For the past few days I've been mulling over whether to include the mortgage / equity in the house as part of my calculations of net worth.
The fact is that the house is not a realisable asset as we need somewhere to live and the mortgage is part of that. Also as the mortgage is over 30 years and secured against the house, is long term secured debt different to short term unsecured debt.
The long and short of it is that I don't know, and I don't know what the financial people would decide either.
After a good few nights in the bath thinking about this... yes, money is what I think about when I relax....I have come to the following conclusion...
I will NOT include the equity in the house because we need somewhere to live and it is not reasonable to have this value as part of my net worth as it cannot be released.
I WILL include the mortgage as part of my debt calculations as its still money I owe and have to pay for. After all that £722 a month makes a huge hole in my bank balance every month. The mortgage is like a millstone around my neck and I want rid of it. And if I want to be aiming for a million in 20 years then first I need to get rid of the mortgage then I can start investing heavily to build up cash.
So overall no change, but I'm now happy with what I am doing. I can't believe its the 21st Jan already and nearly a month gone. I have to say I'm dreading doing my net worth on the 1st Feb as after such a rubbish month its bound to be worse, I just hope its not too bad. Still, if I wasn't doing this I would just be drifting along....now I have a purpose !
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4 comments:
Hi chainamanga,
Yes, a mortgage is debt. You really shouldn't class it as an asset until it provides you with income.
I'm just reading a great book, 'rich dad, poor dad' which helps greatly with the definitions of debt, assets, liabilities, etc.
I started my road to a million last year. Not doing very well so far, but you have to start somewhere.
Good luck.
Thanks, David..... Thats pretty much the conclusion I came to.
Actually, your home (primary residence) is an asset and the mortgage that goes along with it is considered debt that will be subtracted from all of your assets. Over time, your home will go up in value and your mortgage will go down, thus leaving you with equity. This equity can be borrowed against (in the US anyway) and used to pay bills or even as leverage to improve the asset you have (home) and create more value. Sure you have to live in it but if you were to hit hard times, you could sell it for a profit and rent until you were ready to buy. That profit (cash) could then be used for many purposes. Start a business, go back to school, buy stock, bet on blackjack, etc. Any sound financial planning book will tell you a home and it's mortgage should be calculated into your overall networth. That's also why it's used in the calculation on the NetworthIQ site. Eliminating the home from your NW, doesn't give a realistic portrait of your NW status. Good luck...sorry the long rant.
Oddly, I posted about the same thing yesterday (and I hadn't seem this post - honest!).
Notwithstanding what the previous commentor says, I'm currently leaving out both my mortgage and house value - I think it just sways the calculation too much and makes me feel better off than I am. Plus, as others have said (and there's a link to another similar post on my post), you can't realize the equity in your house unless you borrow against it or sell it.
Thanks for the link to NetworthIQ - I think I'll use it too.
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