Primary home as a percentage of net worth

How much does the equity in your primary home boost your net worth? Do you feel comfortable with that number?

When I calculate my net worth, I use a very conservative estimate of my home's value. This is because I live in an area that is teetering. There are positive signs that the neighborhood is improving. Houses are being renovated. New businesses are opening. But the revitalization may not take. Just a few blocks away is a pretty dicey area, and I don't want to assume that I'll hit the real estate jackpot when I eventually sell.

So in my net worth calculations, I list my house's value as $70,000, which was the amount I paid for the house 2.5 years ago. What's changed since then? Well, we have sunk in about $20 grand in new appliances, electrical work, a kitchen upgrade, and some cosmetic improvements. And the real estate boom belatedly hit my neighborhood. Currently, similar houses are selling on the street for close to $150K.

However, my low-ball estimate means that my current net worth of $110,270 (as of January 1) only incudes about $20,500 in home equity. The rest is mostly in the form of retirement savings, college savings for our son, and a cash cushion for emergencies.

Right now, I'm quite happy with the way my house's equity compares with my overall net worth. But I'm hoping to upgrade to a house in a better area in a few years. It's tempting to dump all my ongoing savings into the Move To A House With A Bigger Yard fund. But I don't want that teeter-totter to tip too far. I want to make sure that my primary home's equity always represents no more than a third of my overall net worth.

Why am I so anal about this, you ask? Well, my family tends to go overboard on the whole primary home thing. I have a relative who has a healthy net worth of well over a million dollars. However, about 80% of her net worth is in her primary home. She is very proud of not carrying a mortgage, but the reality is, she doesn't have too many options. She's starting to think seriously about retiring in the next year or so, and her only real option is to sell her house and move to a cheaper area. That means moving out of state. As a result, it will be harder to phase into retirement by working part time at her current job as she makes the transition, which she could do if she didn't have to move.

I guess I'm afraid of making the mistake of sinking too much of my available resources into my house, especially since I do intend to upgrade to a nicer house sometime soon. Our current house is comfortably affordable, but when I move I'll be looking at houses in a much higher price range that will stretch our budget. The move will probably clean me out except for any money I've tucked into college and retirement accounts.

I don't ever want to find myself in the position of a single mother friend of mine who made out very well in the recent real estate boom but had no liquid cash and no other investments.

"All I've got is the house," she said. "If money gets any tighter we'll have to start eating the walls."

This post is meant to be a reminder to myself, and perhaps to others who are saving for a downpayment on a first home or an upgrade. As you're obessing over real estate trends and saving for the biggest purchase of your life, don't neglect retirement savings.

Related posts:
Is your house a starter home?
Year-end net worth report