What Is The Worth Of *Net Worth* If It Is Not Usable?

by golbguru on May 16, 2007

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. ~ Benjamin Franklin.

Beyond such philosophical implications, I have been thinking about the issue of usability of net worth since the last Sunday Review - in which I mentioned it with reference to Super Saver’s article on spendable net worth.

I am not just thinking liquidity when I say “usable”, I am also thinking *replacement-needs*.

Consider you own a quarter-million dollar house, a decent car, and thousands of dollars in a retirement account (say something like 401K - on which there is a penalty if you withdraw earlier than certain age limits). With these assets, assume that your conventional “net worth” is around half a million dollars. Next, suppose you lose your job (or fall into some other financial trouble) - how much of that half-million dollars net worth will come to your rescue?

Even if you downgrade your lifestyle, you will still need to replace a few things from your earlier lifestyle - you will still need a place to stay (owned or rented), a car, some furniture in your house (or apartment), and some other basic needs (may be this includes retirement accounts too) to sustain yourself and your family. So, although your net worth was half a million dollars, you will be able to liquidate only a part of it to support you through your financial troubles. The rest of it will go towards replacement-needs and you will never be able to use it.

On these lines, I am more inclined to think like this:

  • Usable net worth of a home = [Current equity in your home] minus [Cost of replacement home/apartment]
  • Usable net worth of a car = [Current value of a car - assuming you own it completely] minus [Cost of a replacement car]
  • Usable net worth a retirement account = [Current savings] minus [Penalty/taxes for withdrawal]

Obviously, for certain retirement accounts, the penalty and taxes will be zero after you are of a certain age - at that time you will be able to realize the full worth of the savings - till such time, penalty and taxes should be considered.

In addition, there are other *liquidity* issues that sort of eat into the conventional net worth. For example, the current value of your car as defined by KBB may be $15,000, but when you actually put the car out for sale, it’s very less likely that you will get the full $15,000 for it. Such differences, between the theoretical values and what the market offers, further reduces the usability of net worth.

Sometimes, I wonder if there are “net worth rich” people who are in fact *poor* for all practical purposes after considering the usability of their worth.

Do you address this issue of usability of net worth? If YES, we would be interested in knowing how; and if NO, then we would be interested in knowing “WHY”.

Here are some other interesting discussions on related issues:

Related Articles:

{ 10 trackbacks }

What Is The Worth Of *Net Worth* If It Is Not Usable? « Younger Every Year
05.17.07 at 4:24 am
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Roundup for week of 13 May 2007 at Mighty Bargain Hunter
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Money Articles To Make You Think Twice About Buying A Home » Silicon Valley Blog About Money
05.20.07 at 6:29 am
Weekend Personal Finance Review
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Finance Findings For Tuesday, May 22, 2007
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07.19.07 at 6:35 am

{ 24 comments… read them below or add one }

1 Moneymonk 05.16.07 at 12:52 pm

To me, I see your net worth simply as what you are worth on paper.

But once something major happens, then your true net worth will show.

2 moom 05.16.07 at 2:10 pm

Don’t understand why you are taking something away from housing equity.

Anyway, like on a company balance sheet there are several levels of liquidity in most people’s net worth statements. That’s a reason I suppose that NetWorth IQ separates out retirement accounts from other assets. Home equity is useable because you can borrow against it. I keep track of retirement and non-retirement assets. I have more of the latter as I am interested in achieving financial independence sooner rather than later.

3 golbguru 05.16.07 at 2:24 pm

Moom: I am not sure if this is a right analogy, but let me try anyways - you can also borrow against your credit card credit limit - but that doesn’t make credit card a part of your net worth - because what you borrow, you have to give back.

Ok, I know that’s not a right analogy, but borrowing against home equity sounds somewhat similar to me.

What I am trying to convey is the “liquidity” value when you sell of the asset.

4 Super Saver 05.16.07 at 3:47 pm


Usable net worth makes sense if one plans to downsize homes or cars. I think the challenge is that most people don’t actually downsize. (Neither my parents nor my in-laws downsized home or cars when they retired. In fact, the both traded up on their homes.) That’s why I like to be conservative and use spendable (or liquid) networth. If I do downsize, I’ll get a bonus:-)

5 Q at $1 Million to My Name 05.16.07 at 6:34 pm

I measure total net worth, and retirement net worth. Retirement net worth is the one that doesn’t include our primary residence, cars, or personal belongings. That’s the one I need to get to $1 million.

I measure total net worth too just because it’s a larger number and I can’t wait for that to get to $1 million too! :)

6 plonkee 05.17.07 at 12:25 am

I don’t measure usable net worth yet, but I am planning on starting when I purchase my house. I’m going to subtract the cost of selling the house and the outstanding mortgage balance from the (conservative) estimate of the value of the house so that I can see what would happen if I needed to sell.

I should probably look into whether its even possible to access my pension funds before I’m 55 (retirement savings).

