Focus On Building Net Worth Even More Than Growing Income

Grow Your Net Worth

If you want to achieve financial independence, focus on building net worth even more than growing income. A big net worth gives you more flexibility. You are also taxed at a lower rate.

A high income is great. But W2 income is taxed at the highest rates. Instead, you want to generate as much investment income as possible to live free.

Day job income is uncertain. We all think our income will continue to grow to the sky for decades, but one day it'll likely stop growing.

We might get a new boss who doesn't like us. Our company might get sold or go bankrupt. Departments might shutdown. We might absolutely burn out. All sorts of things could happen that will assail our income growth.

Income Comes And Goes, Net Worth Is More Sticky

I thought my income was going to keep on growing to “make it rain” status by the year 2017 (age 40), but my income was slashed in half during the 2008-2009 downturn. It recovered in 2010 and 2011 before getting completely cut in 2012 after I left the finance industry. Only after two and a half years of working online has my income finally got back to my day job income days.

Needless to say, my income is highly volatile and should not to be counted on at all! The only thing I have counted on is my consistent discipline to put away at least 50% of my after tax income every year, no matter what.

As a result, focusing on growing my net worth into a stable behemoth has been my main goal for the past 10 years.

Focus On Building Net Worth More, But Your Day Job Is the #1 Source Of Income

In an ideal world, one will have a sizable income and large net worth. I suggest everybody try their hardest to get that promotion and raise throughout their career, methodically max out pre-tax retirement accounts and sock away at least 20% of their after-tax income no matter what so that your net worth continues to get fed.

Your net worth growth rate might speed up or slow down over time, but the goal is to always have it go upwards.

It's great to focus on super-charging your income. What's equally important is figuring out how to re-invest your income (savings) into other asset classes that have a high potential of providing you a return.

Sooner or later, you will not want to work all that hard for your money. When that time comes, you'll hopefully have multiple asset classes working for you so you don't have to.

Main Reasons To Focus On Building Net Worth Even More

1) The government goes after income, not wealth.

We have a progressive tax system in America. The more you make, the more the government will take away. If you are in the top tax bracket in places like California, New Jersey, or New York, you will be paying around 50% or more of every dollar earned beyond $200,000 to the government ($200,000 income = 33% Federal + 10% State + 6.2% FICA + other taxes).

But if you have $5 million dollars that generates $150,000 a year, the government will only tax you on the $150,000 at 28% maximum, depending on how your income is generated (dividends, rental income, etc).

Once you build a sizable net worth, you can invest in tax friendly income streams such as dividend-producing stocks. Meanwhile, your heirs don't have to pay taxes on $5 million per spouse if you die.

2) Subsidized health care.

A great example of the government focusing on income and not wealth is Obamacare. If you make more than 400% of the poverty level as deemed by the government, you no longer get subsidized healthcare under The Affordable Care Act. For singles, that income limit is roughly $46,000, and for families of three or four, that income limit is roughly $78,00 and $94,000 respectively.

But imagine if your family of 3 has a $2 million net worth and nobody worked. You have no debt of any kind and all you need money for is food, clothing, and entertainment. Your family's dividends earned from a $1.5 million stock portfolio amounts to $40,000.

Under the ACA, your family gets $4,000 a year in subsidy, despite being millionaires, while a family of 3 earning $78,000 with 1/20th your net worth gets $0.

3) Alternative Minimum Tax (AMT) Exemptions.

The AMT exemption amount for tax year 2017 is $53,900 for individuals and $83,800 for married couples filing jointly. The AMT hasn't been adequately adjusted to catch up with inflation for years because the government knows this is a great way to generate more tax revenue from the middle class.

Calculating AMT is not very straightforward as well. But if you use H&R Block or TurboTax, it'll figure it out for you and you can work backwards to understand how much you're getting porked.

4) Child tax credit. 

To keep things simple, the phase out threshold is $55,000 for married couples filing separately, $75,000 for single, head of household, and qualifying widow or widower filers, and $110,000 for married couples filing jointly. For every $1,000 of income above the threshold, your available child tax credit is reduced by $50.

Therefore, if you are thinking about having children, keep these income limits in mind if you want to extract more from the government or not pay more to the government. A family of 3 with a $1 million net worth and income of $40,000 can get a child tax credit while a family of 3 earning $60,000 a year with a $25,000 net worth can't get anything.

5) Different wealth mindset.

When you just focus on making more money every month or year, chances are you're a worker bee and more short-sighted than the person trying to generate wealth through equity in a business. Again, it's not bad to focus on maximizing income, especially when you're first gaining experience.

But the truly wealthy are the ones with massive equity stakes in businesses. Shareholders of companies think more holistically and longer term compared to income-only employees. Some are now arguing that the only way to buy property and raise a family in expensive places like London, Hong Kong, San Francisco, and New York is through equity, not income. Unfortunately, this is becoming more and more true the longer this bull market lasts.

6) Net worth is more easily concealable.

Net worth can be spread across many different companies and investments. It's much harder to calculate one's true net worth than one's income. I'm just looking at all the entries I've put into my free Empower net worth tracker and I'm shaking my head because there are over 25 entries.

Thank goodness for free technology because I've even forgotten some things I own. Nosy people can guess a portion of your net worth through visible holdings like your primary residence. But they will have an impossible time figuring out the whole thing. For folks who like privacy and following the Stealth Wealth mantra, net worth is much more important.

7) Less temptation to go crazy.

Income comes in bi-weekly or every month usually. Each time there's an injection of income, there's a temptation to spend. There's a reason why casinos are much more full during the middle and end of the month. The higher your income, the more temptation you have to go crazy and not give a damn.

