo Realtor from Wasilla Alaska
    Replied 9 months ago
    If I didn't have to be in California, I'd be that guy, sell my assets and move to Texas (or anywhere but California) and be much better off. If you had to be in California though to keep your strong income or family or some other reason, then that guys position isn't as good.
    Dave G. Investor from Phoenix, Arizona
    Replied 9 months ago
    Well let’s see. I don’t think the numbers even matter here. Live in a state that is absurdly hostile towards residents or businesses earning income or owning real estate....or reside in a state with low taxes, is business-friendly and honors the Constitution. I’d choose the latter all day long.
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 9 months ago
    Good article. The debate around including your primary residence or not comes down to risk, and it's cousin liquidity. We seldom discuss risk when discussing assets but all investments are risk adjusted and liquidity affects risk. I include my primary residence because I can always get a HELOC or cash-out refinance and invest that money, therefore it *should* be included as an asset because that equity becomes investable as soon as I extract it as cash. But all assets have various degrees of liquidity which affects their risk, with cash being the most liquid and least risk. The term I like for primary residence equity is "dormant". The problem with a primary residence is that it's generally the most illiquid asset you can hold because you have to live somewhere and moving has huge life disrupting friction. A rental property is somewhere in between; you can sell it but you need to find a buyer and deal with the tenant. A well balance portfolio will have a distribution of risk adjusted investments which vary by liquidity. Maintaining some low volatility highly liquid assets (e.g. cash for 6 months living expenses) offsets risks elsewhere. I think that relative measure of liquidity underpins this article's decision criteria for whether to include something as an asset and for some the liquidity of the equity is so low you shouldn't even bother to count it (e.g. your personal vehicle). I personally have cash equivalents, stocks, rental properties, private equity, and my primary residence. This distribution reduces my overall risk while sustaining a healthy composite return. Btw, love the notion of a FIRE metric as an alternative.
    G. Brian Davis from Baltimore, MD
    Replied 9 months ago
    Thanks Kevin, and great point about liquidity!
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 9 months ago
    Thanks Brian, I find the topic underserved in the discussions. Through that lens, the financial crisis was a liquidity crisis as capital suddenly became scarce forcing people to sell. Liquidity provides choice which increases agility but is inversely correlated with returns. Getting the balance right is not at all obvious!
    Tyler Bobo Realtor from Wasilla Alaska
    Replied 9 months ago
    I count my home equity in my net worth and count my house as a great asset. I know, people can argue all day long about this. I count my house as an asset, or anything as an asset if it: Is likely to make or protect/maintain wealth. So gold protects wealth, stocks, and real estate are likely to make wealth through appreciation and/or cashflow, etc. My house fits that criteria, it goes up in value, and it makes me money. My personal single family residence makes me money because I have to live somewhere, and renting a comparable property would cost me about 600/mo more, plus I'd lose the tax advantages of hundred a month in interest I can write off. My monthly savings of owning a house versus renting is probably about $1,000. AND, my equity is very invest-able. With a HELOC, I can tap that equity faster than ANY other way I can get money, and at a way cheaper cost than most ways. I can get it as quick as if I actually had the cash in my account. So I don't buy into any of the reasons why my house isn't an asset. Very few of my other assets by themselves profit 1,000 per month (before appreciation) with super liquidity. I know, Robert K would be disappointed in me.
    G. Brian Davis from Baltimore, MD
    Replied 9 months ago
    All valid points Tyler! But I stand by Robert Kiyosaki on this one, largely because so many people justify overspending on housing by calling it an investment. We all need housing, but we also need food, and that doesn't mean buying lobster every night is a better use of your money than investing in stocks or investment properties. And at the end of the day, that's the risk with including home equity in your net worth: it opens the door to overspending and then warping logic to justify it. That risk, to me, weighs more than the (many) valid reasons to include it. Thanks for the reply!
    Anderson R. Investor from Toronto, ON
    Replied 8 months ago
    Hey mate, care to share your sample spreadsheet?