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Here’s the key difference between income and net worth: Income is the amount you earn, while net worth is the total value of your assets minus any debt. When it comes to measuring your financial health, income isn’t the metric that matters. No doubt, you do want to know whether your income will help you reach your goals, but looking at your net worth can be a better measure of your overall wealth.
Here, take a look at net worth vs. income and how they factor into your financial health.
Key Points
• Income refers to earnings from various sources such as wages and dividends, whereas net worth is assets minus debts.
• Net worth provides a more comprehensive measure of your financial health than income alone.
• Increasing your income and managing your debts effectively can boost your net worth over time.
• Assets can include savings, real estate, and investments, while liabilities might consist of loans and credit balances.
• Regularly tracking both income and net worth is crucial for achieving financial goals.
Income vs Net Worth: Two Measurements of Wealth
Both income and net worth can help measure the chances of someone creating wealth. However, the difference is that income is the primary way someone builds wealth, whereas net worth measures your level of wealth. To put it another way, income is how you make money, but it doesn’t necessarily lead to creating wealth.
Looking at your net worth allows you to see the value of all your assets and liabilities at a specific point in time. It gives you a sense of your financial health in terms of whether you own more assets — such as your home, investments and cash — than liabilities (any money you owe, such as credit card debt). Your net worth also allows you to see how much of your wealth is held in assets or cash. And it offers a reference point to help you measure your progress toward your financial goals.
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Is Net Worth More Important Than Income?
While income is a key aspect of your finances, net worth is typically more important. That’s because even if you have a large income, it doesn’t guarantee that you’ll generate more wealth than someone else who may have a slightly lower one. Sure, having a larger income can help you build wealth faster, but it’s all in how you handle your finances, such as the amount of money you save.
Say your friend makes $100,000 per year but has a lot of debt, leading their net worth to be $15,000. On the other hand, you make $70,000 but have invested over 10 years, to the point where your net worth is $100,000. You have more wealth and, therefore, are more likely to be financially stable than your friend.
Another instance where income doesn’t correlate with wealth is when someone is older and getting ready to retire. Their income may be lower because they’re working part time, but their wealth could be in the millions because they’ve worked for many years.
All this to say, income is important but only as important as how you use it to reach your financial goals.
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How to Calculate Income
Calculating your income doesn’t simply mean looking at the number on your paycheck. You’ll also want to factor in other sources of income, such as any government benefits, commissions, tips and dividends. Don’t forget to include irregular or occasional income sources such as cash gifts, inheritances, and even tax refunds.
Make sure that when you add these up, it’s your net income and not gross income, as that will give you a more accurate picture of what you’re bringing in. Gross income is pretax money before deductions are taken out. Net income, on the other hand, is income that has taxes and deductions taken out.
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Example of Calculating Income
Say you have a day job that offers bonuses and commissions. You also invest in securities that provide dividends.
Here’s how you would calculate your income:
• Annual net salary: $64,350
• Annual commissions: $3,500
• Annual bonus: $2,000
• Annual dividends: $3,234
TOTAL INCOME: $73,084
You can then use this total to calculate monthly and weekly income. In this case, it’s $6,090.33 per month and $1,405.46 per week.
How to Calculate Net Worth
Calculating your net worth involves creating a net worth statement so you can see a snapshot of your assets and liabilities.
Start by looking at your assets and determining the total amount of all accounts under this category. Assets are items that have some sort of monetary value. These include:
• Checking accounts
• Savings accounts
• Your home
• Real estate
• Retirement fund
• Personal property (such as your vehicle)
• Pension equity
• Securities (such as stocks and bonds)
• Life insurance policy
• Profit-sharing equity
Once you’ve calculated all of your assets, you’ll need to calculate the total amount of your liabilities. Liabilities are any debts or financial obligations you have, including:
• Mortgage
• Credit card balance
• Personal loans
• Auto loans
• Student loans
• Unpaid medical and dental bills
• Money you owe to family and friends
• Unpaid taxes
After totaling up your assets and liabilities, subtract the latter from the former. The resulting number is your net worth. If your liabilities are greater than your assets, you have a negative net worth. The more assets you have than liabilities, the higher your net worth will be.
