I’ve been thinking about how I am going to track my net worth. A lot of the blogs out there have very detailed records of their financial wherewithal (checking, savings, 401k, IRAs, taxable accounts, Home Equity, Mortgage, Student Loans, etc) Heck My Open Wallet even let everyone know that she has exactly $2.02 in her wallet and this balances out to her Quicken Cash balance. While I commend her for having such an accurate picture of her financial picture, I currently do not have a mastery of Quicken to that degree (just got it around Christmas) and nor do I think it will be necessary to track my financials that detailed as far this blog is concerned. While it is very important to know exactly where your money is and where it is going in order to successfully reach your goals, I’ve tended to shoot slightly more from the hip (at least that’s my perception of myself).
Savings and Checking Accounts
Things like savings and checking accounts fluctuate greatly and really don’t tell you much about your financial picture. As long as the bills get paid and my retirement accounts funded I don’t really put to much weight behind whether my short term accounts are big or small. I’ve never had too big of an issue with them getting too small, if they do I would adjust my spending. If they get too big money gets taken out of them and put in a slightly more long term vehicle. In the big picture though (my retirement) these accounts don’t mean anything as they will not be a source for my retirement. This money will eventually fall prey to some expenditure and cannot be relied on as true worth, so for the purpose of tracking my net worth I will ignore them.
Home Equity and Mortgage debt
Next up is Home Equity and Mortgage debt. I guess credit card debt could be thrown into this category also, but I never have and hopefully never will have any form of credit card debt. But back to the house. Here is how I view my Home Mortgage. I will always need somewhere to live, whether I am renting an apartment or condo or owning my own house. When I retire I will still need somewhere to live and it will likely cost me money. I view housing as an expense just as I would my cell phone bill, internet connection, or gas for my car. So in essence it is really more of a cash flow issue than a true liability that decreases my net worth.
Also I am only 26 and by the time I retire assuming I don’t buy a new house every couple years and refinance with a 30 year mortgage, my mortgage should slowly take care of itself over my working years and when it comes to retirement should not be on my mind.
On the flip side many people track the Equity they have in their house. And while I am not oblivious to the advantage of Home Equity. I do not feel that it can be accurately tracked nor should it necessarily be included in your net worth. First off the value of your house can fluctuate greatly and there is not a really good way to determine the actual value of your house without actually selling the darn thing. You can’t check a monthly statement or look up the price in a newspaper so I think there is a large margin of error to consider when tacking on Home Equity value to your net worth. On a standard home this can fluctuate probably $20k in a calm housing market and then there is always the roughly 8-12% transaction cost to sell the house which many people might brush under the rug when calculating the profit they made off the sale of the house or the current “equity” they have built up in the house. A house is not a very liquid asset, and for most people a home is exactly that. It’s a place where you live and not an investment, so don’t treat it that way. In the event you do cash out your house, you’ll still need somewhere to call home and that will probably cost money.
Student loans are another debt that I currently have, but once again I am not going to track them as they will like my mortgage take care of themselves over time. I actually have $50K in student loans but do not feel that they pose any significant threat to my retirement as to even track them as a liability. I plan on paying them off as slowly as humanly possible, but even at that rate I believe I will have them paid off at age 53 so I won’t be worrying about them in retirement.
What I will Track
Maybe I am being too simple in my approach, like I said I am not exactly sure the best way to do this, but I figured simple is better. In tracking my net worth I am only going to focus on retirement accounts such as my 401k and mine and my wife’s IRAs. Now that I am going to only be contributing to a Roth 401k and Roth IRAs I don’t have to worry about subtracting taxes from my net worth, which should make things even simpler.
Should sometime down the road I put money in a taxable account that I plan on using for retirement I will add that. I guess if the time comes that I buy real estate for an “investment” outside of my home I would maybe try to add that into this equation, but as I noted above real estate can be hard to value and I’d rather keep my net worth calculation as accurate as possible.
So in essence for the purpose of this blog
Net worth = 401k + My Roth IRA + My Wife’s IRA