CFI Blog Personal Finance FAQ Series: Do You Count Home Equity in Net Worth?

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?

By the way, if you’re focused on net worth, you’re looking at the wrong number.

Take a look at the video below and find out what to do.

Do You Count Home Equity in Your Net Worth?

Do You Count Home Equity in 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.

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John Davis

John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.