Tuesday, 4 December 2012

Six Million Dollar Man

My eyes wondered on a beggar who was asking for money as he was presenting himself to be disabled. This got me thinking. Who was the richest person on that busy street? 

Net worth is basically the assets (wealth), that one has, minus the liabilities (what he/she owes). I will let the picture do the talking

Most of us were using the assessed value of our home and property as an asset for calculating our net worth, and that pushed us well into positive territory overall. By including the value of our home as an asset, it was a relatively net positive 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? 

Since cars are really just a depreciating asset, I’m going to stop tracking the values of them completely. I made the decision to stop counting the value of my home as an asset in my net worth calculations as it was still on mortgage anyway.

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 a significant amount from our net worth. And this put us right back in the negative. Our debts, including our mortgage, significantly exceed our other assets.

Perhaps one day I’ll be able to cash out the equity or have the mortgage paid off and be able to live rent-free, but in the meantime it just seems to be a bit of a distraction.

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