How Do You Include Fluctuating Assets in Your Net Worth Calculation?

[kyphysics]

In general, it's your assets minus your liabilities. However, how detailed do you go into things you materially own for which there is an unknown/fluctuating market value for - things like clothing, furniture, gadgets, etc. (or do you even include these) - or are invested in (which can also change in value quite a lot - stocks, bonds, precious metals, crypto currency, etc.)?

I capitalized "YOU," since this is a personalized question and not one for which I'm asking how, say, a bank might value/appraise your assets and net worth. Just curious what type of formula and estimating principles you might use.

 

[jtbell]

What do you want to use the net worth figure for?

My wife and I are both retired, so we're mainly interested in being able to support our current lifestyle, plus being able to buy our way into, and pay the monthly fees for, a decent retirement community when we're no longer able to live in, or want to live in, our current house. This includes the prospect of assisted living or nursing care.

Most of our assets are in traditional investments: workplace retirement plans, stock and bond funds, bank CDs. No crypto. We have (or will soon have) income streams from Social Security. Our house amounts to less than 5% of our net worth, strictly speaking, so we don't really count it. However, we live in a small rural town with low-cost housing. If we lived in an area with expensive housing, like BosWash or SanSanSea, we'd probably feel differently. We don't count our cars and other personal possessions because they're similarly small in the grand scheme of things.

 

[mcastillo356]

Hi, kyphysics!

House+pension plan... Wow, I really don't know. Let's see... No car, no mortgage... No idea, ky.

Greetings!

 

[Rive]

how detailed do you go into things you materially own for which there is an unknown/fluctuating market value for - things like clothing, furniture, gadgets, etc. (or do you even include these)

Most of the small stuff does not worth the time spent on selling them, so they are just excluded entirely.

Also... You know.. .the time when even the clothes got liquidated is usually after the burial, so I just does not care

 

[phyzguy]

I have a spreadsheet where I keep track of these things. I just have a small fixed number for "household goods", but as others have said, this is basically negligible in the overall scheme of things. For assets like stocks, bonds, the house, etc. there are markets where you can keep track of the current value. Yes, they fluctuate, but you can know the current value and you can keep track of how much they fluctuate so you can estimate reasonable best case and worst case values if/when you sell them at some point in the future.

 

[Vanadium 50]

If you need to include underwear and socks in your net worth, I think that is more significant than the exact calculation.

 

[kyphysics]

What do you want to use the net worth figure for?

We don't count our cars and other personal possessions because they're similarly small in the grand scheme of things.

I've sort of always been curious, but hadn't really thought about it deeply until this segment of news piqued my interest:

It's not really related to calculating net worth per se, but involves home value appraisal + potential discrimination. Sort of a tangentially related subject...don't remember how my mind wandered over to calculating net worth specifically after that (I think it may have been related to seeing some statistic on net worths relative to age...something like that...)

But, to answer your question, I don't necessarily have a "use" for it. It's sort of just an interesting intellectual topic that came to mind from maybe a meshing of stuff I've watched and read about recently.

I will say that you're probably in a very small minority of not including your home! That is usually one of the main items people use. Cars...I can see how an old clunker wouldn't matter much. Everything is relative...maybe for Bill Gates, he doesn't include cars. I know most people in my circle would throw that in their. You can sell a lot of cars for $7 - $11,000 probably. Furniture can be worth thousands too.

...Okay...Vanadium is right that your underwear is probably not worth calculating.

 

[kyphysics]

I have a spreadsheet where I keep track of these things. I just have a small fixed number for "household goods", but as others have said, this is basically negligible in the overall scheme of things. For assets like stocks, bonds, the house, etc. there are markets where you can keep track of the current value. Yes, they fluctuate, but you can know the current value and you can keep track of how much they fluctuate so you can estimate reasonable best case and worst case values if/when you sell them at some point in the future.

What if you're buying a home for the first time and a bank is assessing your net worth (assuming they do that)?

Do they personally have a formula for valuing stocks? ...I can only imagine how $GME, $AMC, $TSLA, etc. are valued.

 

[phyzguy]

What if you're buying a home for the first time and a bank is assessing your net worth (assuming they do that)?

Do they personally have a formula for valuing stocks? ...I can only imagine how $GME, $AMC, $TSLA, etc. are valued.

