{"id":587,"date":"2021-09-06T10:00:00","date_gmt":"2021-09-06T10:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/why-i-dont-include-a-primary-residence-in-net-worth-for-financial-independence\/"},"modified":"2025-08-29T16:32:07","modified_gmt":"2025-08-29T16:32:07","slug":"why-i-dont-include-a-primary-residence-in-net-worth-for-financial-independence","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/why-i-dont-include-a-primary-residence-in-net-worth-for-financial-independence\/","title":{"rendered":"Why I Don\u2019t Include a Primary Residence in Net Worth for Financial Independence"},"content":{"rendered":"
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DISCLAIMER<\/strong>: This post is about your primary residence only, not a property that was purchased with the intent to be rented to create cash flow and had the numbers run accordingly.<\/em><\/p>\n

ducks & covers<\/strong><\/p>\n

I know I\u2019m about to take shit for this one, but I think \u2013 if you read this post to the end \u2013 you\u2019ll understand (and maybe even agree!) with my rationale. <\/p>\n

Today, we\u2019re going to examine why I don\u2019t include the value of a primary residence as part of a net worth<\/strong> as it pertains to calculating your financial independence number.<\/p>\n

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As a refresher, the 4% guideline states that you reach financial independence when your invested assets equal 25x your annual expenses \u2013 at that point, you can safely withdraw 4% of your assets each year and never run out of money. For example, if I spend $40,000 per year, I\u2019m financially independent when I have $1M invested. I can withdraw $40,000 from my $1M each year, and compounding returns will (on average, over time) always replace the money I take out, guaranteeing that it never runs out (assumes an average<\/em> 7% real rate of return).<\/p>\n<\/blockquote>\n

Distinguishing between \u201cnet worth\u201d and \u201cnet worth as it pertains to financial independence\u201d<\/h2>\n

When I\u2019m calculating someone\u2019s net worth in general<\/em>, I\u2019ll include their home \u2013 and usually, the result is not what they expected.<\/p>\n

That\u2019s because most people include their property\u2019s total<\/em> estimated value <\/em>(i.e., they get Zesty with a Zestimate from Zillow) as an asset, and ignore the fact that they owe hundreds of thousands of dollars on said asset. <\/p>\n

\u201cZillow says my house is worth $500,000, so I\u2019m adding that to my net worth! Woohoo!\u201d<\/p>\n

When you add your house to your net worth in general<\/em>, you add two things:<\/p>\n

    \n
  1. \n

    Your home\u2019s value<\/p>\n<\/li>\n

  2. \n

    Your liability (the amount you still owe on your mortgage)<\/p>\n<\/li>\n<\/ol>\n

    \u2026the net of which roughly provides your \u201cequity.\u201d <\/p>\n

    Your equity<\/strong> is the amount of the house that you actually own<\/em>. That means (down payment) + (any amount you\u2019ve paid toward the principal balance), which will (hopefully) be inflated by appreciation. The bank owns the rest.<\/p>\n

    The liability<\/strong> is the amount that you still owe the bank<\/em>. This is the part that nobody ever wants to include in their balance sheet because it\u2019s a big fat reminder that a mortgage is a death pact with the devil (the word \u201cmortgage\u201d literally translates to death obligation, so nobody come for me \u2013 come for your Latin teachers).<\/p>\n

    If the home sells for the Zestimated $500,000, you have to pay the bank back (and pay the seller and buyer agents 6%, assuming you use them), netting the difference. <\/p>\n

    That\u2019s not to say you shouldn\u2019t own a home<\/strong> \u2013 but by definition, debt of any kind technically detracts from your total net<\/em> worth. \u201cNet,\u201d in this case, means \u201cassets minus liabilities.\u201d <\/p>\n

    If you have $50,000 in a 401(k) and $100,000 in equity in your home but owe $350,000 on your mortgage, knowing you have a negative $200,000 net worth <\/em>is sometimes the wake-up call that you need to save or invest more aggressively. <\/p>\n

    So that\u2019s net worth in general<\/em> \u2013 why don\u2019t I count primary residences in your net worth for financial independence?<\/p>\n

    Your net worth as it pertains to financial independence<\/h2>\n

    This is the part that I pray will bring you around to my point of view: Your house doesn\u2019t count in your net worth as it pertains to FI (a.k.a., the amount you need to reach work-optional status) for two major reasons:<\/p>\n

      \n
    1. \n

      It\u2019s an investment that you have to pay for every month (more on what happens if you own your home outright later) \u2013 meaning it\u2019s not creating<\/em> passive income for you, it\u2019s costing<\/em> income. In other words, it needs to be factored into the expense<\/em> side of the equation.<\/p>\n<\/li>\n

    2. \n

      You can\u2019t use your home\u2019s value to buy stuff (more on why the counterargument for home equity lines of credit is usually bogus later).<\/p>\n<\/li>\n<\/ol>\n

      Your FI calculation only gives a shit about two things: How much you have in the market creating 7% returns per year, and how much your life actually costs every year. <\/p>\n

