These are four assets that you should not add to your net worth! Over the years, many readers have vehemently disagreed with me on this, but I have always followed a sound thumb rule: if I cannot use it, or should not use it, cannot liquidate it at will, then it is not part of my net worth.
1. Emergency fund: This is fairly obvious and should be agreeable to all. We should be using an emergency fund unless there is an emergency. So, it is not part of our net worth, goal-based portfolio, etc. Even after retirement, a portion of the nest egg should be marked as an emergency fund and not touched unless necessary. See an illustration here: Retirement plan review: Am I on track to retire by 50?
2. Own property: This annoys readers quite a bit! When we live in a property, it is not part of our net worth. We cannot use it for any other need. Sure, it can sold in future, and then the proceeds will become part of our net worth. But we cannot count on that now! Between now and then, quite a few things can change our plans.
3. Rent-yielding investment property: This is expected to annoy readers even more! Yes, we get rental income from such property. This should be duly added to our cash flows (after tax!) and accounted for while planning retirement. The freefincal robo advisory tool includes three income sources (rent, pension, etc.) and suitably reduces the required retirement corpus. Naturally, if such income is significant, the retirement investment would be lower.
However, you cannot double-count! You cannot count the rental income and property value to compute net worth! The rental income exists only because of the property. So, if you count one, you must leave out the other. Yes, if you sell, you can add the proceeds to your net worth, but only if you sell.
Just because you can sell the property does not mean you have done so! There is a big difference between the two, especially in real estate. People who always thought they would sell the property often change their plans when they get older, if their children could use it, etc. Plans change quickly. So, unless you have sold it, it is an income-generating asset. That is it. Count the income but not the asset value.
If you have purchased a plot of land only to sell it later (and not get any dividends from it), you can add it to your net worth (until your plans change!). But do tread carefully. Incorrect assumptions can result in faulty financial planning. The same logic applies to art, antiques and other collectibles
4. Jewellery: By now, you know what I will say. You are either wearing it, or it is sleeping on your shelves or bank lockers. It is not part of your net worth unless you sell it (getting a fair price is pretty hard). It is like self-occupied property, just a consumable.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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