Your net worth is much more complicated. As a result, there's much less temptation to pilfer your net worth for short-term desires. I can't withdraw from my CD early without paying a penalty. The cost to sell real estate is high. I can't take money out of my private company investments or private funds before there is a liquidity event.

With income, it's so much easier to spend.

8) Much higher feeling of security.

The feeling of security might be the biggest reason to focus on building a large financial nut vs. building a large income stream. Everybody's number is different, but I promise you that you will feel MUCH more secure once you reach your wealth number vs. once you reach your income number.

I thought I would feel rich once I hit $100,000. I did for a nanosecond, but saw temptation and taxes take a lot of it away. I've made much higher incomes and thought I would feel more secure too, but I didn't really. Instead, every single dollar I put away towards savings or stable investments made me feel much securer instead. The ideal withdrawal rate in retirement doesn't touch principal.

There's something very freeing about spending only the money that is being produced by principle, and never seeing your principle decline, unless we enter some horrendous bear market. Even then, your income properties, dividend paying stocks, and CD income will likely remain quite sticky.

Focus More On Building Your Net Worth

Net worth chart guide by income

Income is just one part of the equation to financial independence. Once you focus on building your net worth, you'll become much better at focusing on multiple ways to build wealth.

The next time someone share's their income, ask them how they are deploying their income. See if you can figure out the structure of their net worth. It's all fine and dandy to have a $20,000 a month income. But if they've got no assets to speak of, there's a high chance that not only will their income go away one day, they'll end up back to square one because people have a tendency to spend everything they earn.

Growing your net worth requires a higher level of financial acumen than growing your income. Plenty of people are making six figures a year. But plenty of people who make such incomes are still destined to work forever given their lack of focus on net worth.

The less you have to rely on your income, the more secure and happier you'll be! Everything you start doing will be because you want to, not because you have to.

Once you build up your net worth, then you can figure out tax-efficient ways to pass it on. One way is to open up a 529 plan for generational wealth transfer purposes. Another way is to set up a revocable living trust.

Even though I no longer make a lot of money from a day job, I'm happier. The time saved not working has been mostly spend taking care of my young children.

Grow Your Net Worth In A More Stable Way With Real Estate

Get into the practice of saving and investing as much of your income as possible into real estate, especially if you already have a 401(k) and company stock. Real estate is a more stable asset class that generates income and provides utility. If you don't own your primary residence, all the more reason to invest in real estate.

Here are my two favorite private real estate investing platforms.

Fundrise: A way for all investors to diversify into real estate through private funds with just $10. Fundrise has been around since 2012 and manages over $3.3 billion for 400,000+ investors. 

The real estate platform invests primarily in residential and industrial properties in the Sunbelt, where valuations are cheaper and yields are higher. The spreading out of America is a long-term demographic trend. For most people, investing in a diversified fund is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. These cities also have higher growth potential due to job growth and demographic trends. 

If you are a real estate enthusiast with more time, you can build your own diversified real estate portfolio with CrowdStreet. However, before investing in each deal, make sure to do extensive due diligence on each sponsor. Understanding each sponsor's track record and experience is vital.

I've invested $954,000 in real estate crowdfunding so far. My goal is to diversify my expensive SF real estate holdings and earn more 100% passive income. I plan to continue dollar-cost investing into private real estate for the next decade.

Manage Your Finances In One Place

Once you've achieved financial independence, then you need to focus on growing cash flow more than net worth. Cash flow is what will maintain your lifestyle so you don't have to work.

The best way to become financially independent is to get a handle on your finances by signing up with Empower. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.

Before Empower, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Empower to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.

The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! 

They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner.

There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?

Retirement Planner Personal Capital
Personal Capital's award-winning retirement planning calculator. Are you on track?

About the Author:

Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.

In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $210,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.

For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. 

About The Author

101 thoughts on “Focus On Building Net Worth Even More Than Growing Income”

  1. Something this article seemed to skip around, and maybe due to the 2008-09 fallout, but real estate investments which generate ‘rents’ (after expenses of management and maintenance) are a classic diversification and passivity of income. It also is a double-whammy by raising cash-flow AND net-worth, if not instantly, over time.

    1. Real estate is definitely one of my favorite asset classes to build wealth. However, it’s been a MASSIVE run-up in SF real estate since 2012. I’ve got three properties in SF, and I want to sell one, and redeploy the capital in the heartland of America through RealtyShares crowdfunding. Lower valuations and much higher yields (10% vs. 2.5% in SF!)

        1. Yes, I’ve met with the CEO, the VP of Finance, and five other people there on multiple occasions over the past 12 months. I believe in investing in the heartland of America where real estate is cheaper and yields are much higher than the coastal cities.

          As a result, I’ve currently invested $260,000 on their platform and plan to build my investment to $500,000 by 2019.

          It’s worth checking out RealtyShares or Fundrise and seeing what type of real estate investments are there.

    2. Yes, totally. Some people buy houses for emotional reasons and don’t count it as an investment. I always make sure there is income potential (basement suite, extra bedrooms, casita, location near jobs and university) as well as being a great house for personal reasons. I like to say, why not have it all.

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  6. OK, I’m going to stick my neck out & ask a really dumb question (a couple of them, actually). I just came across the site today, and it is inspiring and depressing at the same time. I turn 45 in a couple of weeks. My husband is 71. He has a government pension and social security. I have a state job with a pension, but I’ve been there less than 7 years, so the total value, with my making contributions as well as my job, is under $150k. My husband somehow managed not to save anything (a few ex wives took care of any extra income) for retirement. Fortunately, our income (my salary + his pension + his SS) comes out to about $150k per year. I have a tiny bit in deferred compensation, and have just started putting some into an IRA. My 401k from a previous job was wiped out during a rough patch. Husband didn’t get any kind of long term care insurance, so now if he needs to go into a care facility, I’ve got to sell the house & live on ramen noodles.

