When Income Is More Important Than Net Worth For Financial Freedom

When income is more important than net worth for financial freedom

Everything in personal finance seems to go around in circles. This post will discuss when income is more important than net worth for financial freedom.

In the past, I argued that it's better to focus on net worth growth over income growth. Wealth is not taxed like income. Further, financial freedom is about living off your invested capital that generates passive income for life.

Given job income is the main source of income for the majority of people, by definition you'll never truly be free if you mainly focus on income. Only when you build a large enough net worth can you truly be beholden to no one.

But over the past several years, I've noticed that focusing too much on net worth and not enough on income growth has created a scarcity mindset. Before I explain what I mean, here are eight reasons why focusing on net worth is important.

Reasons To Focus On Growing Net Worth

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 pay a total federal + state marginal tax rate over 50%. But if you have $10 million dollars, the ideal net worth for retirement, that generates $200,000 a year in dividends, you only pay a 15% tax rate. But eventually, the government will go after your wealth beyond the $11.7 million mark per person in 2021.

2) Subsidized health care.

Under Obamacare, if you make more than 400% of the poverty level as deemed by the government, you no longer get subsidized healthcare. 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 three has a $5 million net worth and nobody worked. You have no debt of any kind and all you need money for is food, clothing, and entertainment.

Let's say out of your $5 million net worth, $3 million is an investment portfolio and $2 million is in real estate. Your $3 million stock portfolio produces $60,000 a year in dividends. Under the ACA, your family gets ~$3,500 a year in subsidy, despite being multi-millionaires. Meanwhile, a family of three earning $85,000 with 1/20th your net worth gets $0 subsidies. Hee's a post on how to get healthcare subsidies, even as a multi-millionaire.

3) Alternative Minimum Tax (AMT) Exemptions.

The AMT exemption amount for tax year 2021 is around ~$60,000 for individuals and ~$90,00 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. Once you start making much more than $200,000 MAGI, you start paying a hefty amount of AMT.

4) Child tax credit. 

The new enhanced benefits in 2021, provide for $3,000 in child tax credit, which specifically cover teens who are 17 for the first time. Th child tax credit is income-based and would start to phase out for individuals earning more than $75,000 a year or $150,000 for those married filing jointly. 

From there, the credit would be reduced by $50 for every additional $1,000 of adjusted gross income earned. That means the $3,000 credit provided to parents of a child aged 6 to 17 would be phased out completely for individuals earning $95,000 and those making $170,000 and filing jointly. 

A family of three with a $2 million net worth and income of $100,000 can get a child tax credit while a family of three earning $1700,000 a year with a $200,000 net worth can't get anything.

5) Different wealth mindset.

If you have an income mindset, you're likely a worker bee. If you have a wealth mindset, you figure out a way to build massive equity in your business or other people's businesses for next level wealth.

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 stealth.

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. Nosy people can guess a portion of your net worth through visible holdings like your primary residence and your vehicle.

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 spend wastefully.

Income usually comes in a regular bi-weekly or monthly cadence. 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.

Your net worth is much more complicated and much less liquid. As a result, there's much less temptation to pilfer your net worth for short-term desires. For example, I can't withdraw from my private equity funds without paying a penalty. It also takes a lot of preparation to sell a property. With income, I can spend it instantaneously.

Related: Long Term Investing Is All About Saving Yourself From Yourself

8) Higher feeling of security.

The feeling of security might be the biggest reason to focus on building a large net worth 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.

Your net worth is generally much more sticky if you properly diversify. Your income can be extremely volatile, especially if you are in a revenue producing role where a bonus makes up a large percentage of total compensation. You can lose 100% of your income one day, but it is unlikely you will ever lose your entire net worth, unless you were over-leveraged.

Why Net Worth Might Be A Scarcity Mindset

So why can focusing on net worth be considered a scarcity mindset? The main reasons have to do with taxation and receiving government benefits.

By keeping your household income low, a lot of people can pay less than a 10% effective tax rate. Some households can essentially pay nothing due to child tax credits, pre-tax retirement contributions, exemptions, and deductions (standard or itemized).

Paying little to no taxes is fine, but it essentially means you're too poor to financially contribute to the health of America. I know so many people who purposefully stop working, give up their side hustles, and physically let themselves go due to the desire to minimize taxes and get government healthcare subsidies. They've completely limited their potential.

Wouldn't you much rather pay $100,000 in taxes and keep $200,000 than pay $5,000 in taxes but only keep $36,000 a year? I sure as heck would.

Minimizing our tax burden is one of the most important exercises given the government is so wasteful with our tax dollars. But purposefully limiting your income potential in order to pay less taxes and receive subsidies is backwards looking.

Suggested net worth targets by age, income, work experience

Income Growth Mindset

Between the age of 22 – 34, I had an income mindset. An income mindset is what made me take the risk of moving from NYC to SF with a new firm. Despite not knowing anybody in SF, the pay was too good to pass up.

An income mindset is what made me work longer hours to get promoted faster. By shoveling up to 80% of my after tax income into investments for 13 years, an income mindset ultimately allowed me to exit the workforce early.