      Let\u2019s extend our above example:<\/h3>\n

      Let\u2019s say I need $1M to retire in order to draw down $40,000 per year, and my home is worth $450,000 (I have $100,000 in equity and still owe $350,000). <\/p>\n

      Remember, I have $50,000 invested in the market in a 401(k).<\/p>\n

      You may look at this and say, \u201cDope! You\u2019ve got $50,000 invested and a $450,000 house. $500,000 net worth! Halfway there!\u201d <\/p>\n

      Your net worth \u2013 as it pertains to financial independence \u2013 is $50,000.<\/p>\n

      You can take the house out of the equation entirely. <\/p>\n

      Why? <\/p>\n

      Because paying down a mortgage (as it pertains to your journey toward financial independence) is functionally the same as paying rent. By that, I mean, it\u2019s an outflow of cash every month<\/strong>. At the end, you\u2019ll own the property \u2013 but the property doesn\u2019t impact your ability to reach FI, because in order to use the value of the property for anything else, you\u2019d have to sell<\/em> the property \u2013 and therefore plant yourself firmly back in square one, with a monthly housing expense.<\/p>\n

      Someone who pays $1,000 for their mortgage each month and someone who pays $1,000 for rent each month are functionally in the same boat as it pertains to the amount they need to reach financial independence.<\/h3>\n

      That is, up until the moment that the homeowner owns the home outright<\/em> and no longer has to pay $1,000 per month for their mortgage (though they\u2019ll still have taxes and insurance).<\/p>\n

      All that to say: Your equity in the house doesn\u2019t positively impact your FI status, but the mortgage debt doesn\u2019t negatively impact<\/em> your FI status, either.<\/p>\n

      All that matters when you\u2019re striving for financial independence is the amount that you have invested in liquid investment accounts<\/em> that return an average of 7% per year in passive returns that you can actually use to support your lifestyle.<\/h4>\n

      A home is an asset, but it\u2019s an illiquid one. Your home may be going up in value quickly (especially if you live in Denver, it seems), but you can\u2019t use<\/em> any of that value until you sell the house<\/em>. The popular counterargument is that you can take out a loan on your own equity (and pay interest on it): This is something I wouldn\u2019t necessarily advise unless you\u2019re using that loan to buy an asset that creates passive income.<\/p>\n

      Saying that your home is a liquid asset because it enables you to take out even more debt<\/em> is not an intellectually honest argument for your primary residence contributing to your financial independence number, because your FI number can support you in perpetuity without you ever earning another dollar: A home equity line of credit just kicks the can down the road, as it\u2019s debt that you have to pay back.<\/p>\n

      If you get a HELOC, you either have to (a) keep earning income in order to pay back the loan, or (b) your other investments have to subsidize it.<\/p>\n

      If you can sell your home, why can\u2019t you count the estimated value toward your FI number?<\/h3>\n

      I can already tell you with almost complete certainty that someone who didn\u2019t read this post is going to comment, \u201cBut my home is still worth $450,000! I could sell it if I wanted to! It counts.\u201d<\/p>\n

      Sure, you can sell your house and net the appreciation difference \u2013 but that leaves you with one, teensy problem: <\/p>\n

      You still need a place to live, and you just sold yours.<\/strong><\/p>\n

      The chances are, you won\u2019t be able to pocket much of that appreciation outright. Say you manage to net $100,000 on your home\u2019s sale after you pay back the bank and pay the agents \u2013 you\u2019ll probably need to use some or all of it for a down payment on the next place you live, if you buy again. And if your home has appreciated by more than $100,000 since you purchased it, it\u2019s not unlikely that the next house you buy will have appreciated by somewhere in that ballpark, too.<\/p>\n

      Unless you\u2019re willing to rent (not a bad option whatsoever, if you ask me) or substantially downsize, most people just shuffle that same pot of money forward to the next property. <\/p>\n

      This is why I often say your home is a phantom presence in your net worth: Sure, it\u2019s an asset that\u2019s worth something to you, but it\u2019s not valuable to you in the same way that your money invested in equities is valuable to you \u2013 that money is returning an average 7% per year without you doing anything<\/strong> or<\/em> ever adding any more money<\/strong>.<\/p>\n

      Ultimately, it boils down to the difference between a liquid asset generating 7% annual returns that can be tapped at any time vs.<\/em> an illiquid asset that appreciates but must be sold outright to capture value<\/h3>\n

      That\u2019s not to say that you shouldn\u2019t buy a home \u2013 after all, if you do it \u201ccorrectly,\u201d you won\u2019t delay your early retirement very much<\/a>. It\u2019s just to say that \u2013 for most people \u2013 the value of your home is that it\u2019s your shelter (and that\u2019s pretty damn valuable!), not a passive income-generating asset.<\/p>\n

      But what if you own the home outright? That\u2019s a little bit of a different story, but not quite.<\/p>\n

      Let\u2019s say you fully own the $450,000 house. Say you sell it for $600,000 in 5 years. You pay $36,000 in broker fees (6%) and pocket $564,000, because you\u2019ve already paid the bank back.<\/p>\n

      Now, the chances that you\u2019re going to put $564,000 down on your next place are slim. You really have two major options, if you want to avoid paying for mortgage insurance:<\/p>\n