💰 This Week: Net Worth vs Income
Discover why building net worth creates lasting wealth while focusing solely on income can keep you on a financial treadmill.
The Income Trap
Most people interested in personal finance have a goal to build wealth so they can have options, whether it’s traveling, switching careers, or simply retirement. In making that happen, it’s important to focus on income – earning more.
⚠️ The High-Income Illusion
It’s all fine and dandy to have a $20,000 a month income. But if you’ve got no assets to speak of, if your income goes away suddenly, you’ll end up back to square one because people have a tendency to spend everything they earn.
📈 Income Focus
- Measures cash flow
- Can disappear overnight
- Taxed heavily
- Requires continuous work
- Lifestyle inflation risk
🏦 Net Worth Focus
- Measures true wealth
- Grows over time
- Tax-advantaged growth
- Works for you 24/7
- Creates financial security
What Is Net Worth?
Net Worth Formula
Assets − Liabilities = Net Worth
Everything You OWN minus Everything You OWE
📊 Understanding the Components
Assets: Cash, investments, real estate, vehicles, business value
Liabilities: Mortgages, car loans, credit card debt, student loans
💡 Quick Net Worth Calculation
Add up all your bank accounts, investment accounts, and property values. Then subtract all your debts. The result is your net worth – your true financial position.
Why Net Worth Trumps Income
Growing your net worth requires a higher level of financial acumen than growing your income. While it’s great to have a six-figure job, not focusing on net worth could destine you to work at that job forever.
🏛️ You’re Taxed on Income, Not Net Worth
The BIR is interested in how much you make, not how much you have. Assets grow with tax advantages, while income faces immediate taxation.
🧠 A Different Wealth Mindset
While income focuses on your being a “worker bee,” net worth focuses on your own investments working for you – the true path to financial freedom.
🛡️ A Higher Level of Security
You feel more secure about your financial situation when you have assets that can support you during income interruptions or job loss.
📈 Compound Growth Advantage
Assets compound over time, while income requires continuous effort. A well-invested portfolio grows exponentially without additional work.
The Income-Net Worth Relationship
🔄 Both Matter, But Focus Matters More
Of course, this isn’t to say that income isn’t important. It is, and, in fact, net worth and high income usually go hand in hand. It simply makes more sense to focus on how much you have than how much you make. And this focus can be helpful when planning for financial goals.
🎯 Shifting Your Financial Focus
- Track your net worth monthly instead of just monitoring income
- Set net worth targets for 1, 5, and 10 years from now
- Measure financial progress by asset growth, not just salary increases
- Use income to build assets rather than just fund lifestyle
Practical Steps to Grow Your Net Worth
🚀 Net Worth Acceleration Strategies
- Increase the gap between income and expenses
- Invest the difference in appreciating assets
- Reduce high-interest debt that drains your wealth
- Diversify income streams to build assets faster
- Control lifestyle inflation as income grows
🏖️ Coming Next Week: Retirement Planning
Stay tuned as we explore what we all look forward to – retirement. Learn how to calculate your retirement needs and build a plan that ensures financial freedom in your golden years.
“A wealthy person is simply someone who has learned how to make money when they’re not working.” – Robert Kiyosaki
📚 Related Financial Content
If you’re working on building wealth, check out our previous posts on Homeownership and the 20% Rule
