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What Is the Difference Between Income and Net Worth?

Do you remember dreaming of a big salary and a corner office as a college kid because you thought a good income would make you rich? But once you hit the “real world,” that corner office probably looked more like a middle-row cubicle. And that big salary was likely missing a zero or two. (Disappointing, we know.)

But after a couple of promotions, you’re now making a lot more money than you used to. (Thank goodness!)

A lot of people use income as the primary measuring stick for financial success. But is it really the best indicator of wealth? What about your net worth? And what’s the difference between the two, anyway?

While your income tells you how much money you bring in every year, your net worth gives you a true picture of where you stand financially. Let’s dive into the differences between income and net worth and find out how those differences might affect your retirement future!

What Is Income?

In a nutshell, income is money you receive on a regular basis, usually through work or investments.

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Find out your net worth with this free calculator! 

There are a lot of ways you can earn income: The paycheck you get every two weeks from your job or the profits from the business you own and operate. The dividends or compound interest growth you earn from the mutual funds you invested in. The cash you made last weekend selling old records or baseball cards at a garage sale. All of that counts as income!

And since we’re on the topic of income, let’s explore the difference between gross income and net income:

  • Gross income is the amount of money you make before taxes and other deductions are taken out of your paycheck. For example, if you earn $50,000 a year and get paid monthly, your gross pay is $4,166. 
  • Net income, on the other hand, 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 and deductions) = $2,966 (net).

Here’s the bottom line: Your income is your biggest wealth-building tool—so use your paycheck and other forms of income to your advantage! Fun fact: The median household income in America is about $67,500.1 If you invest 15% of that income for 30 years, you could have $2.3 million in your nest egg by the time you retire!

What Is Net Worth?

Net worth is simply what you own minus what you owe. In other words, the total value of your assets minus your debts equals your net worth.

For example, 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. So to calculate your total net worth, add up the value of all the things you own and subtract how much you owe (if anything) on those things.

According to the U.S. Census Bureau, the median net worth of American households is $118,000. A lot of that wealth comes from retirement accounts (like a 401(k) and IRA) and home equity (or how much of your home you actually own).2 Here’s a breakdown of median net worth by age.

  • Under 35: $15,700
  • 35–44: $83,150
  • 45–54: $139,200
  • 55–64: $203,900
  • 65–69: $266,400
  • 70–74: $305,100
  • 75 and up: $249,5003

Try our Net Worth Calculator for an easy way to figure out your net worth.

Once you calculate your net worth, you might be surprised to find out how much you have—or don’t have. In any case, there’s always time to improve your finances and grow your wealth right where you are. 

Is It Better to Have a Higher Income or Higher Net Worth?

Let’s pretend Katie is a marketing executive who makes $150,000 a year and has a net worth of $20,000. Her friend Lacy is a schoolteacher who makes $45,000 a year and has a net worth of $250,000.

Question: Who has more wealth—the marketing executive or the schoolteacher?

You got it. Lacy the schoolteacher actually has more wealth because she has a higher net worth than her friend Katie.

That’s why we say your income isn’t an accurate snapshot of your financial situation. Because when it comes to wealth, it really doesn’t matter how large your income is. Yes, you can build wealth faster with a larger income, but income alone doesn’t make you wealthy. You could make $1 million a year and spend $2 million—meaning you’d be in debt up to your eyeballs.

No, it’s what you do with that income that matters most. Whether you make $500,000 or $50,000 a year, you have to save and invest that income throughout your career if you want to build wealth. And yes—you could earn $50,000 a year (for your entire life) and still retire a millionaire—we see that happen all the time!

Some quick math shows that if you’re debt-free with a $50,000 salary and you invest 15% of your income for 30 years, you could have over $1.7million saved for retirement. 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.

retire in 30 years

At the end of the day, a large income doesn’t necessarily lead to large net worth—especially if you’re saddled with student loans and car debt and you’re always trying to keep up with the Joneses!

When Do You Become a Millionaire?

You’re a millionaire when your net worth—not your income—reaches $1 million. So if you have $700,000 in your savings accounts and retirement accounts, a paid-for home worth $300,000, and no debt whatsoever, congratulations—you’re a millionaire! Go out and celebrate with a nice steak dinner or a beach vacation— you’ve earned it!

You might think millionaire status is out of reach, but you’d be surprised how much the average millionaire looks just like you.

Let’s look at income for example. Only 31% of millionaires had an average annual household income of $100,000 or more over the course of their careers, according to The National Study of Millionaires. In fact, the study found that one-third of millionaires never had a six-figure household income in a single year. Let that sink in for a minute!  

And do you want to take a guess which three careers produce the most millionaires in America today? Here they are: engineer, accountant and teacher.4 The truth is you don’t need to be a doctor or CEO of some big company in order to reach millionaire status—that’s a myth! Anyone and everyone in America today can become a millionaire.

When we talk to millionaires about their success with money, they don’t mention an inheritance or winning the lottery. They talk about smart saving, wise spending and investing practices, and living without debt.

Dave's new book, Baby Steps Millionaires, will show you the proven path that millions of Americans have taken to become millionaires—and how you can become one too! Grab your copy today to learn how to bust through the barriers preventing you from becoming a millionaire.

Did You Just Get a Net Worth Wake-Up Call?

You’ve learned that income is what you earn from working and that net worth is the value of your personal assets minus any debt. Now 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 change your spending habits so you can invest and save more for retirement?

The good news is you’re the one in the driver’s seat. You can make the necessary changes to your finances so you can enjoy the retirement of your dreams. Start by talking to a financial advisor or investment professional who can help you create a game plan for investing. If you need help finding a professional near you, check out the SmartVestor program.

These are general guidelines. Your situation may be unique. If you have questions, connect with a SmartVestor Pro.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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