But after I left the workforce, my entire money ideology shifted towards a net worth mindset because I wanted to take a break and preserve capital. In essence, a net worth mindset reflected a burnt out man who didn't want to hustle any longer.

Related: One Of The Biggest Financial Mistakes Early Retirees Make

From age 34 – 36, my investments returned more than my income not because my investments were so great, but because my income fell by 80% after I left the working world. If I had not completely forsaken the income mindset, I would be in a financially better position today.

Publishing investing lessons from a surreal 2017 illustrated how important it is to focus on income growth. Contributions equaled 10X my expected annual return. In other words, even if there was a 50% decline in my investment returns, I could get back to even in six months time with continuous contributions.

Put it another way, investment returns are no longer the driving force behind my net worth growth, income growth is once again. It's like going back to my 20s, but with larger dollar amounts at work. Being able to actively contribute to your net worth is huge.

Benefits Of An Income Mindset

Here are times when focusing on income is more important than net worth.

1) Helps eradicate laziness.

After a certain point, holding on to a net worth mindset is due to laziness. With an income mindset, you'll always be thinking about ways to generate extra income for you or your family's financial security. Once you've reached your net worth target, all the more reason to try something new. There are some people who work less than 40 hours a week and complain why hey can't get ahead!

2) Provides a tremendous investment buffer.

Although the investment environment has been wonderful since 2009, having an income mindset allows you to continuously build your nest egg in downturns.

Your income becomes most powerful when you can contribute more each year than the amount you could realistically lose each year, e.g. contributing enough in 2008 so that you are even in your stock portfolio even though the S&P 500 declined by 36.55%. During good times, you can run up the score.

3) Keeps you active and healthy.

To make money you need to interact with people. When you interact with people, sometimes you make friends and stimulate the mind. I've found that doing private 1X1 consulting, corporate consulting, coaching high school tennis, attending meet ups, and eating steak dinners with business partners have all helped keep me active and healthy. Often times the camaraderie is even more important than the money.

Once the pandemic is over, there will surly be an explosion of economic activity! We just need to make sure we maintain the ideal body weight so we don't die young!

4) More immediately fulfilling.

Another reason to focus on income growth over net worth growth is that it's more fulfilling to generate active income.

There are less grey areas when it comes to measuring income than when it comes to measuring net worth. For example, there's a +/- 15% valuation range for my real estate portfolio, and likely a +/- 50% valuation range for my online business.

With income, what you see is what you get, and it's likely all due to your effort. There's something very fulfilling with earning more after trying harder. A strong correlation with effort and reward is why entrepreneurship is so rewarding, and why working at a big corporation or the government may be less fulfilling.

Here is the recommended split between active income and passive income for greater happiness.

5) Easier to demonstrate a good work ethic.

If you're a parent, an income mindset will help you consistently demonstrate a strong work ethic so your children don't grow up to be entitled brats. A strong work ethic will also engender admiration from your partner, friends, and family members. The more people respect you, the happier you will be.

Now that I have two young children, I really like alternating my time between work and playing with them. It feels good to tell my children daddy needs to go work to make money so they can eat and have their toys. Working to make more income will hopefully enable children to appreciate the value of time and money. I'm excited to help build their custodial Roth IRAs and get them to work as well.

Retirement Is A Curious Thing

I always thought that I'd live off my passive income and be done with this work thing. But early retirement has a funny way of letting you focus on things you really enjoy doing. In my case, it's writing about personal finance online and being a stay at home dad.

Sometimes, you get so utterly enamored with your passion project that you unexpectedly make a healthy income. When you earn something unexpectedly, that's when you finally feel rich. Now I'm back to investing most of my income in assets that will hopefully generate enough passive income to take care of my family forever.

Net worth is still more important than income when it comes to financial freedom. Just don't get carried away by completely forsaking your income generating abilities once you've achieved a comfortable number, especially during a bull market. At least find ways to make money through activities you truly enjoy. Who knows. You might surprise yourself one day!

Invest In Real Estate To Boost Your Net Worth

Real estate is my favorite asset class to build wealth because it's stable, generates income, and provides utility. Real estate is one of the best ways for the average person to boost wealth. Here are my favorite private real estate 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 $810,000 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.

Track Your Finances Diligently

Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Empower to help monitor illegal use of your credit cards and other accounts with their tracking software.

In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. 

I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management. At the end of the day, it's good to focus on growing net worth and income. Eventually, you'll want to spend your money on a better life for you and the people you care about.

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77 thoughts on “When Income Is More Important Than Net Worth For Financial Freedom”

  1. Dood, el Farbe

    “3) Alternative Minimum Tax (AMT) Exemptions. The AMT exemption amount for tax year 2017 is ~$54,300 for individuals and ~$84,500 for married couples filing jointly. The AMT hasn’t been adequately adjusted to catch up with inflation for years”

    Not only is it not being indexed, that 54K or 84K amount which is exempted itself also starts phasing out at a rate of $250 per each $1000 you are over the phase-out threshold, which is pretty low (120K for single, 161K for married).

  2. I’m definitely chasing income at this point in my journey. However, I’ve been doing it in a way that allows me a lot of control over my time and stress levels. I’ve been skill-building in something that will double my take-home pay, and make me so valuable that even the temp market I am in must start adjusting to my desires. Work remotely for weeks at a time so that I can stay with my long distance girlfriend? Yes, you will allow that.

