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When Income Is More Important Than Net Worth For Financial Freedom

Updated: 03/18/2021 by Financial Samurai 77 Comments

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!

Recommendation To Build Wealth

Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. You can use Personal Capital 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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Filed Under: Retirement

Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.

I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.

In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.

Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.

Current Recommendations:

1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.

2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.

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Comments

  1. Bill says

    August 1, 2017 at 12:17 pm

    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

    Reply
    • Financial Samurai says

      August 2, 2017 at 11:01 am

      Now imagine if your active income generated from something you really love becomes way more than your current passive income? How pumped would you be? Like playing with a massive stack of chips from the house!

      I disagree that passive income is more exciting.

      https://www.financialsamurai.com/confession-active-income-is-much-more-enjoyable-than-passive-income/

      Reply
  2. Turning Point Money says

    August 1, 2017 at 12:12 pm

    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.

    Reply
  3. Dave @ Married with Money says

    August 1, 2017 at 11:27 am

    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. :)

    Reply
  4. Mike Collins says

    August 1, 2017 at 11:26 am

    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.

    Reply
  5. Mr. Smart Money says

    August 1, 2017 at 9:31 am

    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?

    Reply
  6. Steveark says

    August 1, 2017 at 9:17 am

    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.

    Reply
    • Financial Samurai says

      August 2, 2017 at 11:00 am

      Your comment just reminded me of a post I wrote entitled, Active Income Is Much More Enjoyable Than Passive Income

      Reply
  7. New Father Finance says

    August 1, 2017 at 8:59 am

    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.

    Reply
  8. Passive Income M.D. says

    August 1, 2017 at 8:35 am

    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!

    Reply
  9. Joe says

    August 1, 2017 at 7:59 am

    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.

    Reply
  10. Divnomics says

    August 1, 2017 at 7:33 am

    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).

    Reply
    • Financial Samurai says

      August 2, 2017 at 10:58 am

      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!

      Reply
      • Divnomics says

        August 7, 2017 at 8:22 am

        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.

        Reply
  11. Dads Dollars Debts says

    August 1, 2017 at 7:20 am

    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.

    Reply
  12. Gen Y Finance Guy says

    August 1, 2017 at 7:07 am

    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.

    Cheers,

    Dom

    Reply
  13. Chelsea @ Mama Fish Saves says

    August 1, 2017 at 6:50 am

    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.

    Reply
    • Financial Samurai says

      August 2, 2017 at 10:56 am

      Will your husband still work after you turn 30 (or will you)?

      It’s really nice to have a spouse who continues to work so the other spouse can retire early :)

      Related: How To Get Your Spouse To Work Longer So You Can Retire Earlier

      Reply
      • Chelsea @ Mama Fish Saves says

        August 2, 2017 at 7:16 pm

        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.

        Reply
  14. Brad - MaximizeYourMoney.com says

    August 1, 2017 at 6:08 am

    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.

    Reply
  15. Grant @ Life Prep Couple says

    August 1, 2017 at 6:02 am

    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.

    Reply
    • Financial Samurai says

      August 2, 2017 at 10:54 am

      Things definitely do change indeed after kids (not sure about wife, as that makes earning and saving easier do to synergies).

      The value of time at home completely SKYROCKETS once you have kids and decide to leave your job. It’s why I’ve been willing to spend a lot on building a master bathroom, a large deck, landscaping, and getting the hot tub. I spend 2X more at home now than while working, so I appreciate my home more.

      Reply
  16. Adam and Jane says

    August 1, 2017 at 5:55 am

    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.

    Adam

    Reply
  17. David @ Zero Day Finance says

    August 1, 2017 at 5:47 am

    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.

    Reply
    • Ryan says

      August 1, 2017 at 10:10 am

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

      Reply
  18. Ms. Frugal Asian Finance says

    August 1, 2017 at 5:25 am

    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.

    Reply
    • Joe says

      August 1, 2017 at 6:42 am

      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.

      Reply
      • Adele says

        August 1, 2017 at 4:14 pm

        Amen

        Reply
      • Financial Samurai says

        August 2, 2017 at 10:51 am

        Care to share how you amassed an 8 figure net worth, what you did/do for a living, and how old you are? thx

        Reply
        • Jay says

          September 19, 2017 at 9:50 pm

          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.

          Reply
  19. Jim @ Route To Retire says

    August 1, 2017 at 5:17 am

    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

    Reply
  20. AAB says

    August 1, 2017 at 5:14 am

    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.

    Reply
  21. Budget On a Stick says

    August 1, 2017 at 5:12 am

    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.

    Reply
  22. J. Money says

    August 1, 2017 at 5:08 am

    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.

    Reply
    • Balanced Dividends Mike says

      August 1, 2017 at 5:50 am

      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

      Reply
      • J. Money says

        August 4, 2017 at 12:41 pm

        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?

        Reply
  23. Lindsay | Notorious D.E.B.T. says

    August 1, 2017 at 5:07 am

    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.

    Reply
    • Ray says

      August 1, 2017 at 10:34 am

      Congratulations on being debt-free!!!

      Reply
      • Lindsay | Notorious D.E.B.T. says

        August 1, 2017 at 3:06 pm

        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!

        Reply
  24. Apathy Ends says

    August 1, 2017 at 5:03 am

    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.

    Reply
  25. Charleston.C says

    August 1, 2017 at 4:51 am

    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.

    Reply
    • Balanced Dividends Mike says

      August 1, 2017 at 5:27 am

      “…income growth and net worth growth goes hand in hand.”

      Completely agree. Also a great point about the choice one might have to make based on his or her respective time and place.

      Reply
  26. Mr. Freaky Frugal says

    August 1, 2017 at 4:45 am

    “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.

    Reply
  27. Mrs. Adventure Rich says

    August 1, 2017 at 4:27 am

    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.

    Reply
  28. Mustard Seed Money says

    August 1, 2017 at 3:50 am

    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.

    Reply
  29. Balanced Dividends Mike says

    August 1, 2017 at 3:45 am

    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

    Reply
  30. Justin | An Intentional Lifestyle says

    August 1, 2017 at 3:21 am

    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

    Reply
    • Lance @ My Strategic Dollar says

      August 2, 2017 at 5:50 am

      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.

      Reply
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