If you are taking out a loan to buy a home, the bank will certainly want to know your assets and liabilities, since this impacts your ability to repay the loan. I think they value stocks based on market value, which you can easily look up online. Based on your assets and liabilities, they decide whether you are a good risk to give a loan to. I suspect if all of your assets are in stocks and you have no liquid assets (cash, bank accounts, etc.) they would consider you a higher risk than if you have a balance of assets. You could ask the bank how they do the calculation.

 

[Vanadium 50]

When buying a home, the bank doesn't care about anything beyond the likelihood you will pay them back. Net worth is one factor. Another is payment history. Another is your debt relative to your income. Another is your down payment relative to the home's value.

But what is your real question here?

 

[phinds]

But what is your real question here?

Exactly. What is it you actually want to know?

 

[kyphysics]

Exactly. What is it you actually want to know?

Me? It's in the original post. ...How do YOU calculate your net worth? Just a curiosity thing.

As for homebuying and banks, if there is a "formula," I'd be interested in knowing too.

Pretty straight forward. ...feel free to add whatever...it's an open-ended thread

 

[russ_watters]

Do they personally have a formula for valuing stocks? ...I can only imagine how $GME, $AMC, $TSLA, etc. are valued.

Sure, it's share price * number of shares you own.

 

[russ_watters]

I can see how an old clunker wouldn't matter much. Everything is relative...maybe for Bill Gates, he doesn't include cars. I know most people in my circle would throw that in their. You can sell a lot of cars for $7 - $11,000 probably.

There's another reason I would generally not include a car: it is a depreciating asset. Basically a consumable. But again, it depends on what you need it for. If I had to have a fire sale today, I'd include the value of my car. For retirement planning, no. Even if it has a value of $15,000, it will drop over time or I'll use it as a down payment for my next.

 

[kyphysics]

I think I'd be fine to throw in a decent car (say, 2018/2019 Camry) at present day value.

Again, I (personally) wouldn't count my clunker. Probably, using "tangible book value" of material assets in finance, would work.

Intangible assets, such as some rare skill or idea that can be monetized/capitalized on (that presently is not), can be harder to determine. Benjamin Graham never valued intangible book value or assets and stuck with tangible only. But, nowadays, most people disagree with him on that (although, that's related to valuing a stock and not a single person's net worth).

 

[jtbell]

Our house amounts to less than 5% of our net worth, strictly speaking, so we don't really count it.

I will say that you're probably in a very small minority of not including your home! That is usually one of the main items people use.

That's probably true. Many/most people live more or less paycheck to paycheck and don't save much in IRA's, 401k's, savings accounts, etc. If they own a home, they do have to pay the mortgage on it, which increases their equity in the home, a form of forced savings. They end up later in life with a paid-off home as the main component of their net worth. Unless of course they borrow against it again via a home equity line of credit, as some people do.

I don't have all of our account statements any more from when we bought our house 33 years ago this summer. As best as I can reconstruct, our home equity at that time (the down payment) was about 15%-17% of our net worth. The value of the home was five times larger, but in terms of our net worth, it was of course mostly offset by the mortgage debt.

Until the mortgage was paid off, we saved both by contributing to our workplace retirement accounts and bank accounts, and by increasing our home equity via mortgage payments. The former increased faster than the latter, for two reasions. First, our incomes increased steadily (at least in nominal terms), whereas the mortgage payments stayed constant. Second, our retirement accounts (stock- and bond-based mutual-fund-like accounts) grew over and above our contributions, much faster than our home equity did. Our house in a small town in the Southeast is now worth more or less the same as when we bought it, after taking inflation into account, unlike houses in major coastal urban areas. Our other investments grew by a lot in the 1990s and 2010s, over and above inflation, even though they only came out about even in the 2000s because of the dot-com bust and the Great Recession.

So now our paid-off house is a much smaller fraction of our net worth than when we bought it.

 

[Vanadium 50]

So now our paid-off house is a much smaller fraction of our net worth than when we bought it.

This is what my home equity fraction of my net worth is over time:

I expect that the general trend is not unusual. It grows as the home appreciates and the mortgage is paid off. Once that happens, investments are made in other assets, so the fraction falls.

 

[jtbell]

View attachment 284228

Why is there a sharp peak in '06? I would have thought it would be in '08-'09 due to the stock market crash. Did you pay off the mortgage all at once?

 

[Vanadium 50]

Why is there a sharp peak in '06?

A refi on more favorable terms, plus the market heating up.