  3. Hello Sam,
    This is a very good post depicting the contrast between the net worth and income mindsets. I’d actually never thought of this before so it gives me new perspective.

    On another note, I have been reading your blog for almost 9 months now and it has given me a lot of inspiration. You have done a lot of good work through your posts. I wish to meet you one day and thank you personally for all the help that you have been. I am a newbie just starting out on the path to financial independence and hope to learn a lot during this journey.

  4. Great article as always, but this part is incorrect (and it’s actually better than you thought):

    “If you are in the top tax bracket in places like California, New Jersey, or New York, you will be pay a total federal + state marginal tax rate over 50%. But if you have $10 million dollars that generates $200,000 a year in dividends, you only pay a 15% tax rate.”

    If your only or primary source of income is dividends and your ordinary income is <$37,650, you pay 0% federal tax on qualified dividends. California does not have any special tax treatment for dividends or capital gains though (I don't know about other states), so if you have $200k in dividend income in CA, you will be paying 9.3% marginal state tax on that amount, or 7.3% effective – less than half of the 15% you thought you would owe. Not bad!

  5. Hi Sam,

    I disagree with the basic theme, not with the minute observations you made for a NW vs. Income Stream mindset.

    I do not claim to have an answer either.

    But lets take an example of “above average married couple NW” from your other article.

    Jim, Joe, and Jeff are married. They are above average as per your methodology. They are 45, had the same income throughout their career, saved hard, and have a NW of $2M (I rounded it off).

    Their NW is expected to be 1.2M in 401K, 500K in Post-Tax, and 300K in Home equity.

    But here is the reality:

    Jim-couple follows the conventional wisdom, saves and invests like the above average couple, and has the above breakup of his NW.

    Joe, with the same NW, has his $2M invested in 3 rental properties i.e. he has more of his post tax income invested in income producing assets. His breakdown is:
    500K in 401K, 1.2M in Rentals, 300K in Primary Home.

    Jeff, with the same NW, chooses to live in a paid for $1M mansion/fancy cars/jewelry, and $1M in their 401K.

    What are their income streams at 45, having saved at the same rate (so far):

    Jim earns 4% of his 500K post tax account, $20K.
    Joe earns 4% of his $1.2M rentals, $48K
    Jeff earns 4% of….umm..nothing.

    Who of these 3 can retire today?

    Who can retire better when they reach 59.5 age to tap into their 401Ks?

    NW means nothing if it is NOT invested in income producing assets, but in liabilities like primary home, BMWs.

    I am like Jim, your typical above average married couple, but I cannot retire because my NW is all tied up in 401K, and I do not have any income producing assets now (not later), and isnt that financial “freedom” is about.


  6. I think there should be a subdivision under income growth mindset.

    While I am highly aware of my household net worth, I am more keen on income growth growth, specifically passive income growth. I think I am without a doubt in the camp of passive income growth mindset, where I firmly believe as long as I work towards increasing my passive income streams, I am both growing my income (without the burnout from active income seeking) and my net worth over time.

    And for tax, I will not pay more than what I am due for, but happy to chip in even if it is not optimally spent in the ways I mostly desire.

  7. A big thing could be laziness if focusing only on your net worth. There’s only so much saving you can do and once your properly allocated then what? Income generating is huge because it’s (hopefully) a regular occurrence that can be used to consistently provide inflows to your net worth and YES interacting with people, keeping engaged in society, etc.

  8. Save Splurge Deny Debt - Cameron

    Great article as always Sam,

    We are just now starting to see the tipping point of focusing on net worth over income. With a large student debt load, the income is still necessary to finish paying those. We are now paying off the smaller loans and our cash flow has increased considerably.

    This extra amount ($1,000) every month has allowed us to build up savings, investment, and extra debt payoff. It has also allowed my wife to work 1 less day a week to help take care of her family in ill health.

    We have also done things like buy a foreclosure primary residence and started to remodel it to have equity building all the time. It is a potential option to rent this home out in the future. Having those extra options and flexibility even with a negative net worth should help us catch up later on in life.

  9. I was just thinking about a similar topic since I’m deciding where to deploy my savings since I have some debts that will be paid off soon: cash flow vs net worth. I could focus on cash flow and get rid of some smaller student debt, or focus on net worth by throwing more money at my investments. This article provided me some good insight I think I will focus on maxing out my IRA’s and then get those debts down.

  10. If I can find a way to make more money, I can find a way to minimize my income taxes. When you make more money, you have more freedom to make financial moves that can lower you income tax. Hence, I think it’s very foolish to give up on your earning potentials just to qualify for government assistance. This also means that my income will be at the mercy of any government policy. Not a very smart choice I would say.

    For me, I am using both my income and net worth hand in hand to build one and another. To increase my net worth faster, I would have to earn more money. With more savings as part of my net worth, I can use it to buy more income generating assets, which in turns increase my income.

  11. You may have covered this question elsewhere on this blog, but I am wondering if a pension should be included in net worth and if so, how do you calculate the value? If you are receiving a $100,000 annual pension for life, (assume that can be 20-30 years), how would you assign a value to this? In today’s market would probably need a few million invested in stocks to generate that $100,000. Do you add that amount to net worth? Assume the pension is fully vested. Thanks!!

