{"id":120698,"date":"2019-12-28T12:00:12","date_gmt":"2019-12-28T19:00:12","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=120698"},"modified":"2021-03-16T14:57:41","modified_gmt":"2021-03-16T20:57:41","slug":"what-belongs-net-worth-what-doesnt","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/what-belongs-net-worth-what-doesnt","title":{"rendered":"What Belongs in Your Net Worth (& What Doesn’t)"},"content":{"rendered":"

Every month, there are three ratios I track to measure my progress toward financial freedom<\/a>.<\/p>\n

I first check my savings rate. Savings rate is simply the percentage of income that goes toward savings, investments, or debt reduction.<\/p>\n

Next, I check my FIRE ratio (FIRE is an acronym for financial independence, retire early). It\u2019s a less common term, but a simple concept: It\u2019s 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.<\/p>\n

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.<\/p>\n

Here\u2019s what to include, what not to include, and more importantly, why you should exclude a few key numbers.<\/p>\n

Assets Included in Investable Net Worth<\/h2>\n

Bank Accounts<\/h3>\n

This one is obvious, so let\u2019s 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.<\/p>\n

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\u2019 expenses in a liquid emergency fund. Exactly how much depends on your risk tolerance and whether you\u2019ve created other layers in your emergency fund.<\/p>\n

Stocks\/Equities<\/h3>\n

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

And while many real estate investors get high and mighty about how real estate investments outperforms the stock market<\/a>, 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.<\/p>\n

\"Female<\/p>\n

Equities are liquid, and ETFs and mutual funds make it extremely simple to diversify your investments. It\u2019s also far easier to invest in tax-sheltered accounts such as IRAs, 401(k)s, and HSAs using equities.<\/p>\n

Besides, an investment portfolio made up of only real estate is hardly a balanced portfolio, is it?<\/p>\n

Bonds<\/h3>\n

Bonds may be boring and low-yield in today\u2019s market, but they\u2019re a staple of retirement security and income-producing assets. They belong in your investable net worth.<\/p>\n

Related:<\/em><\/strong> What\u2019s the Yield Curve and How Can It Help You Recession-Proof Your Investments?<\/a><\/em><\/p>\n

Retirement Accounts<\/h3>\n

All retirement accounts\u2014no matter what\u2019s in them\u2014count toward your investable net worth. You may not be able to access the funds until reaching age 59.5, but they\u2019re still investments, still compounding for you every year, and still belong in your investable net worth.<\/p>\n

Equity in Investment Properties<\/h3>\n

You bought a rental property<\/a> five years ago for $160,000 and put down $32,000. Today it\u2019s worth $200,000, and your mortgage balance has dropped to $115,000.<\/p>\n

You have $85,000 in equity, which adds to your net worth.<\/p>\n

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\u2019s just cut to the chase and say your equity adds to your net worth.<\/p>\n

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\u2014at least not on a month-to-month basis.<\/p>\n

Even worse, not all of that equity is really yours. If you were to sell that $200,000 property, you\u2019d probably rack up $15-20,000 in closing costs. Again, real estate equity exists only on paper, and in the real world, you\u2019ll incur hefty expenses to realize it.<\/p>\n

Private Notes<\/h3>\n

A private note is a private loan<\/a> that you\u2019ve made to someone else. It could be a friend, family member, or perhaps a real estate investor.<\/p>\n

For example, there\u2019s a real estate investing couple that I\u2019m 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<\/a>, so I\u2019m not doing much direct real estate investing these days. But I\u2019ve lent this couple some money as an indirect way to invest in real estate and earn a strong return.<\/p>\n

Investments in Real Estate Syndications<\/h3>\n

If you\u2019ve invested money in a real estate syndication<\/a>, it counts toward your net worth.<\/p>\n

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\u2019re married).<\/p>\n

Some people get indignant about that requirement, yelling that the rich have access to investments that ordinary Americans don\u2019t. But they\u2019re the same people who put that limitation in place originally\u2014to protect ordinary Americans from high-risk investments. You can\u2019t have it both ways!<\/p>\n

All right I\u2019m back off the soap box.<\/p>\n

\"looking<\/p>\n

Private Equity Funds & Hedge Funds<\/h3>\n

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.<\/p>\n

Perhaps they\u2019re right, perhaps not. But if you\u2019re successful enough to have money invested in a private equity fund or hedge fund, congratulations! And include it in your net worth.<\/p>\n

