A lot of people want to count their home equity in their net worth. Is this the correct way of calculating how valuable you are?
Take a look at the video below and find out what to do.
Do You Count Home Equity in Your Net Worth?
The transcript is below.
Many people like to count their home value, or the home equity, in their net worth. I advise against this practice for a couple of reasons.
- If you include your home equity in your net worth, then Monkey Brain starts to view that amount as a piggy bank. Suddenly, tapping into the home equity to buy that 183” flat screen TV for the man cave starts to sound like a good idea.
- Having a fully paid for home pretty much solves your housing expenses for your life, assuming that you don’t decide to trade up. You’re always going to need a place to live, and tapping the value of the home equity means that you’ve now created an expense which you have to account for.
It’s also the same reason that I recommend caution when looking at reverse mortgages. If you get a reverse mortgage and you do something drastic like take out a lump sum early and blow it on crap, then you’re going to be in deep sheep dip when you have to pay maintenance and property taxes and find that there’s no longer room in the budget for those expenses.