  12. Hi Sam,

    This is a great article. Growing your net worth over the long-haul is important for financial sustainability, but you always need to have income. Being taxed by the government is a certainty, but it shouldn’t incentivize people to minimize their income potential.

    On a side note, I’ve been trolling your site for a few months now and want to thank you for all your help and advise through your writing. I’m a young buck at 27 and I currently work in the corporate finance space. I needed to get out of this rat race and have taken your advise to heart. I finally got off my butt and started a blog at NinjaCapitalist.com. As a former finance guy yourself, you’ve been a great role model for me. Again, thank you for your insightful writing and helping others such as myself work towards financial independence!


  13. Graham @ Reverse The Crush

    Thanks for sharing your thoughts on the income verse net worth debate. It’s interesting to hear how you shifted from income minded to net worth minded and back again. You make a lot of great points about the benefits of both.

    Personally, I’m much more of an income minded person because net worth doesn’t necessarily mean more flexibility. For example, anyone who has a mortgage probably has a higher net worth than me, but they also have higher expenses. I’ve also never really been a fan of the 4% retirement withdrawal rule. Sure it’s an easy calculation that gives the majority of people a frame work to work towards. But when planning for retirement, the bottom line is how much income you can receive. I’m not really sure why anyone would want to start depleting their assets.

    On the other hand, I do understand a higher net worth can lead to more borrowing and income creating opportunities.

    In terms of finding a balance between the two, as long as I continue saving and acquiring assets while keeping minimal debt, the net worth and income will grow. For peace of mind, I guess it’s important to diversify the assets to minimize the impact of a net worth decline in the case of a market correction.

    Thanks again for sharing!

    1. Good stuff Graham. I think you have the right mindset for your stage in life. Sooner or later, you will reach a net worth amount where you go into this “I don’t really care about income” funk. The sooner you get there, the more you’ve got to look out for the dip in motivation.

  14. I’m still all about both income and net worth. While my desk job salary may not grow a whole lot more as I’m nearing 50, my ability to earn additional side income exists and I’m working it. As we get closer and closer to FI this may change but right now I’m still excited to see both grow. (I do really like your reason #8 above though). Thanks for sharing, Sam.

  15. I am working on building up my NW so I can be FI within 10 years. I would like to continue working in a less stressful job (if there is such a job). The office politics are one of the main reason why people burned at work and corporate America is not friendly toward working mothers with a little one. Everyone is expected to work around the clock. Work and life balances are just lip services by management.

  16. Even after entering 7 figure FI I still continue to work in my office job everyday that nets less than $50k after tax as per my life before FI because 1. It’s weird to not be going to work as a 20 something and 2. I want to set a good example for my children if and when they come and 3. It’s for my mental sanity and the only way I get to socialize with working adults at this point.

  17. Personal Alpha Investments

    Great post!
    Income is what makes the net worth possible.
    People need to be made aware of this perspective. Perhaps they’ll look at things differently.

  18. Really liked this post Sam. Net worth at the end of the day is more important (if one had to choose one or the other), but within the spartan-like lifestyle of the PF community, I think the income-making potential is not fully maximized due to this scarcity mindset. And yes, people overthink the tax thing. Their goal becomes more about not paying taxes than making more money. At the end of the day, if you’re paying a ton of taxes, it also means you’re taking home a ton of money. And whether it’s 70 cents on the dollar or 50 cents on the dollar, for every additional dollar you make, that’s still…in addition to what you would’ve otherwise not had!

  19. Love this post and the benefits of each focus.

    I think when someone is just getting started in their career, income should be the focus, and then the next focus is to take a percentage of that income and invest it to create passive income where you’re not trading time for money.

    Income producing assets are the quickest way to financial freedom, in my opinion. An income producing asset (such as investment real estate) will always be valued at a multiple of the income stream that asset produces. So the asset adds to your net worth and produces income at the same time which is the perfect combination.

    I found that when I focused on only buying assets that produced an income, and then created a strategy on increasing the income produced from each asset, my net worth went up as a result.

    1. The double win of seeing principal appreciation and passive income appreciation is definitely awesome. It is amazing the difference in wealth that can be accumulated after 10 years, especially compared to those who simply spend and do not invest.

  20. This is a defining post for this blog.

    Too much of the FIRE blogs out there focus on cutting costs to the bone to hit a 6-figure nut that is 25x annual unrealistic spend…

    I fear for what happens to all of those who are following it when the next big stock market downturn comes. Let alone a catastrophic unforeseen event.

    Build a nut so big you have massive optionality and diversify. Build an income stream that brings you more optionality and lets you grow and have fun.

    That’s what I take away from Sam.

    1. It’s a good takeaway. I do believe in being frugal and seeking value. But I’d much rather focus on creative ways to earn because the upside is unlimited.

      I don’t get proud living off $35,000 a year as some like to announce. I get proud creating something from nothing, creating multiple times more like it’s a game you can’t lose, living it up more, but still living within my means.

      There is so much upside, to truncate this upside due to wanting to pay less taxes or get government subsidies is such a shame.