    So here are my questions: 1. Are we totally screwed? It seems like there’s not enough time to make up for losses. 2. Everyone talks about passive income & assets, but it seems like you have to have a lot of $$$ to get started. Should I build up a 6 month emergency fund first, and then go talk to a financial advisor? I’m not a “do what you love & the money will follow” kind of person, so I don’t have any ideas on things to do to generate passive income. And investing when you have no idea what you’re doing is dangerous. I’ve got analysis paralysis at this point. Any suggestions?

    1. Welcome to my site!

      Is your husband’s pension, for life? Usually it is right? If so, you are definitely not screwed, but sitting pretty, despite his lack of savings. You just have to spend within that pension amount.

      At 45, you are still young to work for many more years. Absolutely build at least a 3-6 month liquidity fund and really getting into the savings mentality where if your savings doesn’t hurt a little each month, you aren’t saving enough.

      As for speaking to a financial advisor, sure why not. Take a look at this post where I talk to a financial advisor for free to give me an idea of what I should be doing.

      And please spend time going through the archives/categories on the middle right of this site to get some new ideas.

  7. This is something I have switched my focus to. Before, I was focusing on income as it was directly needed to pay down debt. After I paid off the consumer debt, I turned my attention to growing assets and creating wealth. Net worth is more important to me now and your points are spot on.

  8. Just read that Sen. Bernie Sanders is going to introduce a wealth tax bill. Now I’m sure that many people will show their envy and say “yeah, go after those evil rich people” but I’m sure they don’t know or care that all that money has already been taxed because at some time in the past, all of that wealth was taxed as income. Plus, if anyone cashes in that wealth by selling stocks of bonds in which it is invested, more tax is paid on the profit. You need to remember that eventually, the government wants all of the money, no matter what the source.

  9. So basically, we should focus not necessarily on having a massive income, but we should focus on living cheap.

    It makes sense, but it’s probably not a very popular notion for much of the U.S. (since people really love to spend all that they earn each year). I, on the other hand, get somewhat of a sick thrill from living on hardly anything. By paying off my mortgage, I will no longer have any debt whatsoever and have discovered that I could potentially live on just $460 each month (for 10 out of the 12 months anyway). My net worth will soar until I decide to call it quits at my day job.

  10. Bilgefisher

    Jeff Brown put it this way. The larger the pot of gold the more income can be generated off of it. That’s why I look at net worth vs income. That is not to say I ignore income. My passive income will exceed my active income before I leave my job. The higher my net worth the easier it is to increase that passive income or take the leap and work full time increasing that passive income. I enjoyed your article, thank you.


  11. “The less you have to rely on your income, the more secure and happier you’ll be! Everything you start doing will be because you want to, not because you have to.”

    I love this quote, especially the second sentence. I live this daily. I can’t imagine ever going back. Having the power to do the work I want to do is so liberating and has made me a more creative and giving person…a better version of myself.

  12. Love your blog and have read a few dozen of your posts. This post has driven me to share my brief story as I feel this post really hit home.

    My wife and I are 30 years old and come from middle class families. My mom is an LPN and my dad is a self employed wood carver.

    We started investing in real estate at 21 years old by purchasing our first home. Over the past 10 years we have slowly bought and sold four personal homes, one condo, a single family “flip” and have purchased and held two fourplexes. This has all been done while growing our family to include a set of three year old twin girls and a four year old son. Over the past four years, I have been a stay at home dad and my wife has worked as the Director of a non-profit that is run through a local school district in rural northern Wisconsin. My wife’s take home pay after tax is $25 per year!!

    At this point in our lives we have been able to grow our net worth to $190k while never having a taxable income larger than $48k in any given year since we graduated high school. We recently became debt free of all debt outside of the mortgages held on our rentals and personal home which were all secured with 20% down. Since purchasing our two rentals in 2010, we have raised monthly rents by a total of $310 per month and enjoy $1,100 in cashflow each month BEFORE depreciation and deductions.

    Totally agree that net worth is more important than a high income. As you mentioned in this post an others, the true key is passive income to go with the high net worth.

    The thing I would like to learn from your blog is what to do with our monthly surplus of cash. We want to be heavily invested in real estate but have a “holding place” for our cash while we build the 20-30k needed for a down payment on any new properties.

    Your blog is the best out there in my humble opinion and I check daily for new posts!! Keep up the great work and thank you for all of your great opinions!

    1. Hi Blayne,

      Congrats on your financial journey! Part of this post was about helping readers build a net worth building mindset first, and this is something you and your wife have been able to do, which is fantastic.

      What you do with your surplus of cash depends on your expenses and feelings of financial security. If you have three or more months of expenses + any future large expenses saved up, then I would deploy a combination of investing in index funds and paying down your highest mortgage debt in a ratio you feel comfortable with. What is your total liquidity amount now, and what are your ultimate financial goals?

      I write every day, but I don’t post every day unfortunately. But look out for a new post on 9/10 or thereabouts on ideas on what to do with your cash.



  13. Mr Ikonz @ Project Ikonz

    Net worth is so much more important than income levels!

    When you hit retirement, your income stops, but hopefully you’ve built an asset base that’s big enough to pay you a passive income for the rest of your life.

