Know What Your Home is Worth When Calculating Assets

The Dallas Morning News

Nov. 1--You've examined your finances with the meticulousness of a forensic scientist, and you've concluded that you're doing just fine.

But how much are you really worth?

The standard financial formula in figuring out your net worth is total assets minus total liabilities.

But your true worth takes into account much more than that.

"Net worth is one thing, but it's another thing to measure real worth," said Derrick Kinney, senior financial adviser at American Express Financial Advisors in Arlington. "If you needed to liquidate cash today, how much are you truly worth?"

Many consumers fail to accurately calculate their true worth by forgetting to include certain items or by using estimates of value that are "significantly different from reality," said Michael Busch, a certified financial planner and president of Vogel Financial Advisors in Dallas. "Some people will be surprised to see that their net worth is actually negative."

Here are some of the things you might miss when calculating your net worth:

--Overestimating the value of your home: Your home may be appraised at $200,000, but whether you'll get that price at sale is another story, depending on the home's condition and location and the housing market.

"You may be worth less than you think," said Lynn Lawrance, a certified financial planner at Financial Network Investment Corp. in Dallas. "A lot of people underestimate the cost of fixing the house up."

--Viewing your home as an easy cash source: "I see it in so many cases," she said. "A large part of their net worth is in their house. They're in a hurry to pay it off, but what they don't realize is they're putting more and more money in an illiquid asset."

Granted, it's more liquid than before, now that Texans can obtain home equity loans.

"But you still have to jump through the hoops and qualify," Ms. Lawrance said. "Cash gives you options, and if it's tied up in equity, that can restrict your options."

--Overlooking some debts when figuring net worth: "Essentially, a statement of net worth should include anything with value if you were to sell it and any amounts you owe to any person or institution," Mr. Busch said.

--Assigning too much value to other things you own: "Be conservative and unemotional in estimating the value of family heirlooms," Mr. Busch said. "Many people make the mistake of attaching value to something that only has value to them. Remember to value items only for what you could sell them for."

Another key point is to recognize a depreciating asset vs. an appreciating asset.

"Depreciating assets are a car, a home, if you bought in a bad area or you overbought in a neighborhood," Mr. Kinney said. "When push comes to shove, you can't control what somebody else will pay for your home, but you can control your own personal level of savings."

That's where your 401(k) comes in as a potentially appreciating asset.

"At least a 401(k) -- you may get a match, the potential for investment growth," Mr. Kinney said.

When looking at your company's pension plan, you will have a little harder time putting a value on that.

"Company pension plans that pay an annuity stream in retirement can be difficult to value," Mr. Busch said. "When determining your net worth, the best approach to valuing a pension plan benefit is to determine what lump sum value the future annuity stream is worth if you quit work today."

Ask your company to give you the present value of the income stream that you're entitled to receive at retirement, assuming you stopped working today. Then add that to your net worth.

"Calculating your net worth can be motivational," Mr. Busch said. "If it is more than you thought, it can affirm that your money management strategy is producing results. If it is less than you thought, it can cause you to change bad habits."

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