What % does your Ferrari make up of your Net Worth?

so lets see, youown a house worth 4million free and clear and a 2million dollar vaction home free and clear and these are not considered part of your net worth?...where did you learn accounting and finance?i would agree that some people , a lot of people live just on the edge... they appear to super wealthy but are really just very heavily in debt...but if thats how they want to live more power to them...like is short, do wants makes you happy, and tehy are actually helping stimulate the economy withtheir free spending

 

If you've paid off 42% of your house in the first 6 years of ownership as I have, then it's a freaking asset.

As for cars as a percentage of net worth, I believe in the 5% rule.

 

Here is a simple example... the facts are simplified, but always to the liberal side of things, toward the advantage of more money saved than would be in reality.

So let's say there is a hard working American who makes $50,000 a year on average for his first 10 years. He saves quite a bit... besides the 6% that goes into his IRA, an additional 20% of his GROSS salary goes into investments at an annual rate of 8%. After 10 years he has $145,000 saved in addition to his IRA.

Now remember, this guy is putting away 26% of his gross savings for his entire career of 10 years. He is now a 31 year old man and wants to buy a car. He has saved well all his life, paid off all his loans, including his college debt. He has been taking the bus to work and walking his kids to school. Living very conservatively and not taking many vacations. At 5%, he can now afford a whopping $7250 Kia in return for his 10 years of diligence.

But now let's say he wants to buy a house. He decides to buy a very modest $150,000 home for his family. He puts down a 10% down payment, or $15,000, leaving his savings at $130,000. His net worth now is 130k-135k, or negative $5000.

Keep in mind that he has no credit card debts, no nothing. Yet, now he has to sell his Kia! He can't even afford to buy a bicycle for 5% of his net worth, because his net worth is negative. Even if his new salary is $70,000 a year, it will be a while before he can afford to buy that Kia again. By the "5% rule" most home owners wouldn't have a car at all, and won't be making it above the Kia class of cars until their 40s.

My point: People spend money on what makes them happy. Who is to judge what that should be but the person doing the spending?

 

LOL. I didn't say that I had a high net worth. I just don't count the house as part of it. Remember, I don't live in California! Besides I got about 1/3 up the trade up ladder and stopped. Most of my peers kept on going, and going, and going...

 

great financial analysis...can you do my financial planning?

 

i'm confused as to why some here don't consider property to be an asset? if need be you can sell it and make more than you have spent on it or break even, given that requires one to leave the "paper money" alone i.e. equity.
but i do agree 5% is low, cars are not investments as property is they are usable goods that cost to operate. putting money into car does not increase its re-sale value as it would with property.
so to me my assets or net worth includes my property and cash minus operating expenses and credit debt. what i try to achieve is a low debt to income ratio, right now i'm down to 15.5% debt yearly. living below your means helps. and yes why on gods earth do people spend tens of thousands on vacations?
oh and i don't own a ferrari, simple really i'd drive the piss out of it and ruin any value it ever had.

 

For the same reason others have mentioned they don't include their home as assets. Especially for a brand new home owner who doesn't have much if any equity in the home. It's really the bank's. Until you get some equity in it, it's not much of an asset.

Even if you don't see it this way, my point is still the same. People should spend their money on what they want, and live the consequences of their decisions. I don't believe in some formula for (5% car, 40% house, 15% retirement, etc.). That's silly, else most Americans would be driving $500 cars.

 

As I explained, the key question is if you consider the house you just bought, with little to no equity, as a viable asset. If you do, then that person can keep the Kia.

 

As usual DrTax is a sage. The mindless trading up never made sense to me. I figure that if you have say $XXX in a paid off house that's money you will never see again! Next beneficiaries of that $XXX will be your greedy undeserving resentful entitled lazy late-sleeping free-spending non-saving credit-card wielding debt-generating gift-seeking whiny ungrateful progeny.

 

Uro are you ok? I see the blood pressure rising.....

Hey Tax, I like your thinking. Though I think it would be clearer for some if you said you do not consider it to be a "liquid asset". Sure, when you get to a certain stage in life you take your house off of your books (in your mind). You seem very fiscally conservative........ I like it and follow the same philosophy.

 

Holy ****,
I've made a big mistake and invested in a lot of Real Estate. I'm actually worth nothing!!!
I wonder how I can afford the cars? Help

 

Ah, just live below you means and pay cash for everything and life will be okay.