    I’m amazed how often I see wealthy people that have a great income, yet have no real assets. On the flip side, I’m blown away by people who manage to set hems elves up for life without needing a big wage.

  14. I agree that acquiring sizeable net worth is indeed the truth, the whole truth and nothing but the truth. From net worth (capital) I can generate income, but not the other way around!

    I recently finished Piketty’s Capital in the 21st Century book. He has some interesting thoughts on future growth rates (i.e., income) vs. return on capital.

  15. This is the idea of the nest egg, however the objective becomes the focus rather than the consequences of one’s saving. I like it. One danger with this strategy is there could be a focus on a big pay day which never comes such as building the next Whatsapp, which is cash flow poor but final price high.

  16. Hi Sam,

    Thanks for all the great reads. When calculating your savings of 50% post tax, how are you treating dollars saved in 401(k) pre-tax into the calculation? Sorry for being overly technical, but I’m trying to hold myself to the same standard by current calc example:

    $100,000 Salary
    less $10,00 401(k)
    $90,000 Taxable Salary
    -33% tax
    $60,000 After Tax Salary

    … Goal would be to save $30,000? Is this how you view it?


    1. Hi TG,

      Your example is basically how I’ve been saving since 2000, as all I could do was max out my 401k in 1999 and save about 20% of after tax income then, living in Manhattan and making a $40K base salary. Since 2000, I’ve maxed out my 401k, and then saved 50% of my after 401k and after tax income or more when times were good.

      My view on the 401k is to max it out, but treat it like Social Security and write it off from being there when we are in our 60s. This mindset forces us to try and build our net worth by investing and saving elsewhere.

      You might like: How Much Should I Have Saved In My 401k By Age

  17. A lot of helpful food for thought in this post – thank you! It’s easy to get over focused on income alone and overlook the importance of putting effort into building net worth. I certainly don’t want to have to hold a 8-6 job in my golden years because I didn’t work enough on building my net worth when I was younger. I definitely agree with you that the government goes after income. Gotta keep building net worth!

  18. Retired Syd

    I was about to agree whole-heartedly with Sam before reading Dividend Mantra’s comment. Now I have to qualify it.

    I’ve been retired for almost seven years now and I only focus on net worth (wealth)–not income. I have no idea how much each individual asset (or even the whole portfolio) is kicking off in income, and I never have. My “income” (meaning spending) needs can be met from any combination of income from investments AND appreciation. It doesn’t matter how much of each contributes to the total. I need to make about 5% per year for my nest egg for it to last for 50 more years if my expenses grow no faster than the rate of inflation over that 50 years.

    Every month I look at my current value and rebalance my assets so that I keep a 60/40 split of equities to fixed income and cash. Whenever this gets out of whack, I either sell some of the equity side or put some of the fixed income/cash side into equities, depending on which way things have gone.

    Since Dividend Mantra brought up the excellent point about wealth being all in one asset for example (a house), I would have to say that I think well-diversified, regularly rebalanced wealth is more important than income. Just to be more specific.

    1. I think the diversified, income producing net worth portfolio is implied in this case, considering the site we are reading.

      The point is you’re much better off with a $2 million net worth and $20,000 income than a $100,000 income and low net worth. The $2 million can be moved and produce $100k if you’re averaging 5% in returns. It doesn’t have to “stay” put in that expensive house.

    2. Thanks for sharing. It’s good for DM to pontificate what early retirement will be like, as it’s good exercise. I remember being very focused on income as well at his stage. But it really is about building a sizable net worth to get that feeling of security.

      I can respect DM for renting a room with family in his 30s and being very frugal to save money. Sooner or later, however, everybody will get tired of sparse living, especially as income and wealth goes up. But I hope he expands his financial repertoire beyond dividend investing, at least for a hedge against a downturn in stocks.

      1. Sam,

        I’m not renting a room from family in my 30s to live frugally. I came back to Michigan to see about potentially moving back here, and so I have to stay somewhere until I find an apartment I like in a city I want to live in.

        It’s either rent a room from family or rent a room from someone off of craigslist (like I did when I moved to Florida). I prefer the former after experiencing both, though both have benefits and drawbacks.

        I guess someone who visits family for a month or two is vacationing. But someone who rents a room from family for a couple months while they look for permanent housing is into “sparse living”. I find that an interesting perspective.

        As far as pontificating, I’m already basically living as I would if I had enough passive income to pay for all of my expenses. I quit my day job and now write for a living, which is something I would do either way, as like MMM, I quite enjoy it. And guess what got me here to the freedom I now enjoy? Income, not a huge net worth.

        Net worth is just a number. You still need to convert that into regular income. Life isn’t a game show where the guy with the biggest net worth “wins”. Freedom can be had for very little income, thus also meaning very little net worth. You don’t need to be a paper millionaire to live a very free and fulfilling life, as many have already demonstrated (and I am as well right now).

        Not interested in belaboring the point, but I wanted to clear up your error on my lifestyle, as I’m not permanently renting a room from family to live a “sparse life”. Rather, I’m temporarily here to discover a place to live, but it’s taking longer as I now have my significant other coming up here in October to explore and see if she wants to live here as well.

        Best wishes.

        1. DM,

          It’s a no brainer to rent a room from family vs CL. Please don’t take “sparse living” as an insult. It’s commendable to live frugally in Michigan now or in Florida before.

          MMM lives sparsely and makes hundreds of thousands of dollars a year from his site and that’s terrific.

          All I know is that life is constantly changing and tastes change along with it.

          BTW, did I not leave a comment once about you one day being able to quit your job if you kept up with your blog? Congrats on making the move!