Example of Calculating Net Worth
As an example, say that Barbara has decided to calculate her net worth. First, she lists out her assets and liabilities:
ASSETS
| Checking accounts | $600 |
| Savings accounts | $10,000 |
| Home | $365,000 |
| 401(k) balance | $24,399 |
| Vehicle (current value) | $32,590 |
| Brokerage account | $12,000 |
| TOTAL: | $444,589 |
LIABILITIES
| Mortgage | $200,000 |
| Car loan | $29,251 |
| Credit card | $4,126 |
| Student loans | $36,700 |
| Personal loans | $13,857 |
| Unpaid medical bill | $300 |
| TOTAL: | $284,234 |
Once she’s written that all out, she is able to calculate her net worth using the following formula:
Total assets – total liabilities = net worth
$444,589 – $284,234 = $160,355
Barbara has a positive net worth of $160,355.
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Ways to Improve Your Net Worth
Ideally, you’ll have a positive net worth that keeps growing over time. Here are several ways to improve your net worth.
1. Keep Track of Your Assets and Debt
Tracking your assets and debt will give you an accurate picture of where you stand. That way, you’ll be able to see your progress and what you need to improve or keep doing to grow your net worth. For instance, if you notice that your debt keeps growing, you can use this information to help you figure out why and take steps to rectify the situation.
2. Pay Off Debt
The fewer liabilities you have, the more your net worth will grow. To build your net worth, you can focus on making sure you’re making on-time payments and avoid taking out new loans if possible. If your budget allows, consider making extra payments toward loans to pay down your debt faster. Monitoring your spending can also help you free up more money to put toward debt. It may take a couple of months to identify areas of overspending, but doing so can be worth the effort.
3. Increase Your Income
Getting a higher salary will help you build wealth by paying off debt or putting money toward investment accounts. Ideally, you want to increase your income and pay off your debts as soon as you can. To increase your income, you can consider negotiating for more in your current job, looking for a new job, or starting a side hustle.
4. Invest
Sticking your cash in a savings or checking account can earn some interest. To accelerate your wealth-building journey, you may want to consider investing some of your money.
You might start investing by contributing to your employer-sponsored account (bonus if they offer a match), and then branch out to other products as you see fit.
The Takeaway
Your net worth is a snapshot of your finances at a specific point in time and will fluctuate. It’s a good measure to see whether you’re on track with your financial goals. It can also be a better indicator of your overall financial status than income. The more you track your assets and liabilities, increase your salary, and pay down your debt, the more your net worth can grow.
Take control of your finances with SoFi Coach. You can easily view all of your accounts in one convenient dashboard: bank and investment balances, current debts, spending breakdowns, and credit score. Easily set up budgets and spot upcoming bills. And get personalized insights on everyday money questions and take action with Coach chat, the AI guide that’s powered by the playbooks of SoFi Financial Planners, so its guidance comes from expert knowledge.
FAQ
What’s more important, income or net worth?
Income and net worth tell you different things about your finances, so which is more important depends on what information you are looking for. Income reveals how much money you earn in a year, while net worth is a better indicator of your overall wealth and financial status.
Is your annual income part of your net worth?
While your annual income contributes to your cash flow, it does not necessarily add to your net worth. The amount of your income that you put in savings, investments, or other assets, however, can grow your net worth.
What is the top 1% income in the US?
To be a top 1% earner in the U.S., you currently need to earn around $800,000 a year. However, the threshold can vary by location. In some states, such as Connecticut and Massachusetts, you need to earn over $1 million to be a top 1% earner.
How do I figure out my net worth?
To calculate your net worth, you will first need to determine your total assets, which includes your bank accounts, personal property, and retirement fund, and your total liabilities, which are your debts and other financial obligations. You can then find your net worth by subtracting your total liabilities from your total assets.
How do I calculate my real income?
To calculate your income, you’ll want to consider sources of income other than just your paycheck, such as government benefits, commissions, tips, gifts, and tax refunds. Adding up these numbers will determine your net income. Net income factors in taxes and deductions, giving you a more accurate idea of what you are making than gross income, which is the pretax amount.
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