That’s probably pretty shocking. “WHAT DID TRENT DO?” I can already sense the regular batch of critics in the comments cracking their knuckles over this one.
Actually, the change is pretty simple. I made the decision to stop counting the value of my home as an asset in my net worth calculations. I also did the same with our automobiles.
Let’s back up a bit. I’m a big believer that calculating your net worth – which is your total assets minus your total debts – is the best way to keep track of your overall financial progress. If you’re making good progress, your net worth will go up each time you calculate it (or at least have a strong general positive trend, since you can’t control the short term fluctuations of the stock market).
It’s pretty easy to calculate it. You can either use a personal finance tool like Quicken or, better yet, build your own net worth calculator in a spreadsheet. I calculate mine every month using a spreadsheet (though I’m considering giving Quicken a serious try when the new Mac version is released later this year).
As I mentioned in the past, I was using the assessed value of my home and property as an asset for calculating my net worth, and that pushed me well into positive territory overall. By including the value of my home as an asset, it was a big fat net positive – $175,000 worth.
But every time I calculated my net worth, I asked myself about the home and the automobiles. Could they actually be liquidated without really altering our life? Is it even realistic at all that we would just sell our house if we needed cash?
Our primary resident is an asset we need to use. It’s where we live. It’s something that would be very difficult to liquidate from our current position because it would require us to move elsewhere. Similarly, an automobile is something we need to use and to liquidate it would require us to make major life changes.
To put it simply, our home and our car aren’t liquid assets. Yes, of course, we could get cash value for them, but it would involve major life changes and significant effort.
Instead, they’re tools. They’re things we utilize to live our life. If we lost those tools, our lives would radically and severely change, something that wouldn’t happen with any other assets we hold.
So we just made a simple change. We’re no longer counting our “tools” – our not-very-liquid assets – in our net worth calculations, and that means we just dropped about $200,000 from our net worth.
And this put us right back in the negative. Our debts, including our mortgage, significantly exceed our other assets.
Many people might say, “Wow, that’s painful.” And in some ways it is. But what I see each month is that our net worth is going up. We’re heading in the right direction each and every month. That negative net worth is getting smaller and smaller.
I have a nice new goal now. I want us to have a positive net worth without our home or our automobiles as assets as soon as possible. That’s a further psychological carrot to live lean and look for more ways to earn money.
What about you? Do you calculate your own net worth regularly? Do you include your home as an asset?