Equity in your house is not cash in the bank. It’s security and it reduces your housing expense, but it’s not a liquid asset. You gotta live somewhere. ”

That couldn’t be more wrong. All you have to do is move across the street into a house that’s out for lease (or sell your house and lease it back). If you are excluding the value of the equity in the house, you have to capitalize the lease payment on a comparable dwelling and call it debt. As I said above, the idea that you can move from a house to an apartment doesn’t make you rich.

It would also be interesting to read how quickly the number of millionaires are expanding as compared to the growth rate in the US. Are there more or less millionaires are a percentage of the total population?

Otherwise, at best we don’t have a good foundation for a discussion, or at worst we’re celebrating a permanent aristocracy.

When you look at the balance sheet of a business, you don’t say, gee let’s not count the office building because they have to work somewhere or let’s not count the value of the factory because, hey, they have to make widgets somewhere… you get the picture.

For that matter, why not say that you shouldn’t include ownership in a small private business – it’s often not liquid and hey, you (usually) gotta work somewhere.

IMO, an asset is an asset is an asset. Sure they have different characteristics, but if they have long-term stable or appreciating value, then they should be part of your NW calculation.

A home can be converted to cash via margining (i.e. mortgaging), renting it out (in part or whole), or outright sale. You can argue that those don’t seem like good alternatives to raise cash, but in reality that really depends on the situation. Many people have financed big life expenses thru mortgaging their home – it is usually the one significant source of liquidity for most middle-income people.

And I know too many people who have taken advantage of relocating or decided to downsize in retirement and were able to take out substantial cash sums in the sale of their home. Again, just because it’s relatively illiquid does not make it unworthy of your balance sheet.

Maybe as a compromise to the debate on this (which I have seen debated vigorously in the past), I would suggest that people look at their financial situation in two ways (I actually look at mine this way too):

1) In terms of liquid assets (the kind that financial “planners” salivate over getting their hands on).

and

2) In terms of long-term assets, including illiquid things like home, tax-def’d retirement funds, equity in private businesses, partnership interests, insurance and annuity cash values, etc.

I’d also point out that all these illiquid assets have very real implications in both insurance and estate planning, it pays to keep them in mind for planning purposes.

If you bought a house thirty years ago at $50 thousand it might be worth $330 thousand now. But unless you decide to go live under a bridge (or move to a much lower cost of living location or downsize) you can’t cash out.

Equity in your house is not cash in the bank. It’s security and it reduces your housing expense, but it’s not a liquid asset. You gotta live somewhere.

Investment properties, however, that’s a different story. When retirement comes around you can cash out of an investment property and put that money into some sort low-risk liquid interest-bearing instrument; so it would be appropriate to include equity in an investment property in your net worth calculation.

I mean, if you can have the material rewards of wealth so much sooner these days than if you actually had to have the money in the bank, then why not skip a couple moves ahead? I think this is very much driving the whole luxury spending trend – there aren’t simply more wealthy people, there are more people that feel entitled to live like the wealthy (and that in turn is fueling the credit abuse trend).

Have I completely gone overboard with the rambling? I scratch my head on these topics a lot.

@Sam – You are so right. To my surprise, many of the things I lusted after when I had no money, have little meaning to me now that I have a little something stashed in the bank. Is it a result of age? wisdom? experience? I don’t know. I like nice homes, cars, jewelry, vacations, etc. as much as anybody. But, once you come to feel the value of creating real wealth it is a more lasting emotion.

As always, you made some great observations.

My point about inflation is that as a society, we keep using a static number like $1 million as the basis for what “wealthy” is. If that’s the case, folks who had $1 million 20 years ago are a lot wealthier than folks who have $1 million today.

Sam,

It is great news but I didn’t really get that from the article. The article seemed to have a sort of “rich-get-richer” feel to it.

Seriously, this is great news. And Miguel is right in his comments, it takes a while to accumulate a lot of money. And when you do, you are at an age when the conspicuous consumption that you lusted after when you were younger just doesn’t mean as much anymore.