    2. I agree – I feel like a lot of fire blogs just want to be as cheap as possible in life rather than enjoying it. I’d rather grow a nice stack while enjoying life along the way…

  21. Interesting perspective. I agree, it is wise to have a net worth mindset while working to be sure to have something tangible for the time and efforts you put into work, no matter your income level.

    Once reaching FI, it’s all up to the individual, whether they want to be lazy and sit on the couch, continue to hustle, or chase their dreams. Personally, I can’t see myself just sitting around.

  22. We definitely have the scarcity mindset here. My husband and I focus on saving for our net worth more than income. I think it’s important to focus on both but for us it’s mostly NW.

    We don’t ignore income completely…though and we both have pretty good work ethics. It’s just harder to control for income which is more likely determined by others.

    Saving money is easy because we can control it all.

    Our NW is north of 700K and we’re not lazy at all yet. It just feeds the fire for more muahaha!

  23. Hi Sam,

    I enjoy the income my net worth produces way more than my earned income from my day job. In my eyes income is income regardless where it comes from, however passive income is what really gets me excited.

    Thanks, Bill

  24. On the one hand you need income to build your net worth over time, unless you win the lottery or have a rich Uncle. We have neither.

    I think in your 20’s and 30’s or whenever you start planning for financial independence, you need to focus on maximizing your income and putting as much of it to work as possible. At this time, you should begin building knowledge and a strategy for your investments.

    After you obtain the first few million, you can quit your day job and focus on what matters most. For me, it was having more quality time with the family. The focus becomes more on allocating capital intelligently and working on passion projects.

  25. Like many things personal finance, I don’t think it’s a “one or the other” approach. It’s similar to people who talk about spending less versus saving more. Doing one isn’t mutually exclusive with doing the other; you can tackle both at the same time.

    While you’re working it’s obviously a lot easier to find that good balance of growing your net worth and growing your income; they pretty much go hand-in-hand.

    I think your last paragraph summed things up quite nicely. :)

  26. You really can’t focus on just one and ignore the other. Focusing on income is important because increasing income will help you build your net worth and live a comfortable lifestyle. But if you forget about net worth then you might just end up inflating your lifestyle as your income increases. In that case you’ll just stay where you are rather than using the additional income to move closer to your goals.

  27. Mr. Smart Money

    Haha, I’ve been doing a lot of thinking on net worth since I just posted an article about it a few days ago!

    Thanks for the reminder to keep working and not get lazy though. 100% agree that having a wealth mindset is key.

    All the 7 figure people I’ve met and talked to could easily stop working and live comfortably – but they all continue to work their tails off. I wonder if that kind of work ethic is due to causation or just correlation?

  28. Very nicely balanced. I think the FIRE community discounts the income mindset unduly. I’m retired a little early with excess funds because work was fun and I didn’t want to walk away as early as I could have. I did finally but I walked straight into four side gigs that pay six figures for basically about two days a week of work. Because I like earning I have to pay over $12,000 in health insurance premiums, both halves of Social Security and the rest of payroll taxes. My wealthy brother is doing the stealth thing and getting free insurance but I think I’m happier because I have a big network from my side gigs that gives me a social outlet and I also enjoy making money. Maybe that makes me odd, I don’t know, but I’m really enjoying the semi-retired but still earning lifestyle.

  29. New Father Finance

    Income is a necessary condition for growing your net worth early in your career. Right now, I’m definitely focusing more on the income side. My net worth growth is currently driven mostly by income and savings. Almost 90% of my net worth growth last year was directly from savings instead of capital gains and dividends.

    I do see what you’re saying though about finding the right balance though, particularly later on when your net worth can really cover your spending. At that point, it is really about doing what makes you happy. And if you can make money by doing it, then you deserve two pats on the back.

  30. Tracking both are important to me, however at this time my lifestyle is based on my income. I’m focusing hard on transitioning all that income from active to passive, and as a result, my net worth has also increased. Investing in real estate tends has helped with both…

    I agree, when you’re passionate about something and it happens to provide an income… that’s the ultimate win!

  31. I’m lazier these days because I have the net worth to fall back on.
    It’s funny how your mindset changed over time. I’d prefer to pay more taxes as well. That means I’m making more money. I don’t mind that at all.

  32. Ha, too bad I’m living in one of the few countries where the government comes after income AND wealth at the same time!

    Our focus lays on growing income and tracking net worth. We aim to have a balance, but the goal here is finding income producing assets with a nice return. By tracking our net worth, we can identify our various income producing assets and find possibilities to generate more income. For example, if we have lots of equity in our own home, we can use that equity to fund a second rental property.

    We tend more to the income growth mindset, but we don’t forget that knowing what your worth can bring even better returns. It’s not that one is more important than the other, it depends on your goals and probably the country you live in (as for taxes and regulations).

    1. Which country is that? The US comes after your wealth (estate/death tax), but only after you surpass $5.49M per person. It’s a shame there’s another 40%-50% tax after you paid all that tax already to accumulate your wealth!

      1. The Netherlands… There are several brackets where you pay none in the first, and it gradually increases with each bracket. You will start paying after you surpass around 25.000 euro (single income) and around 50.000 euro for a double income.

