Net Worth vs Income

The difference between net worth and income is misunderstood by many people.  I hope that this blog post will bring more clarity to our understanding.

Income is simply the money a person makes from employment or other means over a given period of time.  For instance, if Bob works and earns $100,000.00 annually and earns $100.00 in interest this year from his bank accounts and another $2,000.00 from a piece of real estate he owns (after all rental expenses are paid), then Bob's annual income for the year would be $102,100.00.

Net worth is the amount by which a person's or a company's assets exceeds their or its liabilities.   So let's take another look at Bob.  He has $5,000.00 saved in his bank accounts, an investment portfolio with a market value of $25,000.00, primary residence valued at $180,000 (outstanding mortgage of $160,000.00), rental property valued at $100,000.00 (outstanding mortgage of $75,000.00), credit card debt of $4,000.00 and student loan debt of $75,000.00.  So let's figure out Bob's net worth:

Total Assets are as follows: Bank Accounts: $5,000.00, Investment Portfolio Value: $25,000.00, Primary Residence: $180,000.00,  Rental Property: $100,000.00. Bob's total assets are currently worth $310,000.00.

Total liabilities: Unpaid / Outstanding Mortgage on Primary Residence: $160,000.00, Unpaid / Outstanding Mortgage on Rental Property: $75,000.00, Credit Card Balances: $4,000.00, Student Loan Remaining Balance: $75,000.00.  Bob's total liability is currently: $314,000.00  Therefore Bob's net worth is: -$4,000.00 ($310,000.00 minus $314,000.00).

You can see that although Bob's annual income was over $100,000.00, his net worth is negative $4,000.00. A person's net worth and income is equivalent to their financial health.  The healthier a person's finances are the higher their net worth will be.  

Speaking of health, think about an individual who looks healthy but really isn't,.  Bob would be considered a person who looks healthy on the outside (annual income over $100k) but is actually not healthy right now (net worth below zero).

As times goes on Bob's financial health could increase or get worse.  The future of Bob's financial health depends on financial conditions and the financial decisions he makes in the future.  What is your net worth?.