Life is confusing.
We either confuse ourselves or allow ourselves to be confused by the external circumstances or people.
This is very true in the area of finance and wealth.
From the time we are old enough to understand the world around us, our society have already conditioned us to certain ways of looking at things. We no longer see things as they are, but we see things as we are.
In this article, I want to share the confusion we have about income and net worth.
Since young we have been conditioned that doctors, dentists, lawyers, CEOs of MNCs, famous movie stars, and professional athletes are rich because they earn high incomes.
We learnt to judge the financial success of our peers, friends, and neighbours by the car they drive, the house they stay in, and the thickness of the gold necklace they wear around their neck.
We believe that people with these “things” have high incomes and have made it in life. While it is true that there is a definite relationship between income and net worth, these are 2 very different measures of financial success in a person’s life.
What is Income?
Income is the amount of money you make in a given time period like monthly, quarterly, or annually. In my opinion there are 4 categories of income, namely, active income, passive income, gross income, and net income. We will use net income in this article.
Assuming you make a net income of SGD 1M and you spent all of it. What have you done to your net worth? The answer is “Nothing”. You have just wasted the SGD 1M and the opportunity to increase your net worth. Period.
If you focus only on the net income as a measure of your financial success, then you are missing the most important point of personal finance – Financial Independence.
Focusing on your net income will not get you your financial independence because it is NOT how much you make, but how much you keep that counts.
I am sure you have friends who make in excess of 20K SGD per month and they are still as broke as a broken chair. On the other hand, you would also have known some friends who earn an average income of 5K SGD and yet could afford a decent investment portfolio.
What is the difference? The difference is in their focus.
The former focus on net income and the later focus on net worth. Who will become financially independent 40 years down the road? I think you know the answer.
What is Net Worth?
Your net worth is your true measure of your wealth.
So, how do you measure your net worth? There is a very simple formula – Take what you own minus what you owe. The answer to this simple formula shall determine your net worth now.
A word of caution: Most people tend to over inflate what they own and under declare what they owe. While this may give you a “nicer’ picture of your net worth, you are just fooling yourself. Be truthful to yourself. Get all the valuations done and calculate from there.
There are only 2 possibilities after you have done this calculation truthfully. You are either in the negative or positive net worth.
If you are in the positive net worth as of now, congratulations. Continue to grow your net worth.
If you are in the negative net worth as of now, don’t despair. You have most of the working adults with you. You got to focus on increasing your net worth from now on. You will get there by following the ways described below to increase your net worth.
Ways to Increase Your Net Worth
These are several tried and tested ways we use to increase our net worth.
- Generate multiple streams of passive income now. This is what clients of AlgoInsights are getting from our services;
- Save up to 50% of your total (active and passive) income for investment purposes;
- Cut down all unnecessary expenditures;
- Use up to 25% of your total income to pay off all credit cards and high interest debts;
- Use the remaining 25% of your total income for all your household needs.
Following the above-mentioned actions, you will get out of your negative net worth and start to increase your positive net worth year after year.
As you continue to increase your net worth year after year, just remember to stay humble and help people around you. Share with them your personal experience in your wealth journey. They will be inspired and impressed by you and follow you. This is how we change the financial destiny of people for the better – one person at a time.
Abundant wealth to all.
CEO & Founder, AlgoInsights