One of the hottest debates in the personal finance space is whether or not the value of one’s home should be considered in a net worth calculation. There are people deeply rooted in both camps. We happen to be in the “we count it!” camp. But are we the exception, or the rule?
Is Your Home An Asset Or Liability?
The results are in – 67% of all respondents said that they would count their home’s value in their net worth calculation.
Historically, the value of a home has been calculated as part of one’s net worth. I believe it Robert Kiyosaki, author of Rich Dad, Poor Dad was one of the first people to introduce the concept that a home is not an asset. Instead, a home is a liability. Why? Because assets put money in your pocket each month, while liabilities take money out of your pocket each month. I once heard Kiyosaki say in an interview, the difference between assets and liabilities is that in times of crises, assets will feed you and liabilities will eat you. This couldn’t be more true. If you’re facing an unexpected job loss or staggering medical bills, anything that takes money from you each month is adding to your stress and anxiety and, essentially, eating away at your financial and emotional wellbeing.
Related: Why We Love Being At Home
No Passive Income, No Asset
The camp that doesn’t count their home in their net worth calculation holds to the belief that it is a liability. The argument is that you have to live somewhere. Even if you sold the house to access the equity, you would need to purchase another one, hence, tying that money right back up again. The exception would be selling a home with equity and NOT buying another one. In which case, the sale effectively gave the owner passive income and could be considered an asset.
The other reason primary homes are considered liabilities is the cost of routine upkeep and repairs that are necessary to maintain the value. Even if the home is without a mortgage, there are still taxes, maintenance, and repairs. This easily adds up to be thousands of dollars each year. The cost of living in a mortgage-free home is probably the same, if not more expensive than renting a home.
Hmm…no wonder there are people out there who swear they will never purchase a home. The other major drawback for the folks in the “buying a house is for the birds” camp is the restriction of living in ONE spot. The days of settling into a home in a nice neighborhood for the majority of your adult life are long past. These days, millennials and gen-Xers alike are turning their backs on home ownership to pursue a more footloose and fancy-free lifestyle. Tiny houses, travel trailers, and short-term rentals are all the rage. And who can blame them? Life is too short to be stuck in one spot.
I must point out that this argument only holds true with primary residences. Rental properties, on the other hand, are considered assets all day long because they’re putting money in landlord’s pockets every month. Or, at least they should be. If a rental home is not producing positive cash flow, it might be time to consider unloading it.
Related: We Made Our Dream Home A Reality
Forget That, I’m Counting It!
Truth be told, I can absolutely understand each side of the argument and, if we were already multi-gazillionaires, I probably wouldn’t count the value of our primary home, either. But, since we’re not yet multi-gazillionaires, I’m choosing to count it. If nothing else, it offsets the amount of mortgage we still, unfortunately, owe and gives us a much appreciated mental boost. So there you have it, we count it in our net worth as financial trickery! Yes, we are awesome.
The long term plan, however, is to count the value of our primary home as a positive in our net worth calculation until it’s paid in full (Goal: </= 3 years). Then we will switch teams and take it out of our asset column completely.
On the flip side, we don’t count the value of our cars in our net worth. Why? Because cars typically depreciate, and ours are not exceptions. We plan on driving our cars into the ground and, even though they’re worth a little something now, that value will drop like a rock as time passes. So we just don’t bother.
So, what do you do? Do you count the value of your home as part of your net worth? Or do you ignore it because you can’t use the money? What about cars? We’d love to have your opinion in the comments!
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Feature Image: Jason Droege Photography (jd_visualz on Instagram) – Stunning natural photographs of Lancaster County.