        And yep, it’s a pity to pay a wealth tax. But then again, we pay way less for our health insurance compared to the U.S.

  33. The idea of manipulating income to obtain subsidies and avoid taxes is something that the rich seem to understand better then the middle class or poor. Part of that, I assume, is that the wealthy have investment assets allowing for capital gains while the middle class is just working towards earning an income, paying debts, and repeating the cycle every month.

    I think being engaged post financial independence is important. In what realm you are engages is what changes. You can go from investment banking to blogging, or software engineering to bike riding. Basically financial independence opens up a realm of possibilities.

  34. Gen Y Finance Guy

    I still tend to focus more on the income side of the equation than net worth, but it’s balanced with striving to save at least 50% of our after tax income.

    Income is the fuel that keeps the net worth enginge churning, so the more income I can generate, the more I can save, the bigger I can grow the networth nest egg.

    I am sure I will burn out one day based on the hours I am putting in, but the plan is to keep pounding the pavement for as long as I can sustain it.



  35. There certainly seems like a balance needs to be struck between the two. FIRE is an incredible thing, but it is the FI that attracts me far more than the ability to retire early. I am definitely focused on both income and net worth today – Working long hours and staying in my high-paying finance job to save over 50% of pre-tax income and building net worth, but also cultivating ways to continue to work with a business of my own once we achieve financial independence.

    If we stay on track, we will reach FI by the time I’m 30. I love my husband and son dearly, but the idea of being done generating income at that age is somewhat terrifying… I have never been good with too much idle time.

      1. My husband is already “retired” as he’s a stay-at-home dad!

        My plan is to work from home at least part time with some type of money coaching business – and *fingers crossed* be making a small amount of money from my blog by then.

  36. Brad - MaximizeYourMoney.com

    I’ve reached FI and am early-retired. I have no income right now (other than dividends) but a multi-million dollar net worth. Monte Carlo simulations show I’ve got a 90%+ chance of my money lasting 50 years, so I feel pretty good about things. That said, having some income would make me feel even better. :) BUT… I don’t want to work *just to get a check*. If I start to generate income from the things I’m already doing any love anyway, that’d be the ideal situation.

  37. Grant @ Life Prep Couple

    I have gotten to a point where I am no longer chasing income. My wife and I have both turned down opportunities to make significantly more money but they would almost certainly require more traveling and more hours. Something we aren’t willing to do with a little one at home.

    If I would have been reading this blog 10 years ago I would have been all about the hustle. Things change once you get the wife and kids. A false sense of security and time at home start to be worth a lot more.

    We have been chasing net worth the last couple years to hurry up and reach FIRE so we can pursue something we love and hopefully have into turn into income.

  38. Adam and Jane

    Interesting post! I think that income and networth are equally important.

    We started in IT in the late 80’s making 19.5K age 22 each. Our company only allows 401K contribution of 10-15% due to HCE (Highly Compensated Employee) so I was never able to contribute the max until I was 41 and when my wife was in her late 40’s. Our salaries grew slowly and broke the 100K mark in our late 30’s.

    On your 401K estimate chart, we are around the upper middle range and NO where near your high end range.

    On your NW chart, we are about double with your high range not including the free additional NW of 3.5M (principle invested @ 4%) for our 140K pensions/medical (52K+8K+72K+8K).

    Just like in the Millioniare Next Door book. It is not what you make but it is what you keep.

    After we were married, wife made it manditory to save at least 50% of our incomes. When rumours of re-orgs and laid offs surfaced in 2010, we cut 15K of expenses and after several years increased savings rate to 85%. We are also fortunate that our mentor introduced us to tax free individual municipal bonds to allow us to generate passive income starting in 2010 to prepare for the changes in our company. We bought more muni bonds every year. In 2017, our muni bonds will generate 87K. Jane was laid off in 2016 and in 2017 she just started her 52K pension. She is so dang happy to not work ever again!

    At this point, I have no drive to accumulate more or to work. I think I am lazy and burnt out from doing 24×7 on calls for the last 28 years. I am just hanging out at work for another 2.2 years to reach 55 to double my pension to 70K and to get 8K for medical. Funny that is that I dont want to be at work anymore but the team needs me to support my IT systems since I am the only one left that knows it. They laid off my backup in 2016.

    I mentioned to Jane that it is time to spend. We have over 500K in savings earning crappy interest. My mentor told me to just leave 75K in savings, invest the rest and have a line of credit just for emergencies. I rather have a min of 200K in savings for emergencies and buy another 300K of 4% muni bonds. I am basically missing out on an extra 12K tax free income a year if I would have invested 300K on more bonds. That would have brought our passive income to 99K. I am hoarding cash to build up our war chest and secretly hoping that Jane will allow us to buy a condo in Hawaii. She only wants us to rent a couple of months in Hawaii. I hope she is NOT reading this post! Well, having 9-10 years of living expenses in savings is very comforting too.

    Another thing my mentor told me is “to have some passion in life. What is the point of accumulating so much money if you have no passion?”. I was focused on the end of the journey to FI and then to retirement and not enjoying the ride. My mentor is so correct. I started my hobbies again which made me happier and my other passion is helping my co-workers, friends and family reach FI. Only 50% of the people listen because they are afraid to take the first step. I give them my time for free because I really enjoy helping them.