Private REITs and Crowdfunding Investments<\/h3>\n

Not long ago, crowdfunding investments and private REITs were also reserved for accredited investors only.<\/p>\n

But in a surprisingly reasonable move, the SEC created a special exemption for real estate crowdfunding websites. Nowadays, anyone can invest in them\u2014or at least certain crowdfunding websites that meet the exemption.<\/p>\n

I\u2019ve invested some money in GroundFloor and Fundrise, and so far, I\u2019ve been happy with them. It\u2019s early yet though, so don\u2019t take my word for it!<\/p>\n

Regardless, these investments also belong in the “assets” column in your net worth.<\/p>\n

Related:<\/em><\/strong> Plan Asset Rules: Read This Before Investing Your Retirement Funds!<\/a><\/em><\/p>\n

Rare Collectables That Rise in Value<\/h3>\n

I was reluctant to include this, because every Tom, Dick, and Harry thinks they have a collection that\u2019s worth something. Most aren\u2019t.<\/p>\n

Nearly all physical objects go down in value, not up. Cars, toys, electronics, whatever\u2014these are depreciating assets, not appreciating assets.<\/p>\n

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.<\/p>\n

If it\u2019s a true vintage car that\u2019s been restored, it counts. If it\u2019s a mint condition, first edition Babe Ruth baseball card, it counts.<\/p>\n

But if it\u2019s your old Transformers collection, stop kidding yourself.<\/p>\n

Assets Not<\/em> Included in Your Net Worth<\/h2>\n

Equity in Your Primary Residence<\/h3>\n

In a technical sense, equity in your home counts toward your net worth\u2014but not toward your investable net worth.<\/p>\n

You can\u2019t use that money to invest or build wealth; it\u2019s just locked equity. When you sell your home, you get to keep some of that equity in cash (whatever doesn\u2019t go to closing costs or perhaps taxes if you exceed the IRS\u2019s residence capital gains exemption). But that day isn\u2019t today, and the only way to pull out cash to invest with is to take on debt, which offsets the cash and then some.<\/p>\n

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.<\/p>\n

\"medium<\/p>\n

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.<\/p>\n

Even if you house hack for your primary residence<\/a>, it helps your cash flow, but it doesn\u2019t 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<\/a>, the properties do become an investment once you move out.<\/p>\n

Personal Vehicles<\/h3>\n

You\u2019re not Cameron\u2019s dad, and your 2001 Buick is not a vintage collector\u2019s piece.<\/p>\n

Again, accountants technically include equity in vehicles as part of your net worth. But vehicles are part of your transportation expenses\u2014they cost money to maintain, they depreciate in value, and the more you spend on them, the less you\u2019re putting toward real investments.<\/p>\n

The one exception is commercial-use vehicles, such as trucks if you\u2019re in the trucking business. But those aren\u2019t personal vehicles, are they?<\/p>\n

Personal Belongings<\/h3>\n

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\u2019ll find out firsthand just how little value your items retain.<\/p>\n

Even jewelry sells for pennies on the dollar if you were to try and liquidate it.<\/p>\n

It\u2019s not an investment. It\u2019s stuff.<\/p>\n

Liabilities<\/h2>\n

Your net worth is made up of more than just assets, of course. Your liabilities reduce your net worth.<\/p>\n

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.<\/p>\n

But since you didn\u2019t count your primary residence or your vehicles as assets, you also don\u2019t need to count your home mortgage or car loan as liabilities. Unless you\u2019re upside-down\u2014if you owe more than the assets are worth, count the negative equity as a liability.<\/p>\n

Final Thoughts<\/h2>\n

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.<\/p>\n

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\u2019m moving in the right direction and makes me feel good.<\/p>\n

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 \u201cfinancial independence\u201d and \u201cretirement\u201d don\u2019t.<\/p>\n

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\u2019s passive income that offers you freedom to quit your job and live the life that you want, not numbers in your net worth columns.<\/p>\n

\"\"<\/a><\/p>\n

Disagree with me about including your home equity and vehicles in your net worth? <\/em><\/p>\n

Go ahead and tell me why below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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\u2019s what to include, what not to include, and more importantly, why you should exclude a few key numbers.<\/p>\n","protected":false},"author":158586,"featured_media":114567,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5182],"tags":[],"class_list":["post-120698","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-personal-finance"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120698","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=120698"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/120698\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/114567"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=120698"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=120698"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=120698"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}