Should I Include My Home Equity in My Net Worth Calculation?

Your net worth is an important measure of your financial health. One common question is whether your home equity should be included in that calculation. While it’s technically part of your net worth, it doesn’t function the same way as cash or investments. Simply put, it isn’t easily accessible. Understanding how home equity should be factored into your overall wealth can help you get a clearer picture of your finances and set more realistic goals.

In one Reddit thread, the poster asked whether to count the value of their home equity in their net worth. And the answer is that while home equity is typically included, it is not as liquid as other assets, so it can be useful to think about it differently.

What goes into net worth?

There’s a simple formula you can use to calculate your net worth. It’s basically the total of your various assets minus your liabilities.

Here’s an example of how to calculate your net worth (including your home equity):

Assets:

IRA – $1 million
Brokerage account – $100,000
Savings account – $100,000
Home value – $800,000

Total – $2 million

Liabilities:

Mortgage balance – $300,000

After subtracting total liabilities from total assets, that brings your net worth to $1.7 million. If you were to exclude your home equity, your net worth would fall to $1.2 million.

While people commonly include home equity in their net worth, it’s financially healthy to treat it differently from your other assets.

In this example, to access your $500,000 in home equity, you have two options: you could either borrow against it or sell your home. However, borrowing increases your debt, while selling your home may not be practical, depending on your situation.

It can help to differentiate your net worth goals from your savings goals. 

Using the above example, say you’re aiming to save $2 million for retirement. You currently have $1.1 million for that purpose (IRA + brokerage account; assuming your $100,000 savings account is reserved for emergencies). In that case, you should focus on accumulating another $900,000 in liquid or investable assets, rather than counting your home equity toward that goal.

It’s good to keep tabs on your net worth

Your net worth is a broad snapshot of your overall financial health, so it is definitely worth tracking.

However, if you see that your net worth is growing rapidly, but much of that growth is tied to your home value, you may want to continue focusing on growing your savings and investment portfolio.

It’s nice for your home to gain value, but that doesn’t translate into readily accessible funds the same way a brokerage account does.

If you approach retirement with a valuable home, downsizing could help you convert home equity into usable funds. That’s an option to keep in mind for the future, even if it’s not practical during your working years.