Your House is Your Home and Not a Substitute for Saving and Investing

Popular financial magazines like Money often feature articles on how families spend and invest their money. A typical article includes a balance sheet that lists all assets, liabilities and the total net worth of the family. Assets include the market value of the primary residence, value of cars, investment accounts and more. Liabilities include mortgage, taxes, expenses, credit card debt and so forth.

This accounting system has some problems when you include the value of your cars and primary residence as input to help you construct your retirement savings and investment plan. First, family cars should not be included as an asset. They are a necessary evil - you can't get along without them. But from a common sense point of view a car is not an asset like a stock, bond or cash. No one decides to sell their car to buy furniture, pay bills or take a vacation. When you sell a car, you buy another car. And many people buy ever more expensive cars so they can't pocket any money by trading down. A car is a car - it is not a financial asset which can be easily converted to cash or another good or service.

Second, in most instances your primary residence is not a substitute for a well thought out and systematically executed savings and investing plan consisting of stocks, bonds and cash. Your home is where you live - it is not like other forms of real estate from which you collect rent or make capital gains from speculation. If you plan to continue to live in your home when you retire, its current market value is only on paper and does not contribute to the pool of money needed for your retirement expenses. Therefore, its value should not be considered in your retirement planning. However, if you plan to sell your home and buy a less expensive one, then you can include the cash that you expect to pocket as an asset for the purposes of constructing your retirement plan.

Lots of people makes money with real estate but many homeowners use their house simply to live in. For these folks their house is not an investment vehicle and should not be treated like one.

Posted February 22, 2006.