The Difference Between Net Worth And Income

Both net worth and income are good indicators of your financial picture. But the figures are very different so it’s good to know what each metric means.

Regularly assessing both your income and net worth is important, but your net worth will help determine your financial health.

What is the difference between net worth and income?

Income is an indicator of your monetary influx into your life, i.e. how much you earn. The average income for full-time employees in April 2021 is just under £32,000.

Net worth is a bit harder to work out as it’s an overview of your finances at a particular point in time. It takes into account all of your assets and liabilities into account. So your net worth is done by subtracting the sum of your liabilities from the sum of your assets.

For example if you have £30,00 in savings, £10,000 in investments and £7,000 then your net worth would be £33,000.

Why knowing the difference between net worth and income is important

It’s so important to know the difference between the two figures as they tell very different things about your finances.

Understanding your income will help you to live within your means and avoid any additional debt. By living within your means with a good budget you’ll be able to help improve your net worth through savings and investments. Remember even people with a high income can have a negative net worth if they don’t live within their means.

Over the past few years we’ve all seen jobs and incomes come and go, so your net worth is important. As your net worth includes any emergency fund saving etc having a positive one is so important. Building your net worth will help you to become financially stable.

How to figure out your net worth

Start by adding up all of your assets both financial (cash/ bonds/ stocks/ savings) and tangible/ physical assets such as land, property, cars and items such as jewellery, and fine art.

Then you’ll want to work your liabilities including all of your outstanding debts such as mortgages, student finance, credit card debt and loans. Then subtract your liabilities from your assets to get your net worth. Ideally you’ll be left with a positive number so your assets outweigh your debt.

By working this out you’ll have a realistic picture of your finances.

How to improve your net worth

Now you know the difference between net worth and income you can look into improvising your net worth.

Pay down debt

If you have any debt that is reducing your net worth then work on ways to decrease these figures. Start with the bad debts such as credit cards, loans and finance. And once these are done you can look at debt such as mortgages.

Need some help planning how to pay off debt? Here’s how to start clearing your debt.

Increase your investments

Once you’ve got your debts under control you’ll want to increase your assets. And investments tend to be the best growth over time especially thanks to compound interest.

There are lots of different types of investments and you can choose how you feel about risk if you don’t want to worry about losing all your money. You can also look at investing in physical items such as property or jewellery/ handbags. Anything you think that will go up in price over time so you can sell on for a profit.

Look into ways to increase your income

While income and net worth are different, if you increase your income you’ll have more money to pay down debt/ save etc which can impact your net worth. The two go hand-in-hand so look into ways you can earn extra money, take on a side hustle or ask for a pay rise at your job.

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