How important is net worth? My wife and I had about $200k net worth until we bought a house. Now it’s probably the same amount but negative after the house purchase. We max out our 401ks and employee stock purchase. Our mortgage and car note is below the 30% suggestion.
It will probably be 5-8 years or more until it’s positive again.
Here's an example:
Let's say today you have $100,000 cash in your bank account and no other assets to your name.
Your net worth is $100,000.
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Now let's say that you buy a house tomorrow for $500,000. You put 20% down ($100,000) and secure a loan from the bank for the final $400,000. Here's your new net worth:
Asset: House $500,000
Debt: Loan ($400,000)
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Total: $100,000
To them any debt is bad no matter what it is and drags down their calculation of becoming a millionaire. Their calculation for net worth is all savings minus any form of debt.
There are a lot of variables in play, but buying a house with a mortgage can end up being better financially than renting. There are a lot of factors to consider. If renting is worse than home ownership, and you hold off buying until you can do it without a mortgage, you may lose out. Additionally, if you can get a really low fixed-rate long-term mortgage, but you invest in long-term total market index funds, historically, you'll come out on top over having paid cash for the house.
A mortgage is different, by getting a mortgage and buying a house, you build up your assets with every payments you make, it's often better than paying a rent and not getting anything in the end... The main difference between a car and a house is that the house generally doesn't depreciate, which is why a mortgage can be a good investment.
Also, if debt is bad (and I agree), do these people live with their parents? Because that's the soundest financial move possible.
EDIT: Ah I see they were implying they went from $200k net worth to NEGATIVE. I hope the transaction costs were less than that!
Starting with a $200k net worth, and you (for instance) put down $100k on the home. You now have $100k in cash/securities and $100k in home equity, assuming you paid the appraised value of the home.
Hope that helps!
Either use the purchase price or appraisal as an estimate for what you'll be able to sell the house for. (It's often wise to decrease this number, as you can lose roughly 10% of the value in further transaction costs when you sell.)
First, to address the "net worth" when buying a house, as mentioned in a comment, other than transaction costs, you should not have taken a huge hit when buying. The house should be valued close to the overall purchase price.
Net worth should include adding up all assets, such as what the house (and cars) would sell for, any 401k, etc, and subtracting any liabilities, the mortgage and other debts. At the moment of buying a house, you gain debt but you also gain the house as an asset. They roughly cancel each other out. I doubt the transaction costs exceeded $200k!
When you dive deeper into personal finance, depending on your goals, other values may become more important, like the total amount of assets you can and do invest so that they generate their own returns.
I think net worth is important to calculate your retirement age.
For software engineers, who easily make six figures a year, I’d say you should shoot for having a million in net worth by around age 30. This would mean you have good cash flow and smart investments.
A home does not inherently decrease your net worth. When you buy, the value of the home is added to your net worth minus however much you owe in mortgage and whatever your downpayment and closing costs were. If your home appreciates in value a lot it can increase your networth powerfully, but it could also just decrease and cause you a lot of pain.
Goes without saying your credit score should also be maxed out by the time you hit 30 to get the best interest rates.
After the first million you should aim to reach the next million by about your mid to late 30s I’d say. Not sure of the trajectory beyond that.
over time, some of your income will be diverted to reducing the mortgage so that your net worth grows (rather than being spent). this is why houses are seen as piggy banks--they act like forced savings because the asset has relatively stable value (and can even appreciate).