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Let's say you have the following balance sheet:

$350,000 - home value
$200,000 - retirement
$15,000 - savings
(assets = $565,000)

$250,000 - mortgage
$10,000 - car loan
$40,000 - student loans
$15,000 - credit cards
(liabilities = $315,000)

Net worth = $250,000

If you then buy a car for $45,000, is that considered 21% (45/250) of your net worth or 8% (45/565)?

What percentage would the mortgage be considered as?

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You properly calculated net worth of $250k, the percentage of net worth for a given asset would then be based on how much of that $250k it contributes. For example the house is worth $350k but has a $250k mortgage, so it contributes 100k of the 250k net worth, or 40% of net worth. That's all well and good when the liabilities each tie to a specific asset, but you've got liabilities that don't logically offset a specific asset. I've only ever considered net worth as a whole, so I'm not sure of a use-case for this calculation, but I would probably apply the other liabilities equally after taking off the ones tied to specific assets.

So here I've used the mortgage to offset the home value, then aggregated remaining liabilities and calculated the percentage to offset all assets by: Net Worth

Regarding the car purchase, if you buy a $45k car, you are either shifting assets around or incurring new debt, neither of which alters your current net worth (ignoring immediate depreciation on the car which reduces net worth). So that means the percentage of your net worth that it contributes will depend on how it is purchased, if fully financed with no money down it would represent 0% of your net-worth because it is offset by the attached debt, if you bought it outright using other assets then it would represent ~14% of your net worth using the approach above and assuming the existing $10k car loan was unrelated to this new car purchase.

Some people suggest you should spend less than x% of net worth on a vehicle as a rule, so if you have $250k net worth that would be the denominator in any such calculations. This isn't a rule I'd heard of before today, but saw it and thought it might be part of why you were asking. It's not a rule I have ever thought about or followed.

  • Trying to understand the implication here. If I buy a $10K car with a $10K loan, are you suggesting the car is not an asset? How does this change if the $10K came from a HELOC? – JoeTaxpayer Nov 18 '18 at 16:59
  • @Joe, in that case, the car is an asset, but since there is a matching debt, net worth doesn’t change. – prl Nov 18 '18 at 17:18
  • @JoeTaxpayer: In real life, it's a net debit. You buy a car for $10K, borrowing the money. You owe $10K, but realistically can only sell the car for $8K or less. – jamesqf Nov 18 '18 at 18:28
  • So if you just got out of college with a negative net worth due to student loans, you shouldn't buy any car at all? – The Photon Nov 18 '18 at 18:31
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    This is my concern. Say I have a $400K house. Whether I owe $40K or $500K, I still have a $400K exposure to real estate and everything that means, good or bad. If I have $1M in stocks, that’s my exposure, whether I own it outright or on margin. This goes to my original comment, why the OP is researching this. – JoeTaxpayer Nov 19 '18 at 0:34
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This answer is a counterpoint to Hart's answer, an alternative view.

Net Worth

Say home prices crash, down 50%. What is the impact on your Net Assets? $175K just went up in smoke, so 250-175=75K, your net dropped 70%. Even though the house is only listed as being 32% of 'net assets'.

On the other hand, the S&P doubles, now your net goes from 250 to 450K. An 80% increase, even though the retirement account was only 63.5%.

In my opinion, percent of net is problematic. Because if there is any debt at all the numbers add to over 100%. The way I'd approach this is to look at the percent represented by each asset. The asset column adds to 565K and that will give you the accurate percent of exposure for each item it contains. Any other method obfuscates the impact of each asset. I can return and edit other examples to show how the method presented distorts that impact.

  • I agree that percentage of net worth is not incredibly useful or common. It doesn't show exposure, but net worth isn't about exposure. My approach does add up to 100%, but it only tells you what an asset's current contribution to net worth is. Your approach obfuscates that the home has attached debt. In either case you get a limited view, the question is what do you want to see. – Hart CO Nov 19 '18 at 15:34
  • The house is 140% of net worth. The equity is 40%. That's some funny math to get to 32%. Similarly, the retirement account is 80% of net worth. I don't see a problem with assets being more than 100% of net worth. – Acccumulation Nov 19 '18 at 20:18
  • @HartCO - Agreed! – JoeTaxpayer Nov 19 '18 at 20:50

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