        2. DM – I would say only spending $1,500 a month in expenses in your 30s for years now is pretty sparse living. $78 a month for groceries, $137 a month for restaurants, and $62 for fast food isn’t that much. You didn’t spend any money on entertainment either according to your last income and expense report. Paying only $200 a month in rent is pretty amazing too.

          It seems you’re pretty sensitive with people knowing how little you spend, yet you publish it every month. Why is that? It’s understandable you are more focused on income now because you started late and then quit your job. Income probably is more important for you at the moment.

          I’m much older than you and my one feedback would be to find more balance. Sam is right. You don’t know what you don’t know. Life has a way of changing your mind. Keep it flexible!

          1. Old Man,

            I honestly don’t mind when people call my lifestyle sparse. We all have different opinions on that. What is sparse to one is luxurious to another. I’d bet those that lack electricity and running water in India would beg to differ about how sparse I’m living, but it’s just different perspectives. Nothing wrong with that at all.

            I only took issue with Sam’s characterization of a specific choice to rent a room from family. That really isn’t to save money (I could rent a room from a stranger for approximately the same amount), but rather a lifestyle call, and to keep the money in the family. And it’s very temporary anyhow.

            As far as balance and changing one’s mind, that’s exactly how I ended up doing what I am doing. I was spending much more before all this, living like most do in their 20s. I spent money when I wanted to. I had a nice car, a nice pad, and ate great food. And I wasn’t happy with any of it. Running a rat wheel to generate a lifestyle that doesn’t buy happiness was leaving me with no energy to actually enjoy life. Living on less has freed my mind, and given me great perspective on life, happiness, and time.

            But to each their own, my friend.

            Best wishes.

            1. All,

              Okay, I’m hopping in the ring now. What DM has been trying to get at is build income generating net worth, and in his/my life that is primarily dividend income producing equities. My networth is built on a house, which I could rent out and a portfolio that is growing. I can turn these two assets into income producing assets: Rent, Dividends. I would think the goal is this: Save Often, Save More than you think you need and Invest into income generating assets that increase your net worth.

              I reinvest dividends, for instance. I am projected to make over $4K in dividends next calendar year. These dividends are buying more assets to add to my Net Worth which is further going to generate MORE income, and the cycle of this is amazing.

              In terms of lifestyle – we shouldn’t argue or talk about how one likes to live. That is a case by case basis and one’s calm lifestyle is one’s exciting lifestyle, & vice versa. I’m a 26 year old man and instead of going to bars every weekend, forgetting my nights and walking out with a gigantic tab, I find it more fun to have friends over, have bonfires, have tailgate parties on weekends for games – because you get to know people & have a closer feel. It’s all relative to that perspective and lifestyle one has that makes them as happy as possible, you know?

              To end, I think the real goal is: Save Often, Safe More, Invest Often/more into Assets that Produce Cash Flow/Income that Increases your Net Worth. Thoughts?


              1. I think generating dividend income is great. Tax efficient too. I just recommend build a diversified portfolio of assets for most people. The net worth mindset is different from just an income generating mindset.

                One just has to ask what is the composition of one’s net worth to find the answer.

    3. I fully concur with Retired Syd’d remarks. I’m now in the same position whereby I am planning on investment and appreciation to grow my net worth by 5% per year and assuming inflation increases at 3% per year for a net growth of 2% per year (on average). My portfolio of investments must be well-diversified and regularly rebalanced. They need not be highly focused in areas of RE or dividend stocks. My top concerns now are health care cost and potential market correction. Growing income is no longer a concern.

  19. Sam,

    I don’t really agree with the premise here, at least not as it is being presented.

    A high net worth doesn’t really mean anything at all if it’s totally illiquid and doesn’t produce regular income that you can live off of. You can’t go to down to the local net worth store and buy stuff with a number. You need cold, hard cash to do that. And that’s why I’m focusing on building regular and reliable rising income.

    However, one’s net worth will invariably rise with building assets that generate rising income, so it’s almost a moot point.

    But to have $2 million in your house that you live in against no debt may make you a multi-millionaire on paper, but you’re not any more free than the guy working at the local fast food joint. Unless, of course, you sell that house and use that money to generate some kind of income for you via income-generating assets. Then, of course, you have to find somewhere to live.

    I prefer the YMOYL model where you have passive income slowly rising against expenses. Income covering expenses with a margin of safety is freedom. A high net worth is not. At least not all by itself.

    Best wishes!

    1. Hi DM,

      I’m definitely not saying have all your net worth tied into a house and have no liquidity. That would be silly. I’m talking about having a net worth building mindset instead of an income mindset.

      I guess all I can say is give yourself more time. Earning the $400 a month in dividend income is great so far for you, but I’ll make a bet that once you get to a higher income and net worth figure, you’ll appreciate the net worth figure more than your dividend income for financial independence. It’s easiest to disregard taxes as not deal when you don’t pay much in taxes. But views will change as your income grows as taxes becomes one of your largest expenses.

      Things will change all the time, as you’ve written on your site. Focus on building the net worth figure. Let me know your views in 5-10 years!


  20. Completely agree with focusing on increasing net worth by increasing savings, choosing good investments, through raises, entrepreneurship, etc. However, especially for a single person, if it’s realistically doable, I’d also recommend seriously considering increasing net worth by finding a wealthy spouse.

  21. Great article. I’ve been putting over 50% of my income back into my business and property acquisitions for the past 3 years. My income has stayed relatively the same, while my net worth continues to grow. It takes a lot of self control but it’s a great strategy.