    My goal is to have the least amount of taxable income in retirement.


  39. I recently wrote a blog post about how “passive income is king.”

    You can spend all of your time trying to build a massive nest egg, but if you aren’t generating any passive income, you don’t have any financial freedom. Your $2 million home won’t help you retire, especially if you don’t have the passive income to pay the taxes.

    Great post as usual.

    1. Although if you sell that $2 million home, that sure will help. How much house does one really need in retirement?

  40. I like you organized you are with your thoughts and your writing. I personally have thought a lot about net worth and how beneficial yet sometimes deceiving it is to our perception of wealth.

    I heard about real estate investors who were worth millions of dollars, most of which went down the drain during the 2008 financial crisis. I know it takes a lot of effort, time, commitment, and hard work to build such a high value of net worth. But when our net worth depends so heavily on how the market performs, we can also be left with almost nothing in the end.

    I want to have build high net worth and generate strong income at the same time. If the our net worth drops, we still have the income to support us. If for some reason we stop making income, then we still have the net worth to fall back on. It’s not as easy as that in reality, but my risk-averse mindset tells me to try to be on the safe side and never sink with the market.

    1. Coming from someone with an eight figure net worth, what your 2nd paragraph states as your goal is pretty much impossible. If you want to generate high passive income from net worth, it entails risk. So your net worth will definitely be impacted by the economy.

      A stock market or real estate crash impacts high net worth individuals much more than those who work for income.

        1. I liked the article, it I do disagree on a few points.

          I also have a high net worth. However, I show very little taxable income, close to zero, yet I live well.
          The primary way that is done is by owning commercial and residential real estate with depreciation losses to offset any cash flow received…you can do a cost segregation study to accelerate the depreciation if you need to shield more cash flow.

          The other way I shield wealth from taxes is to have a portfolio of non-dividend paying stocks. I only sell the stocks that are losses, and never sell those that are winners. What this does is give me liquidity off my net worth whenever I need it, yet not create any taxable income. Even in the current market I have been able to generate several hundred thousand in net loss carry forward from the stock portfolio, while the value of the portfolio has gone up by several million dollars.

          So it’s a ideal situation, my net worth has risen significantly, but no taxable income has been generated. As a matter of fact, when I do run out of stocks that are losses to sell, and must sell winners, I will have enough net loss carry forwards to avoid paying any taxes on the capital gains for many, many years.

          What’s even better is, I can borrow against the stock portfolio, or real estate portfolio for any liquidity needs, and the interest will be deductible.

          The last point is that if at any point I pass away with these unrealized gains in my portfolio, my heirs will inherit the portfolio at a stepped up cost basis based on the date of death, or 9 months after the date of death…and No capital gains will have ever been paid.

  41. I’m aiming for a good compromise of the two. I’m aiming to build up my net worth enough to safely live off of it throughout early retirement.

    However, I’m working on building up enough rental properties and side businesses that I have a steady income stream coming in as well.

    When I leave the 9-5, I’m sure I’ll want to do something to keep myself busy (after a month or two of just goofing off first!), so those side businesses will help provide some money that I won’t have to draw as much on my investments.

    — Jim

  42. For now, I care very little about income. Haven’t focused much time yet in increasing it. Calculated that roughly every 250 points up or down that the S&P goes equals my income. Put in a lot of time over many years to set that up. The 250 number should go down over time. Ironically, I also care little about taxes. The main reason don’t focus on income is because if one wants to earn more and has a job either they need to keep changing employers or attempt to climb up the latter. Neither of which interest me. I’d potentially like to start a company one day. Until then won’t focus much on income.

  43. Right now i focus on both. I am trying to grow my income to directly contribute to growing my networth. I’m in that time frame when my raises now will drastically change where my income is in 10 years. (however, with the right planning I shouldn’t care if I’m working in 10 years ;) )

    Doing the finishing touches on my employee review to try to max out my raise which will then go directly into the 401k. Plus it is bonus season which we are planning on throwing it in savings to help with our baby leave or throw it into the wife’s Roth.

  44. Haha… I will admit, I am getting lazier as the net worth rises :) In fact, I’m literally trying to scheme up ways to work way less and still get paid the same or more – hah. But yup – all this def. rings true. And obviously a good problem to have either way.

    1. Balanced Dividends Mike

      Hi J. –

      In your most recently published net worth overview (for June 2017) and some other posts, you mention your portfolio allocations are primarily in broad-based index funds.

      Related to Sam’s post (this and others) discussing the desire to obtain additional returns, do you find yourself ever considering shifting allocations toward more income-based funds or investments? If so, is it potentially because you find yourself shifting mindsets as Sam mentioned? I admit I do from time to time.

      There seems to be a number of newer products (whether traditional mutual funds – passive index and actively managed – or ETFs) that are marketed as income focused. It sometimes makes a lot of clutter.

      Thanks, Mike

      1. I have all my money in VTSAX w/ Vanguard because i’m totally cool getting average returns across the market :) I may go with a 3 prong portfolio as I get older like some others do (sprinkling in a bonds fund and an international fund), but right now I like being more aggressive and just letting it ride as I don’t lift a finger. And quite honestly, I’m not smart enough to even try and earn more out of the markets – I suck and dislike researching stocks so this is my happy medium. Not sure if this helps?

