Net worth and income are both indicators of your financial picture. But when comparing net worth vs income, understanding what each financial metric means can help you set up a brighter financial future.
Today we will take a closer look at the difference between net worth vs income. Plus, point out which of these numbers is more important than the other.
Net worth vs income: What’s the difference?
So, how is net worth different than your income? Here’s what you need to know about each.
Net worth is a metric that illuminates an overview of your finances at a particular point in time. Instead of focusing on a single account, net worth takes all of your assets and liabilities into account. With that, you can find your net worth by subtracting the sum of your liabilities from the sum of your assets.
For example, let’s say that you have an investment account with a balance of $100,000, $15,000 in outstanding student loans, and $5,000 in savings. In this case, your net worth would be $90,000.
If you need help calculating your net worth, check out our full guide. Also, you can take time to learn about your liquid net worth vs your net worth. But for the purposes of this article, we’ll be focusing on your overall net worth.
Now, if net worth is a financial metric that takes your overall financial picture into account, your income is any monetary influx into your life. So, let’s say you earn the median household income determined by the Census Bureau in 2020. With that, your income would be $67,521.
However, it is also worth noting that your total income will not equal your net income. You’ll likely have to pay income taxes, which will leave you with a net income lower than your total income.
With that, you may need to compare your net worth vs net income for a more accurate look at your finances.
The difference in net worth vs income
When it comes to net worth vs net income both have an impact on your overall financial picture. You can use your income to generate wealth. But wealth is measured by your net worth, not your income.
Regularly assessing your net worth can help you determine your financial health. As you continue to produce an income, you can improve your net worth over time with smart financial choices over time.
Why distinguishing net worth vs income matters
Net worth and income are two pieces of your financial picture. But it is critical to understand that net worth vs income indicates very different things.
But solely relying on your income as a measure of wealth falls short. Without working, your income would evaporate, leaving nothing to fall back on.
But on the other, net worth is an assessment of your financial health. Even if you have a high income, it is possible to have a negative net worth.
Building your net worth can create a financially stable future with less dependence on any particular job. A higher net worth can give you the flexibility to survive and potentially thrive without an income stream.
Net worth vs income: What's more important?
Net worth and income are intricately tied. It is practically impossible to build a net worth without first building an income. Once you have an income, you can make strategic choices to build your net worth over time.
With that, net worth and income are both important numbers for your finances. But ultimately, your net worth is more important than your income. That’s because a healthy net worth can lead to a financially sound future.
How to improve your net worth
So, now you know the difference between net worth vs net income. Net worth is an impactful number for anyone to focus on. But how can you improve your net worth? Here’s a step-by-step process to make it happen.
1. Assess where you stand
First things first, you’ll need to assess where your net worth currently stands.
You can do this by adding up all of your liabilities and all of your assets. Liabilities include things like your outstanding debts, while assets include investments, cash on hand, and more. Next, subtract your liabilities from your assets to arrive at your net worth.
Taking the time to assess your net worth can help you see a realistic picture of your finances. If you find a negative net worth, you’ll know there is work to be done. If you are pleasantly surprised by your net worth, you can map out your next financial goal.
Try not to be too hard on yourself when you uncover your net worth. The important thing is that you’ve taken the time to calculate your net worth. And that’s a big step!
If you want to see how your net worth stacks up, check out this piece that breaks the numbers down by age. Although you can compare your net worth against your peers, remember that everyone’s financial journey is different.
2. Pay down debt
If you have debt weighing down your net worth, paying it down can help to improve your net worth. Try starting with your highest interest debt first to make the biggest impact.
Need help creating a plan to pay off debt? Take advantage of our completely free "Destroy your debt" course!
3. Invest to improve your net worth
Essentially, investing puts your money to work for you. With time, your investments can grow to improve your net worth. Luckily, there are plenty of ways to invest.
4. Consider ways to increase income
Yes, we’ve talked about how your net worth is a more important metric than your income. But the two go hand in hand. With a higher income, you can potentially build your net worth faster.
Net worth vs income: Both are important!
Net worth vs income — in the end, both are important. What you do with your income will have a big impact on your net worth. If you are ready to start focusing on your net worth, start by determining yours today!