There are numerous other threads where “we” didn’t shine but yes, this one is a strong contender for the top10 spot. Lot of folks may be confused with the calculation of net worth because this section is covered in L3…you know the whole morning exam IPS…
I still think the crux of the question is “is home equity included in net worth”?
I vote No–with a caveat. If you really think that you will sell your home and successfully downsize someday, then you can count home equity as an asset. (EG - if you live in the Upper East Side in a $30m condo, but you plan to sell it and move to eastern Kentucky and buying a $15,000 trailer, then you can consider it to be an asset. I have never met anyone who has successfully downsized. They all wind up re-upsizing.)
The point is–everyone needs some kind of house. And everyone consumes. So your point is…a really stupid point.
Nonetheless, I can also see how home equity can be considered to be “real” wealth–once your house is paid off. If my mortgage is $2000 per month (just principal and interest), and I pay off my house, then my spending goes down by $24,000 per year. And if you look at your spending (consumption) as a % of your net worth, then your net worth “multiplier” just increased by some amount. So your “real wealth” increased. Kinda.
You seem like you’re more likely to have a reasonable answer to this than the OP.
To me, it seems like you’re talking about something other than Net Worth entirely when you start talking about what you are intending to do with your house (like live in it vs downsizing). Calculations for retirement readiness, maybe? If you are intending on living in your house obviously you shouldn’t include its value in the assets that you have to retire on.
However, even if you don’t intend to downsize, the value is still there if you need it. It’s still an asset on your personal balance sheet. I’m thinking about the definition of an asset from a business standpoint; the house is something I own that could be sold to provide me money. Or if I were to die, my family would receive more inherited wealth than someone who has the same assets as me minus a house. I don’t think businesses get to exclude PP&E from their balance sheets just because they’re intending to use those assets. Likewise, I still have to pay taxes on my home whether I want to think of it as an asset or not.
So I’ll ask you this one question (and I’m genuinely curious if you have an answer/explanation that will put me in my place here):
How do you evaluate the comparative net worth of these 3 people? Person A: $1 million in assorted securities, rents a house. Person B: $900k in assorted securites, owns a $300k house. Person C: $800k in assorted securities, owns a $450k house. These are the only assets and liabilities of these three people.
Only if is all of above currently available for sale and can be sold at the stated price, and all three security portfolios are identical and real estates are in the same category, only then the one of the three above who is having the highest current net assets is the richest measured in the currency units. Otherwise, a framing bias.
How I would evaluate it (and this is from the Greenman Theory of Spending–you won’t find this in any textbook):
Person B has the highest wealth.
Wealth (in my book) is expressed as a multiple of your consumption. So if your consumption is $100k per year and your total wealth (not including home equity) is $1m, then your wealth is 10x consumption.
Assuming that all of these people spend $50k per year on things OTHER THAN their rent (food, clothing, utilities, property tax), and assuming person A spends $30k per hear on rent…
Person A’s consumption is $80k, and their total wealth is 12.5x.
Person B’s consumption is $50k, and their total wealth is 18x.
Person C’s consumption is $50k, and their total wealth is 16x.
Granted, this is overly simplistic, and doesn’t take into account the lifestyles of the individuals, nor their wants and needs and what makes them happy and all that other Maslow-esque stuff. But when I think of true “wealth”, this is how I think of it–as a multiplier of your spending.
Interesting. I think it makes sense certainly in terms of measuring how far your assets will carry you in your current life. But I think the crux of any disagreements here are just over what Net Worth even is.
IMO, just like if a business were to shutter its doors today and sell of its assets, personal net worth is what your benefactors would be left with if you died today.
Before or after tax and transaction costs? Each asset class has different tax treatment as well as transaction costs, thus net worth left to beneficiaries might be a doubtful category.
maybe we should address this question to the CFP forum…I would imagine their thread is +60 pages long
When you are talking about one-dimensional term of wealth, it’s best to talk to an accountant who will help you to get rid of illusion.
Before, I’d think. They may get taxed on the assets but they still received them. You should probably be deducting transaction costs from your assets’ value to you even if you aren’t passing them on.
OP got mad that people didn’t freeze in awe at the number he thought was high, so started to b*tch about everything. I find this to be quite amusing.
OP, at 1.5mm is still higher than that of that guy with 1.3mm “come at me” person…although as I and other posters have said at age 33 with 11 years of high finance - front office - experience under your belt, $1.3mm is not bad but not good either…Maybe a client portfolio manager in upstate new york then yeah!!! you the man son!!! But in SF, NYC, LA, Newport Beach, Miami, Seattle, Chicago area? pffff.
^Yep. Hence the “multiple of expenses” idea.
If a guy is worth $1.3 million, but he spends $650,000 on taxes, food, clothing, shelther, country club memberships (hey, gotta look good to impress clients, amirite6?), and three vacations per year, his wealth is 2x spending. That means if he quit work (or became disabled, or laid off), he could only survive for a couple of years. Not good.
If my wealth is a mere $1m, but my house is paid for, cars are paid for, student loans are paid off, I don’t have impress clients with my country club membership or Armani suits, and my vacations are quality, but not lavish, then my spending is around $75k per year (including my tax expense). My wealth multiple is 13.3x. That means I can live (at my current standard of living) for 13 years. Actually, I could probably live longer than that, assuming that the return on my investments is greater than the inflation on my living expenses.
Also, the reason I include taxes as an expense–They’re not “living expenses” per se, but they are most likely the biggest expense that a wealthy person has.
It also proves the point that we should minimize our taxable income (to minimize our biggest expense) and maximize our non-taxable income (tax-deferred accounts, unrealized capital gains, etc.).
want to add your cars? go ahead!
your pets? why not?
your investing base is going down bc you are drawing principal to cover expenses but your expenses do not go down equally but stay the same. so you need a much higher return than just beating inflation since your investing base is being reduced yearly by expenses/base
^If myincome from my investments is greater than my living expenses, then my “wealth multiple” increases. So if investment return is 4% and inflation is 3%, then my wealth multiple increased, and I did not withdraw any principal. Instead, I added to my principal.
(In this sense, I use the term “income” not to denote accounting or taxable income, but rather total return. Because if I have any kind of return, I can create my own income stream.)
pets… only if they are on this list
https://www.scoopwhoop.com/Most-Expensive-Pets/
- White Lion Cubs
Estimated worth up to $140, 000
This breed of lions were first spotted in 1938 and they were rare back then. The colour mutation was first seen among the lions of the Timbavati area and is responsible for the white fur and the light eyes of these animals. It is believed that the recessive genes in both the parents is responsible for the pristine white colour of the cubs.
Source: latimes 1. Green Monkey
Auctioned for $16,000,000 in 2009.
No, it’s not a monkey. It’s actually a thoroughbred American racehorse, fathered by another thoroughbred American racehorse, called Forestry. According to a report by CNBC, the first time Green Monkey raced, he ran an eighth of a mile in just under 9.8 seconds. Now that’s super fast. Unfortunately, he suffered an injury and hasn’t been able to duplicate that speed ever since.
Source: horsecollborative
it all depends in the multiple. with a 5x multiple you better be making outstanding returns vs a 13x multiple.
i think you should copyright the GreenmanWealthMultiple