    1. Good stuff Billy. This is the type of discipline that I’m talking about when you focus on building net worth. You’ve got to have something to show for your income. And that’s your net worth.

  22. Hmmmm….. Well….. I think increasing networth is an excellent goal, but retirement and personal finance is more complicated than that. There was a whole lot of shrinking net worth in the last recession. Net worth is really just a number. You might own a $900,000 house, but how will that help you purchase that organic milk at Whole Foods! Or pay the property taxes for that matter.

    If retiring early is your priority, then passive income should be your goal. You should also try and keep your cost of living to a reasonable level.

    Your overall goal should be to have various passive incomes which in total, exceed your normal cost of living. If you are in that situation, then you are financially free.

    1. That $900,000. house could provide income in the form of a rental suite in the basement. Also, you could have foreign student boarders in any unused bedrooms. I had both when I was suddenly downsized. I kept my house and did not touch my retirement funds, which came back by 2011. The house kept increasing in market value. In dire straits, you could also rent out the house entirely and rent a small apartment, live in the basement (which I have also done while travelling), move in with relatives or friends, etc. I stay invested even when NW temporarily declined.

  23. These aren’t really mutually exclusive…it’s math.

    I do think if you’re focused on net worth, the income will come. If you’re focused on income, net worth is unlikely. You can use that quote for a small royalty fee in the future.

    1. Haha, I didn’t see the writing you did after the graph. I see you wrote basically the same thing. This is a great article because it’s so true. It’s another way of saying, “its not how much you earn, it’s how you use your money”. But, it bears repeating in this sense since it’s so true.

  24. I was an advocate of building assets and net worth about 45 years ago and still am. In fact, I used to minimize current income in exchange for higher net worth. My strategy was always to keep rents at market to build assets and maximize value. It transfers current income tax to capital gains. This si the formula to building wealth.

  25. I’d focus much more on total LIQUID net worth than income for sure, because doing so makes one much more conscious about savings…and I’d say that a goal of tucking away at least 20% of take home pay is a minimum. That said, in the earlier stages of one’s career, I can understand the focus on income until that salary level moves on up. Also, get (happily) married. There is nothing like the power of a soul mate AND a dual salary earning household. Oh, and don’t get divorced OR arrested for DUI OR sued. Well, there you have it.

    1. Thanks Steve. Life is so simple, isn’t it?

      Liquid an non-liquid net worth are both important. I don’t mind illiquid assets such as real estate if it provides a utility or provides an income. Having things illiquid has helped me, and many others not frivolously spend their money away.

  26. supernova72

    Great post. The ACA examples are fantanstic. I keep a net worth model as well and have this “blank” like item for my DB pension plan. I’m eligable for $36K a year when I retire.

    If all the stars align that could be 2015. The plan freezes in 2016 with no more accruals.

    Would you include a pension as part of your net worth? I backed into the value and a lifetime annuity would cost ~ $625K to generate $3K a month. Cheers.

      1. Another Reader

        Do you treat Social Security the same way? The two methods I see used most often to capitalize the value of a pension or Social Security are the cost of an equivalent annuity purchased in the private sector and the dollar amount of assets you would have to have to produce the beginning amount at the 4 percent SWR.

  27. All of these are excellent, real life examples that should motivate anyone with a brain and a desire to not only live comfortably, but securely.

  28. Lance @ Healthy Wealthy Income

    I generally find that people who say income are usually not investing enough (or anything) to see what real wealth feels like and what amount it can generate over time.

    Like you said there are many variables with income and work. My boss surprised me and retired 3 years early. Luckily the next boss likes me and I stayed on, but she is only here for 3 years before retiring. So I know I have three years so I’m starting a plan now just to be ready. You never know when it can all change so invest as much as you can as early as you can.

    Great, great article.

  29. I think the people online who report their incomes frequently tend to be:

    * Younger and more insecure.
    * Have just started making money, so they want to tell the world to feel better about themselves.
    * Or try to make money by telling others how to make money.

    I think the reason why some report their income, but not their net worth is because:

    * They are embarrassed they don’t have more.

    Humans are pretty insecure beings who are easy to understand. I’m a psychologist. You don’t see confident people with large net worths trying to brag about their income or wealth.

  30. it’s not how much you make, it’s how much you saved. Having high net worth provide security. Being the victim of down sizing layoff before, no job is safe. Your net worth is the one carry you through the hard times.

    Lets say you have 2 friends: NW and Income. During the down turn, Income is more likely to leave you high and dry. NW will always stay with you even though he might be suffering as well. So it’s better to grow your friendship with NW :)

    1. Another Reader

      I have to disagree with this. During the Great Recession, my friend NW declined dramatically. My friends Rental Income, Dividend Income, and Pension Income stuck by me.

      Job Income is an unreliable friend, so it’s best to replace Job Income with other friends.

      1. But Rental Income, Dividend Income and Pension Income derive from Net Worth (savings), which is the point of the article.

  31. I would say I obsess over my net worth instead of income a majority of the time. True, they go hand-and-hand quite a bit, and I look for ways to increase my income to sock more away to increase my net worth. Plus, the focus on net worth encourages people to save their income!

  32. The First Million is the Hardest

    I definitely agree. It’s not about what you make, it’s about what you keep. The less you have to rely on your income to get by in life the more secure and happier you’ll be.

  33. Even Steven

    Can’t retire if you are working a job, so assets and net worth are key. You can change your definition of retirement but it still will need the networth/passive income to bring you along.

  34. All true, except that the easiest way to increase your net worth is to increase your income – provided that you save/invest that increased income. So the two are intricately linked – for most people.

