Primary residence – to include or not to include it in your net worth calculation

Do you include your primary residence in your net worth calculations? I do but I admit I have doubts whether to include it or not.

 

Reasons for including:

  • It is indeed an asset that you have. In case of financial stress, you can always sell it and move somewhere cheaper or where you pay a small amount of rent. You can also rent it fully or partially.
  • The fact that you own your primary residence means that you do not have to pay rent, i.e., you are indeed saving this money on rent you would have to pay if you did not own it.

 

Reasons for not including:

  • It might artificially inflate your net worth. If you have a house which is worth 1 million EUR which is the only asset in your portfolio and debt of 200k EUR, that situation is totally different from someone who has a 100k EUR home, 900k EUR in assets that yield 7% a year and 200k EUR in debt. The second person can be considered nearly financial independent, whereas the first one is very far from it.
  • According to Robert Kiyosaki your house is not an asset and I agree with his arguments. Our primary residence does not yield us money and generally takes money away from us, in taxes, maintenance, etc. in addition to the fact that we generally buy more expensive goods for our primary residence.

I have decided to include it because I believe argument #2 is very strong, i.e., the fact that we own a property means we will not have to pay rent elsewhere, however I admit my net worth will be highly inflated by my primary residence, which I value at 380.000 EUR, in particular as I pay down the debt.

It almost seems as I giving in to lifestyle inflation and this is positively reflected on my net worth. My net worth is being benefited by the fact that I am kind of falling in the trap of lifestyle inflation, which should not happen. Nevertheless, I would indeed pay at least 1k per month if I did not own it and lived in a house slightly worse off that the one I bought. What are your thoughts?

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Financial Statement – April

Savings rate = 48%

Total net worth increase = + 6,440 EUR

Our savings rate was not amazing this month because we had some expenses still related to the loan for our primary residence (which we do not yet live in but plan to do in the next 6/12 months).

Cash 18,100 +1,500
Net Cash flow Real Estate Business 4,000 +500
Pensions 101,930 +1,720
Security deposit for current house 2,000 +0
Rental Property #1 115,000 +0
Rental Property #2 120,000 +0
Primary Residence 380,000 +0
Debt (Primary Residence) -314,580 +2,720
Total networth 426,450 +6,440

Our cash did not increase significantly due to the fact that we have prioritized paying down our debt. In the following months we will have monthly amortized debt of over 3k every month (this only includes capital, i.e., no interests and no insurance are considered), so on average we will pay almost 4k every month which is quite aggressive. It is great though because we have an obligation to save. Since it is a huge monthly commitment, we really need to make sure we save even on the small things, which we did this month and we will have to continue doing over the next months.

I prefer to aggressively pay down debt in a short period of time for 2 reasons:

  1. I dont like debt. I know it does not sound very rational and might sound weird from someone who studied finance. But, more broadly, I dont like money commitments, especially the ones I know I am losing money, which is generally the case of a mortgage. There are so many costs that the banks charge you (more info on this post), I just feel I want to get rid of this mortgage as fast as I can.
  2. The faster you pay the loan, the less interests you pay. Even with a high interest rate, if you pay your loan fast enough, at the end of 3/4 years, you end up paying very little on interest rates because you are amortizing the capital very fast.

Some people feel more confident knowing that they have to pay a very little amount per month but what makes me feel comfortable is having little or no debt. So, I prefer to struggle in the short-term and have high monthly payments because I know I currently have a high salary which allows me to do it than just delaying this for the future. This is my way of buying my future freedom.