retirement

What is the Difference Between Income and Net Worth?

8 Minute Read

Think back to your college or high school graduation. Do you remember dreaming of a handsome salary and a corner office because you thought a good income would make you rich? Once you were on your own, you probably discovered the marketplace only offered minimum wage and a middle-row cubicle right out of the gate.

How is your income now? Maybe you’re making bank or simply enjoying a satisfying career that pays an average salary. But do you ever think about the difference between income and net worth? We’ll unpack the nuances between income and net worth in this article, and show you what those differences mean for your nest egg. We’ll even give you a tool to help you calculate your net worth and determine if you’re on track to enjoy a bright retirement.

What’s the difference between income and net worth?

Consider this scenario of two wage-earning professionals: Katie is a marketing executive who makes $150,000 a year and has a net worth of $20,000. Lacy is a schoolteacher who makes $45,000 a year and has a net worth of $250,000. Who has more wealth—the marketing executive or the schoolteacher? You got it. The schoolteacher, whose income is one-third of the marketing executive’s, actually has more wealth because she has a higher net worth.

That’s because when it comes to wealth, it really doesn’t matter how large your income is. Granted, you can build wealth faster with a larger income, but at the end of the day, it’s not what you earn that will set you up for a confident nest egg. It’s what you save and invest throughout your wage-earning years.

So, what’s the difference between income and net worth? Let’s dive deeper to understand the differences, and why those nuances matter to your future retirement. 

What is income?

The IRS defines earned income as all the taxable income and wages you get from working.(1) You earn income if you work for someone who pays you, or you run a business or farm. Income alone doesn’t make you wealthy. You could make $1 million a year, yet spend $2 million and be in debt up to your eyeballs. Along the same lines, you could earn around $50,000, the average annual salary in America,(2) and retire a millionaire if you plan and save throughout your entire career.

A quick calculation shows that a debt-free person who earns $50,000 and invests 15% of their income for 30 years could have almost $1.4 million saved for retirement.


*The blue bar indicates this person’s million-dollar year.

On the other hand, a person making twice that income who never invests even a small portion of it will likely come up short in retirement. A new financial buzzword describes this fresh demographic of high-income earners who have little net worth as “Henrys,” or “high-income earners not rich yet.”

Equifax studied a group of “Henrys” who are under 55 years old and earn annual incomes of more than $100,000, yet haven’t hit assets of $1 million. The study cited student loans and car debt as barriers keeping “Henrys” from saving more for retirement.

Untamed discretionary spending averaging $68,000 annually per Henry household also appears to interfere with their wealth building.(3)

As you see, a large income doesn’t necessarily lead to large net worth. And since we’re on the topic of income, let’s explore the difference between gross income and net income.

Gross income includes your pre-tax, pre-deduction wages. For example, if you earn $50,000 a year and get paid monthly, your gross pay is $4,166. Net income is what you actually bring home after taxes and payroll deductions, like Social Security and 401(k) contributions. Your monthly net income could look something like this: $4,166 (gross) - $1,200 (taxes/deductions) = $2,966 (net).

Practical takeaway: As Dave says, your income is your biggest wealth-building tool—so use your paycheck to your advantage! Pay off debt as soon as you can and begin investing 15% of your household income into retirement.  

What is net worth?

Net worth is what you own minus what you owe. In other words, the total value of your assets minus your liabilities equals your net worth. Look at it this way: If you own a home worth $300,000 and you owe $100,000 on it, you have $200,000 in equity toward your net worth. To calculate your total net worth, add up all the things you own and subtract all the things that you owe—that’s your net worth.


According to the U.S. Census Bureau, the median net worth of American households is $80,039.(4) The majority of that wealth comes from home equity, followed by 401(k) and Thrift Savings Plan accounts, then IRA  and Keogh accounts.(5) Even more interesting, Business Insider reports the following breakdown of median net worth by age of householder.(6)

  • Under 35: $6,676
  • 35–44: $35,000
  • 45–54: $84,542
  • 55–64: $143,964
  • 65–69: $194,226
  • 70–74: $181,078
  • 75+: $155,714

How do you stack up? Use the chart below to calculate your net worth and gain insight into how many assets you really have. Remember, your income alone will not provide a comprehensive snapshot into your financial health. That’s why it’s good to know your net worth.

Now calculate: ASSETS TOTAL - LIABILITIES TOTAL = NET WORTH.

Once you calculate your net worth, you might be surprised to find out how much you have or how much you don’t have. Regardless of your current net worth amount, there are ways to improve your finances and grow your wealth. Listen to Ron and Colleen from Los Angeles, California, share how they got serious about their money, paid off $123,000 of debt in 18 months, and ended up millionaires.


When do you become a millionaire?

In an Ask Dave on-air segment, Dave explains you’re a millionaire when your net worth—not your income—reaches $1 million. He also uses the phrase “cash millionaire,” which means a person’s net worth exceeds $1 million, and $1 million of it is in liquid assets they can get a hold of quickly. “It’s an interesting place to be,” Dave says in the segment. “Cash millionaire means it’s not all tied up in a business or retirement or in a home or those kinds of things. That’s what you’re after.”  

You might think millionaire status is simply out of reach, but the characteristics of an average millionaire just might surprise you. Dave frequently hosts on-air millionaire theme hours where he invites everyday millionaires to call in to share how they achieved financial success. In addition to smart saving, spending and investing practices, callers usually mention their simple way of life. Here are some of their shared habits:

  • They read a ton. Millionaires usually can’t tell you the latest drama unfolding on reality TV because they have a penchant for learning, growing and using their time wisely.

  • They say no to instant gratification. Millionaires have no problem buying used cars, wearing $30 jeans, and purchasing modest homes. They care more about sensible spending than keeping up with the Joneses.

  • They despise debt. Millionaires get out of debt, and stay out of debt. Instead of owing money, they invest it.

  • They budget and have a plan. Millionaires maintain a monthly written budget. They also seek the advice of an investing professional to understand how to prepare for retirement.

  • They are generous. Millionaires understand that they are blessed to be a blessing. Millionaires give to their churches, charities and causes they care about.  

Did you just get a net worth wake-up call?

Now that we’ve established that income is what you earn from working and net worth is the value of your personal assets, you should be able to crunch some numbers to determine where you stand financially. Are you making a great salary but have nothing to show for it? Or do you have an average salary and want to refine your budget to invest and save more for retirement?

The good news is you’re in the driver’s seat, and you can make the necessary changes to your finances to ensure a solid retirement. Start by speaking to a financial advisor who can help you create a game plan for investing. If you need help finding a professional near you, reach out to a SmartVestor Pro!

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