7 KMC 05.17.07 at 4:41 am

I hadn’t thought of this explicitly until your post - thanks.
When I’ve calculated net worth in the past, I do two of them - with and without home equity.
In addition, I have a small emergency fund and taxable, non-retirement investments that are liquid. I have a rough idea of what those are worth.
Finally, I wouldn’t consider a home liquid at all. Therefore, measuring it’s equity minus cost of replacement as liquid funds is dangerous to me. Apply your thinking about the car to a house.

8 Customers Revenge 05.17.07 at 6:47 am

Net worth is just an accounting definition, not useful for much. It is definitely a mistake to think net Worth = spending money. Your “Usable Net Worth” is an attempt to measure the spending money you have. In all real financial analysis the rule is to avoid accounting and just tally the cash flows. So if you can leverage your house to get cash, as moom says, then that’s legit, because you are “spending your net worth” (asset-liab.)

9 ted 05.17.07 at 8:48 am

When you figure usable net worth of your home do not take market value minus mortgage balance. Take at least 15% off the market value to cover sales expenses, needed fix ups, taxes, moving costs, possible price drop, etc.

Say you can sell your house for $250k and you owe $175,000 on the mortgage. Your “net worth” in your home is $75k, right? But if you actually sold the home and moved, you could realistically expect to clear about $37.5 in cash, or half of your “net worth” value.

10 Art Dinkin 05.17.07 at 1:45 pm

You ask:
Sometimes, I wonder if there are “net worth rich” people who are in fact *poor* for all practical purposes after considering the usability of their worth.

Many farmers here in Iowa own $1,000,000+ in land, but struggle to cash flow their families living expenses. Welcome to the wonderful world of argiculture.


11 db 05.18.07 at 2:25 am

When I calculate my net worth values, I basically ask myself the question “How liquid am I?” That is, I calculate the actual cash value at the present moment — how much could I actually draw out of an account or how much cash could I convert a less liquid asset into today?

For example, I look up the trade-in value of my car in the Kelly Blue Book and include that in my net worth. I figure if I needed to sell the car today, I could expect to get close to Blue Book for it. (this also helps me keep perspective of how a car depreciates in value).

I have a 3-4 gold coins, and so I have a couple of sites where I keep track of what other people are selling these exact coins for. I include that in my net worth as well.

One caveat: I do include the value of my retirement accounts and don’t try to factor in penalties for early withdrawals, because I have no intention of making an early withdrawal.

And golbguru: to me your analogy of tapping into home equity being like borrowing from a credit card is a pretty decent analogy. The only difference is you’re sort of “paying yourself back” (though not completely — if the bank wasn’t profiting from a HELOC I doubt they’d let you do it).


12 db 05.18.07 at 2:30 am

P.S. — One other thing is that I don’t feel compelled to get a precise figure for my net worth. To me it is an approximate value and I aim to keep its calculation fairly straightforward and simple. I’m not tracking myself with the same stringency an accountant brings to the corporate books.

If you feel compelled to get a really precise answer, have fun!


13 db 05.18.07 at 2:37 am

P.P.S. — Regarding including real estate, I think as others have alluded to here, that the only way to include this is if you put down the amount you could get free and clear after sale of the property (e.g., when you liquidate).

I like the point somebody else raised about calculating in the costs to sell, though I’d probably ballpark a standard figure for those items to keep continuity in my net worth calculations or just consider the simple amount of house value-outstanding mortgage to derived an expected amount that you’d receive free and clear. Either way makes sense to me if you are consistent with it.

I wouldn’t value the home from the perspective of how much equity you could tap into through a HELOC. Doing that is incurring debt, and you are trying to determine your basic liquidity.


14 Manny 05.18.07 at 3:20 am

Another measure of financial strength is “investable assets”, i.e. cash, stocks, bonds, etc. These would tend to be more liquid, and “spendable” in an emergeny. Many financially astute people look at cars, houses, etc as two categories: appreciating assets (homes), and depreciating assets (TVs, cars, etc). I personally try to visualize the year-over-year compounding of the money spent on an item, to imagine whether I’d like to have “more cash” or “more trash” in 20 years.

15 Corndogdriver 05.18.07 at 9:15 pm

The beauty of the “extra points for no debt” measure of net worth is not how much of your house can you eat or use to buy food. Rather it’s ‘My kids will always have a roof over their heads no matter how crappy everything else gets’. I make a good bit of money and have no mortgage. In the event I lose that income for whatever reason, I can go to work at the parts counter at Napa and keep everyone fed and the lights on. That has value - a value lots of people poo-poo becaue they’re never going to experience it.

The tendency to confuse weath and income is alive and well in the U.S.A., with many folks placing high value on what they can turn into income through more debt. How much sense does it make in an emergency to borrow against your home equity in order to make a car payment?

One thing that ought to be clear is that if “The Sophisticated Borrower” model of wealth creation was going to work, it would have started working by now.

16 J at Home Finance Freedom 05.19.07 at 6:43 am

Hello. Replacement value is a good point and I mentioned a similar point recently by mentioning a car’s marginal value above the cost of a junker (basic transportation). I agree that net worth is unhelpful and I posted about broke “millionaires” and liquidity in “Biggest Net Worth Mistakes” (click my name link) a week ago, so feel free to visit and comment.

Thank you.

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