  35. I agree Sam, net worth is the way to go! I wish I could save more but my biggest drain is on nanny costs. I have slimmed our expenses on every section of our lives except this – I need a good nanny who tutors too so gotta pay! So what do I do? The only option I have is to earn more. Learning a new skill to increase the income bracket or figure out a way to work on passive income.

  36. Another Reader

    Ultimately the objective is to have enough unearned income to cover your needs and wants for the rest of your life. And the confidence that the stability and diversity of your income protects you from the vicissitudes of asset markets.

    The government “encourages” real estate wealth accumulation and the use of leverage in doing so with tax policy. By playing the game correctly, you can minimize taxes and get your tenants to buy the assets for you. It’s not passive income, but buying the right properties minimizes the work.

    Some years I pay the accountant about as much as I pay the federal government. Meanwhile, my tenants add to my net worth every month or two by roughly the amount I pay all year in federal taxes. Works for me.

    1. I definitely agree w/ you on real estate, my favorite asset class to build wealth.

      I’m thoroughly impressed with either how much you pay your accountant, or how little you pay the federal government. Share more details!

      1. Another Reader

        Think about many, many Schedule E’s…..and Silicon Valley prices. I’m looking for a really good CPA that’s more reasonable and is knowledgeable about real estate, if you know one.

  37. I think net worth is definitely better to focus on than income. If you make all The money in the world and never have anything to show for it. It doesn’t do much good.

    I do think cash flow is even better. My rentals are providing $60,000 a year now and that will only rise as rents to up with inflation and loans get paid off. Plus I plan to buy a lot more!

  38. I was just thinking about the feeling of security that increasing investments bring to me. The amount of money is my cash accounts is constantly going up and down from paying bills, loans, contributing to investments etc. But it’s a great feeling to see investment income increase over time. It’s also nice seeing every student loan payment take off more and more of the principal every month, because I know this is increasing my net worth as well.

  39. My Grandad told me that when he started working as a geologist after the Korean War he thought to himself “if I could just get into a management position and make $10K/year I’d really be set”. Seems funny now.

    Deploying capital and debt into productive assets is the only real way to build true wealth. This is the biggest mental hurdle for the middle class. There is a quick and easy read called “The Richest Man in Babylon” that deals with these concepts.

    1. Richest Man In Babylon- very simple t read, yet one of the BEST books to learn from…I did.
      Am employing the teachings, and have been non-employed (willingly) since the age of 40, when the rent on our store was raised to double the amount. The good news is that I had rentals, which also were slowly being raised:) Now looking to deploy monthly income into investments, as they come in.
      Am in top tax bracket now:( Very disadvantaged income being generated thru short term investments of 6-13%. Looking for ways to learn/read about taxes of high net worth individuals in RE, and perhaps entities. Now, I need direction:)

  40. Sam, and interesting point is about going for that raise/promotion vs becoming more of a target in a layoff. This obviously is an industry specific risk, but think about this. let’s say you make $100k, and are really looking for that bump to $125k. But if getting it puts you in the “highly paid” crosshairs for layoffs, you might be better off flying low and extending your career by a few years. Even 1 or 2 extra years in the job will leave you financially better off than the person who got the raise and then canned.

    Obviously the best is to get a raise and a long career, but something to think about.

    1. Josh – You definitely bring up a good point about going for too much. At my old shop, the Managing Directors who were pulling down $400,000+ base salaries were very targeted during layoffs.

      It’s just a hard argument to make NOT to try and make as much as possible while you can, as bad things happen all the time, regardless of how much less you earn.

  41. Louise @ Good Financial Choices

    I’m slowing moving to getting my head around net worth being more important than income.

    Personally I’d love to start seeing my investments generating passive income, although I know I have a long way to go until they generate anywhere as much as my day job.

  42. I have to say, I don’t think there’s anything wrong with trying to increase your income, but it should be done through diversification, not just relying on your day job income to keep going up infinitely. However, you do make some really good points about why building net worth is more advantageous. Especially regarding taxes!

  43. John C @ Action Economics

    It’s all about building wealth. You’re certainly right on the tax treatment for high earners. Even making around $60K a year with 2 kids we pay no federal income taxes. One thing on the earned income credit, it has a really long tail. The family earning $40K a year would get around $1,700. The max credit for a married couple with 2 kids is reached with income between $14K and $23K. Also having $3,150 or more in investment income disqualifies the credit.

    Another nice tax treatment for lower and middle income earners is the Retirement savers tax credit, gives us another $400 per year to build wealth with, but for those with lower AGIs the credit is worth up to 50% of retirement contributions of up to $2K per person, so a max credit for a married couple of $2,000.

    I think more people are comfortable sharing their income because it is a quick status symbol. Net worth as you mentioned is more difficult to calculate and I think a lot of people honestly don’t know their net worth. Also I think there may be some fear of being classified as “rich” based on net worth. The inverse may also be true, I doubt a guy with a 6 figure income would want to tell his friends he has a negative or low net worth.

    1. Do you feel any guilt not paying any taxes? Honest question.

      I feel guilt not paying at least $30,000 a year in taxes for some odd reason. But I also feel horrendous paying $150,000 a year in taxes… so for me, I think the right balance is somewhere around $30K-$50K based on the consumption + desire to contribute and get my wealth redistributed.

      1. John C @ Action Economics

        Although I don’t pay any Federal Income Taxes, I do pay social security taxes, of around $4K per year, state income taxes of over $1K a year, property takes of around $2.5K per year and state sales tax of around $400 per year, for a total of almost $8,000 in taxes or 13% of my income. I don’t do anything shady to not owe any taxes, just by saving a large amount of our income (over 20%) into tax advantaged accounts and having 2 kids we end up not owing any tax. I certainly wouldn’t do anything immoral or illegal in order to get out of paying taxes, although some people do.

