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Consumption “Assets” and Net Worth

Whether value of your primary home or the car you drive be counted in your net worth? Or in Indian context, the value of jewellery you possess?

For a long time, I was on the other side of the fence – any consumption stuff should not be considered in net worth working. Now, my views have changed – the stuff which give you and your family “status” and let the world know that you have “arrived” are definitely worthy of being counted in your net worth. Ok, don’t roger me for being so subjective despite of running a blog obsessed with numbers. But even in numbers context, anything which can be liquidated for money maybe be considered in “Net Worth”, or more simply wealth status.

I say “maybe” and not “should” because for consumption stuff, which serves only a particular need, it is upto an individual of what he / she plans to do with the money realised after liquidating the stuff. For example, I scrapped my 15 plus year old motorcycle and got nearly 10% of purchase outlay as cash value. As I did not buy another motorcycle (yet), the amount realised added to my net worth, meagre it maybe. 

But then, changing views is the simple part. Next step is where things get tricky – the extent of value of consumption “assets” to be considered in wealth. One may consider full value of such stuff in one’s wealth workings but I would be wary of that, primarily due to such “assets” being not that liquid and one may not realize the expected value in a jiffy without giving some discount to market value. Secondly, consumption stuff serve one specific need and one part liquidate such stuff to pay for other essential stuff or even discretionary stuff if required. You cannot pay your hospital bill or holiday expenses by selling one balcony of your home.   

Circling back to ascertaining “value” of consumption assets to be considered in net worth. Rule of thumbs I have established for myself:

-          For stuff which will needed to be replaced with another super quickly, albeit with less priced “asset”: In such situations, I would consider not more than 25% of realizable value after accounting for cost (think loans) as part of my net worth. Let’s tackle this with an example which we all can relate with – the home you own has appreciated quite a lot and you are running a bit low on income generating or other growth assets. Rather than being house poor, you have decided to unlock value of your home by either downsizing or by moving from prime location to not so prime location. Say your house property is worth INR 1 Cr, and you own it clean without any loan. You should consider only INR 25 Lacs in your net worth. Logic – you would need to buy or rent another place to put up after selling your home and I would be pragmatic and assume 75% of the realized value from sale of house will get tied up in satisfying the  "sole" need for shelter. In case I have loan on the property, realized value reduces proportionately and so does amount in net worth. But there are always some exceptions: like you are the sole heir to an ancestral property and can immediately move in that place after you sell your home. In that case, by all means consider full net realizable value of your home in net worth

-          For stuff you don’t want to replace with another, full realizable value less cost can be considered in your net worth. Example – you are done with driving around and want to go car free. Delivery guys have made life easy and public transport works for you. For occasional need of a car, you don’t mind UBERing it. The money you realize by selling your car contributes fully in enhancing your net worth!!! 

So there, consumption "assets" can also be part of your net worth. Just do the numbers a bit before assigning value to such stuff


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