  45. I’d say I’m squarely in the Income camp right now. I just turned 30 a few months ago, and only last month reached a positive net worth (+$6k!) for the first time in my adult life.

    If I DID have a large enough net worth to be financially independent, though, I know I’d continue doing SOMEthing on the side that would still generate income. Making money makes me happy, but I’d probably tone it back a bit and focus more on passion projects like you. I’d want to keep building up my net worth (even if more slowly), and focus more of my income on giving back to charities I support – something I can’t do a lot of right now, sadly.

      1. Thanks – only I WISH I was debt-free, haha! My savings/investments/checking account balance has only now reached the amount of debt I have (~$82k), so they roughly cancel each other out right now. Once I am debt-free my net worth will shoot forward though!

  46. Apathy Ends

    Very interesting Sam, I have found our nest egg has (even though it is not all that big) already started shifting my priorities away from work. I focus on the important part of my job and let all the menial tasks fall of the edges. A lot of it has to do with not being passionate about my job (which you talk about in the post)

    I will still push for promotions and raises, and they shouldn’t be impacted as the stuff I stopped doing wouldn’t be written on a review.

  47. Charleston.C

    Interesting. But this isn’t a zero sum game right? As in, the pursuit of income doesn’t necessarily detract anyone from a networth mindset. For anyone who is not financially independent, income growth and networth growth goes hand in hand.

    Once someone is at retirement level of networth, I’d imagine it becomes a choice (or balance) between effort to generate income and time (our most precious limited resource).

    Then again I’m not at financial independence level yet so it’s all speculation from me.

  48. Mr. Freaky Frugal

    “Sometimes, you get so utterly enamored with your passion project that you unexpectedly make a healthy income.”

    Good point! If you can make income from something you already love doing, that’s awesome! Otherwise, you’re just another Wage Slave grinding away.

    I’m FIREd and have a very low income. Believe it or not, Mrs. FF and my income is so low that we make money on the healthcare subsidy because we buy a Bronze HDHP.

    You mention that Income Mindset “Keeps you active and healthy.” I think that’s true if what you do to earn income is challenging. Being challenged or pushing beyond your comfort zone on regular basis is what keeps you active and healthy.

    Challenging yourself may or may not make money. Mrs. FF trains, qualifies for, and runs the Boston Marathon, but she’ll never make any money from it. In fact, running races costs money. But nobody would deny it’s challenging.

    I find writing a blog challenging and difficult, but I doubt I’ll make much money from it. It’s just my way of trying to help others FIRE.

  49. Mrs. Adventure Rich

    I think this has been one of my biggest questions about FI… would I really be able to move from full time work and focusing on income (to grow our Net Worth) to no longer making any income and shifting my focus all together. But it sounds like there needs to be a balance, even in retirement, in order to stay healthy, motivated, fulfilled and secure.

  50. Personally I don’t like to include your primary home in net worth since it’s somewhere that you have to live. I feel like it gives a false sense of security when included. Otherwise I’m good with using Net Worth as a benchmark as long as you realize it’s a benchmark and not the end all be all.

  51. Hi Sam –

    Nice article; I smirked when I read the last question to readers: How do you find the right balance between the two?

    This is the core theme of the blog I mentioned I’m kicking off soon. Whether income vs. net worth or income vs. growth (or perhaps many other topics in or out of the personal finance arena), it’s all about FINDING the right balance – not just keeping it. As I conclude on the pending blog’s About page: “In order to keep your balance, you need to first find it. And it’s never ending; it’s a continuous balancing process of improvement, enjoyment, and learning. If you keep investing in yourself, the dividends will keep coming.”

    To answer your question, I believe it varies depending on one’s current, yet long-term mood. You mentioned being in an income mindset for 13 years where, if I understand correctly, the goal was income growth. You can make the argument though that growing net worth and income also go hand-in-hand. Increase net worth and you have additional income producing assets; acquire additional income producing assets and you can increase net worth.

    It’s about finding the right balance and adjusting as needed (based on market conditions, whether you’re still working or retired, etc.). While likely years away from retirement, I am focused on growing my net worth but also with an income oriented mindset (and not just in the form of dividends from the equity portion of my portfolio).

    Overall, as you mentioned, things do seem to go around in circles – and not just in personal finance.

    Thanks, Mike

  52. I’ve focused on both income and networth equally since entering the workforce mainly due to both having alot of runway when I started out. But I have noticed that the more our networth increased the less I focused on income. I used to always be thinking about the next job, the next promotion but in the past couple of years of watching our networth grow I’ve taken my foot off the income petal.

    Ultimately I think you have to have balance. Having a growing networth and income is the best of both worlds. I don’t want to work longer than I need to and have too much money when I FIRE but I also don’t want to feel like I shortchanged my career either.

    Intriguing article

    1. Lance @ My Strategic Dollar

      Totally agree here. I focus on both at this point (I’m only 27). So I focus on growing passive income through RE to cover all expenses, so I can then throw as much money into investments as possible.

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