High Income vs High Net Worth: What would you rather have?
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| High net worth (or wealth) is always better than high income! |
Swedish Proverb: “He who buys what he does not need, steals from himself.”
My wife and I have been traveling since our early retirement in August (2020) along with our Pomeranian dog, Toby. Our journey since early retirement have taken us to locations such as Ocean City, Atlantic Beach, the Poconos, Myrtle Beach, Mountain Creek, among others...
In this post, I’d like to discuss the difference between high income and high net worth (wealth).
Growing up, I thought high income was the only goal. The reason for working, besides paying the bills, was to gain experience so I can then get a higher paying job in the same field. No one bothered to tell me there was a more important thing than just income.
When I started working at car dealerships, each one of us selling cars would brag about our paychecks when we had a good sales month. This was a natural behavior in the industry. Because most salespeople were working on commissions and not on salary, it was common for salespeople to show off to other salespeople how good their month was.
I didn’t think there was anything wrong with that behavior because everyone did it.
In hindsight, I wished someone would’ve said, “Wow, my net worth just went up by x number of dollars this month.” This statement would’ve made me curious about what this net worth thing was all about at an early age...Who knows? Maybe I could’ve retired even sooner...
What is income?
Income is defined as money you earn in exchange for providing labor, a service (including fees, commissions, fringe benefits, and similar items), or capital invested (stocks, bonds, CDs, etc.).
For most of us working folks, that means a paycheck. If you’re self employed, then it’s profit. If invested in capital, then it’s dividends, interest paid, etc.
What is net worth?
Net worth, or wealth, is the value of all assets minus liabilities. To calculate this, you would add up your assets like real estate (market price of your home), capital investments (stocks, bonds, CDs, cash, etc.), and/or car (market value). You then subtract any money owed on each type of asset. If you have real estate, subtract money owed and closing costs of around 5-10% of the market price. For cars, subtract money owed from the market price.
High income is great as a tool as it makes saving towards retirement easier. However, it’s only a great tool if you don’t overspend each month. If you make $100,000 per year but spend $200,000 per year, then you’ll never be able to put away money towards retirement. In this scenario, you’ll always be broke and in debt!
On the other hand, if you make the same $100,000 per year, but save $20,000 per year towards retirement, then you’ll be building wealth. In this scenario, you would have $1.4 million at the end of 25 years, assuming 8% rate of return invested in the stock market.
As you can see, the high income is only useful, if you do not overspend! I would certainly take the second scenario over the first!
Unless you’re making minimum wage, almost anyone can save for retirement. There are examples of school custodians who became millionaires by saving money regularly. They were not making high six figure salaries, but rather around $40,000-$50,000. This proves almost anyone can save up for retirement.
Common refrain from these examples are always the same: Spend less than what you make, then put away money towards retirement.
It’s easy to understand this simple concept, but it’s not so easy to do. It requires a behavioral change to force to save NOW for a better tomorrow. It means putting off things like fancy vacations, expensive dinner out at 5 star restaurants every week, and buying less.
Don’t end up being that old guy who realizes all too late that he failed to save up for retirement! This regret is one of the biggest regrets most people have at old age. Do something about it now! Spend less, save more.
In conclusion:
Many people only see high income as the answer to financial independence. It is, but it isn’t. The answer is to earn enough but saving some of that money each month.
When you have wealth, you can plan ahead. If you lose your job, it’s not a big deal. You can use that time to relax and to learn/improve. It’s not a scramble to pay your bills the following month. Wealth is something you can hand it down to your children or family. It’s potentially a life changing thing to have wealth in your family.
When you don’t have to worry about roof over your head, food on the table, or heat/electricity in your home, life becomes much easier. This is where you want to be.
You don’t want to be living paycheck to paycheck, wondering what’ll happen if an emergency comes up. This is unfortunately, the current state of affairs in America. It was reported by ‘Bankrate.com’ recently that over 60% of households couldn’t come up with $1000 if an emergency came up! Don’t be in this group.
Wealth equals stability, security, and a better tomorrow. It’s how you can climb the social/economic ladder yourself and for your children.
Thank you all for reading!
Jake
Wandering Money Pig
Please check out our YouTube channel ‘Wandering Money Pig’ showcasing our travels and our Pomeranian dog! https://www.youtube.com/channel/UC3kl9f4W9sfNG5h1l-x6nHw
