According to financial advisors, the majority of a person’s net worth shouldn’t be invested in their home due to the hazards of natural disasters and an unstable housing market.
Homes belonging to both middle-class and ultrawealthy people have been reduced to ashes by the wildfires that have devastated the Los Angeles region for the past week. The fact that some claim to have lost everything serves as a sobering reminder of how much of the average American’s wealth is dependent on their house.
“Homeowners and potential buyers would be wise to reconsider how much of their net worth is in their homes as natural disasters become more frequent and destructive due to a changing climate, insurers pull out of areas they deem too risky, and housing remains historically unaffordable,” financial experts told BourseWatch.
According to Census Bureau data, the median net worth of American homeowners was approximately $406,000 in 2022; however, when home equity was taken out of the equation, the typical net worth of homeowners dropped to $156,700. To put it another way, most American homeowners’ homes are their biggest asset.
Sam Dogen, the creator of the personal finance website Financial Samurai, who became financially independent and quit his day job more than ten years ago, stated that this allocation is not recommended for the majority of people due to the dangers associated with natural disasters and an unstable housing market. Minutes after an earthquake rocked San Francisco, where Dogen and his family reside, Dogen talked with MarketWatch on Friday. (They didn’t get hurt.)
According to Dogen, he launched his website in 2009, “right at the bottom of the financial crisis,” when a lot of people had invested too much of their money in real estate and had lost everything they had saved when the market crashed. Real estate, equities, bonds, cryptocurrency, or art, for example, should not account for more than 50% of your total net worth, he said.
“If it just crumbles, you don’t want it to take your entire net worth down with you,” Dogen said.
How much of your money ought to be kept at home
According to financial experts, a person’s age, income, and total wealth are just a few of the variables that determine how much of their net worth should be placed in their property. As of October, the median down payment was close to $57,000, while the median transaction price was $375,000. This means that a first-time home buyer could have to contribute a significant portion of their net worth to the down payment.
In spite of these obstacles, homeowners should preferably set aside money for savings and investments outside the house in order to progressively accumulate liquid assets over time. By the time a homeowner plans to retire or become financially independent, they should realistically aim for their home to account for 25–30% of their net worth, according to financial advisors who spoke to MarketWatch. The remaining portion should be maintained in cash or cash equivalents and invested in a combination of stocks and bonds.
Being overly wealthy at home “is like putting all your money in only one sector, like technology or one stock, instead of a broader market index like the S&P,” Wealth Enhancement Group senior vice president and financial consultant Laura Mattia told MarketWatch. Interest rates, the state of the economy, and a host of other variables can cause real estate prices to rise and fall. Being more resilient to market volatility and diversified is preferable.
It makes sense for a homeowner to want their home to account for between 25% and 30% of their total wealth.
Dogen created a guideline for the typical homeowner, who intends to retire in their 60s and solely invests in stocks, bonds, real estate, and risk-free assets, to consider their asset allocation depending on age. His own property accounts for 27% of his household net worth. These percentages might not be particularly relevant to many younger Americans: As of 2024, only over one-third of those aged 35 and under were homeowners, while the typical age of first-time homebuyers is currently 38.
On his website, Dogen offers other suggested allocations for those who want to invest in different types of assets or who intend to retire early.
The reality is that while a home can contribute to a person’s net worth, it does not generate any income or cash flow, said financial planner James Guarino, a managing director in the tax practice at Baker Newman Noyes. “It’s actually demanding cash drain, because in order to maintain that home, you’re talking about real estate taxes, utilities, water … all insurance, all of the costs that really cause a further drain on resources or cash flow from other sources,” he explained.
Guarino agreed that having your house represent 30% of overall net worth is a sensible goal as a person approaches retirement. In fact, “the smaller that number is, the better off you are,” he said.
For many middle-income homeowners, this 30% guideline can be aspirational as housing affordability hovers near record lows, potentially leaving owners with less margin to save and invest. As a result, home equity made up a larger share of net worth for families in the bottom half of the wealth distribution in 2022, while those in the top half had more retirement and other financial assets, according to a report from the Congressional Budget Office.
At the same time, the share of homeowners entering retirement with mortgages has also increased, reaching 50.8% among homeowners who turned 65 between 2013 and 2018, according to a 2023 study by the Michigan Retirement and Disability Research Center. Black retirees with mortgages in particular had low financial assets. “Mortgage-financed housing wealth may be an asset for some higher-wealth households, who gain from its use as a hedge against long-term-care cost risk. It may be a liability for others, though, especially minority households,” the researchers concluded.
Overall, a person’s net worth is really “an indicator of financial independence, which means reaching a point where your assets can fully support your lifestyle,” said Spenser Liszt, a financial planner with Motif Planning. While a primary residence “plays a unique role in this equation because it fulfills the essential need for shelter,” financial independence means having diversified assets that you can live on, Liszt said.
While homeownership has historically been one of the main wealth-building tools in the U.S., some financial experts say things are changing. “In reality, real estate is not always the best investment,” the personal-finance media personality Ramit Sethi wrote on his website. “It comes with significant phantom expenses. And there are often better investments, such as a simple low-cost index fund.” Sethi, a millionaire, chooses to rent.
In other words, while homeownership can help people hedge against inflation, some see a path to wealth in which a primary residence actually accounts for 0% of a person’s net worth if their rental costs are low enough to allow them to invest in other assets. As half of homeowners are now worried that natural disasters will impact their residences, renting can also help hedge against these kinds of hazards.
Renting may emerge as a wealth-building strategy for higher-income households, yet the reality for the typical renter is having money to invest is difficult. Renters have a lower median income than homeowners – $41,000 versus $78,000, respectively – and are more likely to pay a large share of their income to housing. This disparity leads to a lower median net worth among renters ($9,250) compared with homeowners ($406,000).
How much house should you buy?
Having money left over to save and invest means first choosing a home you can truly afford. Government guidelines say housing is unaffordable when it exceeds 30% of income.
“While this is a good rule of thumb, I personally aim for much less,” said Crystal McKeon, chief compliance officer at TSA Wealth Management. “My husband and I calculated our home purchase based on only one of our salaries, so that if either one of us lost our job, we would not have to worry about being able to pay the mortgage.”
Dogen, for his part, developed what he calls a 30/30/3 rule about housing: Buyers should have 30% of the home value saved up in cash (20% for the down payment and 10% as an emergency fund); their monthly mortgage payment should be below 30% of monthly income; and they should not buy a home that costs more than three times their gross annual income.
“Where people go off the rails is they just go all in on housing” and then the unexpected happens – they lose their jobs, the market declines, or there is a natural disaster – “and they’re wiped out completely,” Dogen said. Establishing guidelines about a home’s place in a person’s overall net worth “gives people some confidence and security so that they’ll be OK over time.”
The bottom line: Homeownership is only an asset to the extent that it contributes to financial stability. People should only buy a home after they have a fully funded emergency account, McKeon said. As the average duration of unemployment has gotten longer, financial planners told MarketWatch, people whose jobs are less secure should save enough to cover at least six months of expenses in case of job loss.
Saving for a home should not come at the expense of building an emergency fund or saving for retirement, Guarino added. Most personal-finance experts recommend setting aside 15% to 25% of gross income for retirement – which, despite being decades away for many people, is a more urgent priority than homeownership.
“Younger folks today are certainly dealing with an extremely uphill battle in order to make [homeownership] a reality,” Guarino said. “I think that’s just that’s the world that we live in today, and I’m not so sure it’s going to change anytime soon.”
