In a previous blog, I linked to an article about some quick on the back of a napkin ratio that you could quickly see if you are on target or not. These ratio are just meant as a quick sanity check,
Well, one of the ratios is savings to income. The debate then rages as to whether to include or exclude your house. The only way you could realize that equity in the house is to downsize or move to a less expensive area of the country. Neither one of these are in my near future.
The only way then to tap the equity is through a loan on the equity, which really isn’t taking the equity out but securitizing the load with the equity in the house. Therefore, I don’t include my home equity in the calculation.
However, if you plan on moving in the next few years and will be getting cash between the sale of the old and purchase of the new, I would include that in savings. Also, if you have investment properties, I would include that in savings.
For debt, I do include the mortgage. First, it is a debt. Second you have to live somewhere.
In my net worth calculations, I do include home equity but not cars.
I look at these as quick numbers to get a sense of where I am. If your income jumped recently, then the ratio are very different then they were last year. Maybe, you removed a huge debt and your income is far less now then you needed in previous years.
The idea is to be honest with yourself to see if you are on track. Where are you? Where are you going? And to a less extent, where did you come from?
Right now, I am in the forest and concentrating on my debt to income ratio. You may be further along on the journey concentrating on the savings numbers. Or you might be doing both.
Home Equity and Retirement Ratios
April 10th, 2008 at 12:51 pm
April 10th, 2008 at 01:48 pm 1207835283
Just curious. I certainly count my cars. When we buy a car our cash doesn't go into a black hole. Likewise, if I lost my job, my car would be 3 months' living expenses. I'd sell it in a second. Depreciating them gradually is a much more real representation. But I am an accountant, what can I say. We depreciate assets.
I love ratios so I have to check out that post now.
April 10th, 2008 at 01:54 pm 1207835644
That being said, for a while I included the value of the home but it was very volatile. I switched to purchase price. Then I finally settled on assessed value. (It's only a few thousand more than purchase price). It rises VERY slowly/gradually and seems the best representation. Assessed value will never be more than house is worth. It will rise much slower than housing prices, but if they fall much further our assessed value will be lowered. So I have decided that is the fairest measure, while ignoring all the volatile at the upper end. (Assessed is $316k, house was worth $650k for a time, maybe $350k today. I can't keep track! Those undulations on the high end don't really matter. They show little of our true net worth).
So yeah, it took me a while to get here. But this is fair as it ignores a lot of noise at top, but will certainly take into account if we go upside down or anything like that. Which should reflect negatively on our net worth if it comes to that.
April 10th, 2008 at 02:09 pm 1207836596
Anyway, I think it is less important where you are, and more important where you are going. So sounds like you are going the right way. !!
April 10th, 2008 at 02:10 pm 1207836615
As for the house, each person has just has to be honest if they look at it as an invest. The period of life that I am in, I don't see selling the house or if I did buying something smaller. So at this point, there is no reason to include it in savings.
But again, it just depends if you look at it as an investment.
April 10th, 2008 at 06:11 pm 1207851080
I think the ratio idea is interesting to look at for overall savings.
April 10th, 2008 at 08:42 pm 1207860142
Course to be fair, my ratios even with the mortgage would be good (we are going cheap). I just don't see the point of including it in this exercise.
April 11th, 2008 at 01:24 am 1207877050
*I use a conservative estimate of sales price and deduct 8% for agent commissions, taxes, etc.