To me, these formulas are nothing but a dick measuring contest. Figure out what you think you need in order to retire, calculate your current value of assets and figure out what kind of annual contribution level/growth will get you there. Who cares where you are compared to anyone else.

I have used Formula #1 in the past but feel it is more on the low side. My goal is have a net worth of $1 million dollars ASAP. This includes diversifing investments in stock market, real estate, investment through finanical advisors and the obvious (IRAS, 401K, etc).

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Formula #1 is high - I meet the result if I include the estimated equity in my house.

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And why in the world wouldn't you do that?

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Formula #1 is high - I meet the result if I include the estimated equity in my house.

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And why in the world wouldn't you do that?

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Because I can't benefit from the equity in my house unless I sell it, and if I sell it, then I will be homeless. I'm planning to stay in the house for a long time, and my goal is to have the house paid off well before retirement. Selling it to cash out isn't part of the current plan.

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Formula #1 is high - I meet the result if I include the estimated equity in my house.

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And why in the world wouldn't you do that?

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Agreed. You do not add your primary home equity to your net worth total.

The problem with saying you don't use your home equity to determine your net worth is that net worth is assets minus liabilities. A home mortgage is a liability. If you're going to include a home mortgage in the liabilities section when figuring out net worth, you need to consider equity as part of the assets.

Granted, this discussion is academic, because if you still owe on your mortgage, your equity in the house is already priced into the liability section of the calculation.

As long as I know that I can sell my home for more than what I owe, I sort of consider it a wash. I don't count the equity that would be a positive to my net worth if I were to sell, but I also don't count the balance as a negative as long as I know it would sell for more than that value. If I were to ever become upside down (or even barely break event), I would be thinking about it very differently.

I wouldn't put much faith in any of these numbers. I'm 36 and I calculate out at 2X in the first formula and 10X on the second formula. My income has been pretty low until the last year or two but I have leveraged in to a lot of rental real estate equity in the last 4-5 years. I also have two young kids at home.

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Working until that age means what I said, unable to retire.

And it hurts younger generations because there are only so many jobs. More workers means more out of work.

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The jobs a person with 30-40 years of experience does have no bearing on what a Millenial can do.

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Working until that age means what I said, unable to retire.

And it hurts younger generations because there are only so many jobs. More workers means more out of work.

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The jobs a person with 30-40 years of experience does have no bearing on what a Millenial can do.

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I realize the jobs are different, but there is a trickle down effect that affects all workers. There is a set amount of jobs and a growing pool of workers for those jobs.

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As long as I know that I can sell my home for more than what I owe, I sort of consider it a wash.

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Sooo...I almost had my home paid off, and then decided that I didn't want to own an expensive piece of non-diversified real estate that doesn't appreciate and has high taxes. I took out every dollar I could in order to get to 20% equity, and started over with a 30 year mortgage. The bank sent me a nice fat check. Are you saying that my net worth just increased by the amount of that check? Of course you aren't, because I have faith that you're not an idiot!

Bottom line - home equity is a liquid asset, and is part of your net worth. Period.

The exception is if you don't have much equity - then I would understand a conservative approach.

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Sooo...I almost had my home paid off, and then decided that I didn't want to own an expensive piece of non-diversified real estate that doesn't appreciate and has high taxes.. I took out every dollar I could in order to get to 20% equity, and started over with a 30 year mortgage.

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How much did this strategy lower your taxes?

Edit to add: And why would owing money on an expensive piece of non-diversified real estate be better than owning it?

About 2-2.25x each formula.

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How much did this strategy lower your taxes?

Edit to add: And why would owing money on an expensive piece of non-diversified real estate be better than owning it?

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Strategy didn't lower the taxes at all. But 50% of my payment was T&I, so I saw little advantage to owning something that would still have a monthly payment. Also, I decided that if I ever want to use it as a rental, I could pay cash for another house, eliminate the payment totally on the existing one, and make money on it whether it appreciates or not.

I don't view 20% equity as owing money. I view it as paying very low rent, and whatever appreciation happens, so be it. When I was in my 20's and early 30's, of course I wanted to pay the home off and "own" it, because the mortgage balance was higher than my total assets, which made me nervous. Now I've got better things to do with that money.

My point was that the mortgage balance is a debt, but the equity is an asset. And you don't have to sell the house to access the equity.

There are definately valid reasons to prefer having a mortgage to paying your home off in these times of historicly low interest rates. But none of them were the reasons you listed.

But yes, home equity is part of "net worth". Though generally a poor idea to consider it value when talking retirement savings compared to better vehicles for building wealth knowing you have to live somewhere. The only time home equity is truely usable is if you are willing to downsize, which few people are.

