What is the Difference Between Net Worth vs Income?
Most people do not understand the concept of net worth vs income. It’s not uncommon for people to believe that income is everything. College students often spend years and tens of thousands of dollars getting degrees because they believe it will help them land a high-paying job. However, these students soon learn how common it is for new graduates to receive minimum wage.
These individuals are usually able to move to higher-paying jobs over time. Some of them may even become happy with the amount they are earning. However, they may still have trouble understanding the difference between income and net worth.
Let’s Examine the Difference of Net Worth vs Income
Let’s assume Tim is an accountant who earns $100,000 per year and has a net worth of $25,000. His friend Robin is an HR manager who earns $60,000 per year and has a net worth of $200,000. So who has a greater amount of wealth? The answer is Robin, because her net worth is greater. So why is this the case?
This is because your total wealth is different from your income. It is true that a larger income can help you build wealth faster, but having a high income doesn’t necessarily equate to a large quantity of savings.
So what exactly is the difference between your net worth vs income? You may also be wondering how this difference will affect your retirement savings.
What Exactly is Net Worth?
We have talked about net worth multiple times thus far, but what exactly does one mean when they refer to “net worth”? Net worth is an efficient way to refer to how much you own minus how much you owe.
For example, if your house is worth $400,000 and you currently owe $150,000 on it, you will have $250,000 in equity that is counted towards your net worth. So to calculate your total net worth when you sell a home, you would add up the value of all the assets you own and subtract the amount you owe on everything.
The U.S Census Bureau states that the median net worth for American households is approximately $104,000. Much of this net worth comes from the help of retirement accounts as well as home equity.
What Exactly is Income?
To explain the difference between income and wealth, we should explain what exactly income is. According to the IRS, income refers to the “taxable” income and wages you receive from your job. You essentially earn an income when someone pays you for your services, or if you own a business that turns a profit. However, your income alone won’t make you wealthy. You may be earning $600,000 per year, but end up spending $800,000. That means you would be $200,000 in debt, and with fewer savings or “wealth” than before.
Alternatively, you could earn $80,000 per year and retire with $600,000 in savings by following the right strategy. This should make it clear having a large income doesn’t necessarily equate to having a high net worth, especially for people with existing loans they need to pay off.
Gross Income vs Net Income
Let’s also look at the difference between gross income and net income. So what is gross income? This refers to your wages before any deductions or taxes. So if you earned $60,000 per year, you would get paid around $5,000 per month.
Net income, on the other hand, refers to the amount you actually take home are deductions and taxes. These deductions include your social security as well as 401(k) deductions. Assuming these deductions and taxes amount to $1,300, your monthly net income would be $5,000 – $1,300 = $3,700.
To put it simply, your income is your main wealth-building tool. If you can utilize your income properly, you build up a sufficiently large quantity of savings by the time you retire.
Becoming a Millionaire
Everyone wants to become a millionaire, or even a billionaire at some point. However, becoming a millionaire is a more attainable goal. So what exactly is a millionaire? Is it someone who earns over $1 million per year?
A millionaire is simply someone with a net worth of $1 million or higher. A “cash millionaire” is someone that has $1 million in liquid assets, meaning they can get a hold of $1 million quickly, or that their $1 million isn’t locked up in their business or other places.
Many people believe that they will never become millionaires. However, it is possible to join the coveted “millionaire club” with the right approach. Wealthy people have many of the same characteristics that people with average net worth have. This also means that it is easier to become a millionaire than you would think.
Common Habits of Millionaires
It should come as no surprise that millionaires spend a lot of time building wealth. However, they also spend a fair amount of their week reading books. These could be books about finance, business, or even self-help. These books help them learn and grow, which leads to better wealth management and wealth building practices.
Millionaires generally despise debt. When one of these wealthy individuals lands themselves in debt at some point, they are quick to pay it off. In fact, most wealthy people prefer to invest any extra money they have lying around.
Millionaires are also careful to create a budget and follow it to the T. This is crucial for building wealth and ensuring a comfortable retirement.
Millionaires are skilled at building wealth, but they are also generous when it comes to giving it away. It’s not uncommon for wealthy individuals to donate a part of their earnings to charities, churches, or social causes they believe in.
As you can see, net worth vs income are two very different things. So keep these points in mind when you are working to build up your nest egg and achieve a comfortable retirement.
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