 

Well you don't live in california either. I have made more money on a particular piece of property than salary on more than one occasion. We are still seeing bidding wars for hot property with multiple over asking offers. I bet most of us west coasters count their homes as part of their net worth, but glad you don't have to!!. John

 

The 5% rule was meant for purchasing an exotic car only.

I know it's not the gospel, but it works for me.

 

Why don't you just ask everyone what their net worth is. The answer to your question would allow you to back into someones net worth if their Ferrari is in their profile. This is another example of the inane stuff that is getting into this site.

 

That's not what he said. He said he doesn't count HIS house towards his net worth. There is a big difference between buying a house to live in and buying real estate as an investment.

Look at it this way. Let's say you buy a $100,00 house. You put 10% down and your closing costs are $5,000. You make payments of $750 a month for three years. Over the course of those three years you make a few improvements and of course you maintain the house right. Let's say you spent a grand total of $10,000 over the three years. Pretty conservative, yes? You also had to pay taxes on the house didn't you. Let's very conservatively say $5,000 for all three years (I really wish my taxes were that low). All of this money has to come from some part of your income.

Now you decide to sell the house and when you have it appraised you are overjoyed to find out that your $100K house is now worth $130K and between the appreciation and the pay-down of your principal you stand to make a tidy profit of around $50K (assuming the 10% down, a generous $10K in principal reduction and the $30k in appreciation).

You figured out your profit by subtracting what you owe (about $80K with all of the above assumptions) from what you will sell it for ($130K).

Now let's do the math for real this time and not leave out all the details

Subtract all the follwing items from your $50,000 "profit"
$50,000
MINUS
Down payment $10,000
Closing costs $5,000
Capital improvements $10,000
Total of payments $27,000
Taxes $5,000
EQUALS_NEGATIVE__$7,000

So you see in the end it actually cost you money just to own the house so it is a liability not an asset. In investment real estate (hopefully) you have someone else paying the costs for you therefore you ARE making money on it (unless you are into pure speculation real estate). By the way I didn't include closing costs, taxes and fees for selling it either!!


I think that's what people mean when they say they don't count their house towards net worth!

Sorry for rambling on but it is amazing to me how so many people can miss such a simple concept.

Do the math for yourself and see if it doesn't work out!!!

 

What do you do if you are unlucky enough to live in an area where the price appreciation over several years has created an equity value that has become a significant part of your net worth, even though you bought the house to live in, not as an "investment"?

JK!

John (where the house I sold 4 years ago just came on the market at a price 80% higher than what I got for it)

 

i just sold a property i bought 3yrs ago for more than double what i paid, thats an exception but for most the value increase is greater than your example in 3yrs time.

 

First of all great for you, that's a phenomenal return and I wish I could do that every three years!! I'd be a very happy person!!!

There certainly are areas where appreciation is much greater than this but the national average for last year was less than 8% (and that was a good year).

So let's crunch the numbers for the national average for real.
100K house with 10K down
90K loan at 6.5% would have payments of 570/month
Appreciation at 10% (I'm generous)
After three years at 10% the house would be worth 133K but you would still owe 87K.

So now we have

46K in "profit"
MINUS
10K down
5K closing
10K cap impr's
20K payments
5K taxes

Equals---- you still lose 4k. By the way these figures were taken right from an amortization schedule so yes they are right. Again I'm being generous by not adding in closing and sales costs on the way out.

You are also very right that in some areas appreciation has reached well into the teens per year on average.

I should have said that ONE of the only ways you can buy a house to live in and make money is if you happen (or are smart enough) to buy into an emerging market.

Don't get me wrong either, buying a house is a good thing. It just isn't as good an investment as most people think. I get tired of hearing how much people make when they sell a house when if they do the math right it's gonna be a lot less!


OK I'm done preachin now. Anybody need a good but slightly used soap box??

 

If your house doubles or triples in value, don't almost all of the other houses nearby go up too? Can you really afford to move if your income hasn't changed?

I never understood that one...

 

At that point it becomes a question of "am I willing to move into a different area" or not. The house my parents have has 18th in value (1,800% of its purchase price) since they bought it. They can't afford a house in the area we live so they're not selling because they don't want to move.

 

Great thread

When we talk of equity and liability plus the "5% rule" where do children fit into all this? i.e. what percentage of your equity should you allocate for the cost of their upbringing and inheritance or, alternatively, how much for your enjoyment of life, seperate from the enjoyment you would recieve from the whining little urchins?

Because if, as I presume, those who stick to the "5% rule" dont consider allocating their assets amongst their offspring (and offspring's, offspring) turning them into a liability, then perhaps they should re-calculate.

Ricard