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Here's a great article for the "above average" person, which most of us probably are. The net worth comparisons are closer to the bottom.

http://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/

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I like that this article differentiated between pre-tax contributions and post-tax ones. At first I was getting irritated because I was thinking I'd be below the low-end even though I consider myself a good saver, but then I realized I'm doing well considering my roth contributions.

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The only time home equity is truely usable is if you are willing to downsize

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...or in my case, a choice not to upsize, which is effectively the same thing.

If you had it paid off and got a new mortgage, you are borrowing the money and have to pay it back. You weren't able to use your home equity in any sense other than its a cheaper way to borrow than a credit card, and the underlying asset might go up in value at around the rate of inflation.

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You weren't able to use your home equity in any sense other than its a cheaper way to borrow than a credit card

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My equity allowed me to re-purchase my home on margin. It's just like you would do with any stock. You put 20% down, but you reap the benefits of appreciation for the full value. Of course, if the price drops too low, you have a margin call to re-establish the 20% - I don't have that risk with a home, at least not my home. If things got that bad, I'd be even happier to have low equity. Unless you're Louis Zamperini, it's better to eat part of an albatross rather than a whole one.

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As long as I know that I can sell my home for more than what I owe, I sort of consider it a wash.

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Sooo...I almost had my home paid off, and then decided that I didn't want to own an expensive piece of non-diversified real estate that doesn't appreciate and has high taxes. I took out every dollar I could in order to get to 20% equity, and started over with a 30 year mortgage. The bank sent me a nice fat check. Are you saying that my net worth just increased by the amount of that check? Of course you aren't, because I have faith that you're not an idiot!

Bottom line - home equity is a liquid asset, and is part of your net worth. Period.

The exception is if you don't have much equity - then I would understand a conservative approach.

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For me, I have about $100k in equity. That includes my 20% down payment plus the appreciation. I don't consider that equity because, for me, I would have to sell the house to get it (and then find another place to live, and to stay where I am, that would just mean an even bigger mortgage than what I already have). I personally don't see myself talking out any home equity loans or anything like that. And I'm not going to buy any additional properties or become a landlord. At best, I might one day sell and move someplace cheaper...at that point (after I sold), I'd consider the cash earnings part of my net worth.

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You weren't able to use your home equity in any sense other than its a cheaper way to borrow than a credit card

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My equity allowed me to re-purchase my home on margin. It's just like you would do with any stock. You put 20% down, but you reap the benefits of appreciation for the full value. Of course, if the price drops too low, you have a margin call to re-establish the 20% - I don't have that risk with a home, at least not my home. If things got that bad, I'd be even happier to have low equity. Unless you're Louis Zamperini, it's better to eat part of an albatross rather than a whole one.

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Unless you declare bankruptcy, you are still going to pay up for any negative equity in the home should you be forced to sell. Borrowing against it and owing monthly payments just adds additional risk. Low interest rates and personal savings may mitigate that risk. But if home loans were still 9% no one would be advocating to refinance and take home equity out to invest in other things. Low rates make it more attractive.

Also, I think margin investing is a bad analogy. You are using leverage to buy a home when using a mortgage, but not the same way leverage is used when buying on margin.

Of course the low rates make my strategy attractive. Housing 8 people comfortably for $600/month P&I is a near miracle.

My point was that mortgage rates have never been this low, and who knows if they will stay this low. So planning a refi to acces home equity, and therefore including home equity as part of usable net worth, is a poor plan for most people.

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My point was that mortgage rates have never been this low, and who knows if they will stay this low.

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I know. Mortgage rates will not stay this low. I am 100% sure they will go up. The trick is knowing when.

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The trick is knowing when.

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Anyone who knows is going to be a rich person.

How do you guys treat a lease vehicle for net worth calculation? Of course it's not an asset, but it is a set monthly payment going towards a debt under contract.

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How do you guys treat a lease vehicle for net worth calculation? Of course it's not an asset, but it is a set monthly payment going towards a debt under contract.

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I don't lease, but if I had one I would count the full payoff value as a liability against net worth.

Maybe not it's full payoff value, but the cost it would cost you terminate the lease since that is technically the amount that you're on the hook for.

I wouldn't think you'd count a lease in a net worth calculation. Maybe the payoff amount mentioned above, but I also wouldn't count apartment lease, cell phone contract, etc as part of net worth. Those are just monthly expenses. I wouldn't think future expenses factor into net worth any more than future earnings.

Agree.

Who saw this turning into a discussion on capital vs. operating lease treatment?

I thought the same thing.

If you hit any of these formulas - be prepared to have your retirement and savings raided in the future. Viva L'America.