        When my kids are out of the house or when our income increases we will pay more in income taxes. My guess is in the next 2 years we will be making enough that we pay in a few thousand a year. Several years ago when my wife and I were getting started and earned around 25K a year combined we ended up getting a large net refund, I did feel guilty about that because it was money I hadn’t worked for to earn.

        Although you are certainly the above average person as far as lifetime earnings goes Sam, if every household contributed $30K per year to federal income tax alone, Washington would get something like $3.5 Trillion from the individual income tax. You certainly do well more than your part to contribute to the countries coffers!

        1. John, why would you ever feel guilty about a tax refund? of course you earned it, it is part (or all) of what was withheld from your paycheck. you just let the government borrow it for free.

  44. Good article. I agree with you about those benefits. I would clarify the end goal a bit though.

    I think a long term stream of diversified income is the actual goal. Growing active income from a job is certainly not a good end goal, because it is not diversified. You will stop working at some point, and then it’s zero (as you mentioned). But growing net worth is also a bit of a means to an end. A big net worth could technically be a big number of assets that don’t do much for you. So there are 2 pieces of the equation: (1) the assets and (2) knowing how to deploy them to produce income with an understood amount of risk. I would think the goal more fully is to have various assets that efficiently produce income for you.

    1. I agree with Sir Salty. Focusing on income helps mute the volatile feedback from stock market about value. Benjamin Graham said in his book that the market’s valuation of stocks is like a manic depressive neighbor who tells you one day that your house is beautiful and worth a million bucks and the next day that it is a heap and not worth dime. (or something like that)

      I’ve started to focus as much on the income that my investments produce as a proxy for an “intrinsic value” rather than the current trading price. There is some subjectivity in this. For instance, junk bonds yielding 6% carry a lot of risk, especially in today’s market, but I would not recommend putting 100% of anyone’s portfolio in that asset class.

    2. That certain is a good end goal. It takes upkeep to generate a steady passive income stream for sure.

      There’s one thing I’m realizing that you might not feel yet, and that is our mortality. The older we get, the more we realize there’s no point saving and earning all this money. Having a large net worth provides security and the distributions that enable freedom without doing any passive income maintenance if so desired.

  45. I could not agree more with you on this one Sam! When I was graduating college I thought that I’d feel rich and secure if I hit $300k/yr. Yep, it does help, but the real security is knowing that your Net Worth alone could support you in perpetuity. Love your examples on how the government subsidizes not working and actually encourages those who can go out and make a huge income to not work so hard. My countdown has started to take them up it!

    1. It is funny how the government incentivizes folks to not make over a certain amount with subsidies isn’t it? “Let’s keep the middle class down and provide them with goodies so we can more easily control them.”

      1. Same reason that they incentivize you to get married, have kids, and carry a mortgage. They want you to be indebted and a slave to the system. No free, unencumbered people here!

  46. Jay @

    I can agree with this based on the premise that income does not translate into savings (which in turn translate into net worth). The mindset is a great point as well. Don’t dwell on income because it’s current. Net worth is long term.


  47. I’m definitely with you on the importance of net worth, has always been my sole focus. Once you build up those assets, you have tremendous flexibility with how you make that lump sum work for you.

    I think people probably like sharing their income because it’s easier to achieve a decent income, and provides a sense of achievement – a bit like how people love to talk about their great returns on one stock, but never mention the overall portfolio performance. Much easier to get a quick win in the short term.

    Less temptation to go crazy is also a great one – I know after I receive a bonus I’m a little more relaxed with my spending for a short while, but I hate it when I have to spend any of my treasured share portfolio!

    1. Nobody every loses money in the stock market Jason! It’s so true, and so funny how we humans have to constantly justify our existence, some way more than others. We all have it. We have an inherent desire to prove we are worth it.

  48. It’s the classic lifestyle inflation trap which sees footballers go bankrupt as soon as the cash tap is turned off.

    Interesting points about taxation and benefits being primarily focused on income and not on wealth. I recently read a great article whereby the author had calculated how much they would lose if they salary-sacrificed 100% of their salary into the pension scheme. In this case; they would then be eligible for a huge range of benefits whilst seeing a £40k pension contribution each year! I believe the final take home difference was only about 20% less, not bad.

  49. Security is #1 for me. Just the feeling of having many years of expenses in savings/investments means I worry less about income insecurity. Both Mrs. FW and I could lose our jobs tomorrow and be fine for 10 years. That’s mental security that money CAN buy!

    The tax implications of a high net worth and low income / expenses is one of the most interesting facets of the financial independence, retire early movement. It’s a great bonus, and a good incentive for hitting the lower spending targets.

    Those tax incentives also incentivize owning a home outright. If you don’t need to pay a mortgage, then you’ll need to take a lot less money out of your taxable investments. This gives you more low-tax withdrawal room to spend on other things.

    One thing that you could probably add to your list: College Financial Aid. While your taxable savings are included in your parental contribution calculation, the value of your home and your retirement accounts aren’t (including a roth with seasoned contributions). A low income, combined with a paid off house and living expenses paid for by withdrawn Roth contributions can put your kids in a great place for financial aid. This could be a post all by itself… :-)

    1. Very good point about college Financial Aid! Perhaps you’d like to write a post or guest post here about it! I remember my parents made a little too much to get college aid, but didn’t make enough to feel the massive pain of tuition. It’s part of the reason why I went to public school for $2,800 a year!

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