Growing Net Worth Vs Growing Income: Which Should You Focus on?

Transcript:

On this episode of the Personal Finance Podcast, we're going to talk about growing your net worth versus growing your income. Which one should you focus on?

Buddy and welcome to D Personal Finance Podcast. I'm your host, Andrew, founder of Master money.co. And today on the personal Finance podcast, we're going to be talking about growing your net worth first, growing your income. Which one should you focus on?

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But in all reality, I appreciate each and every single one of you for sharing those as well. Now we just launched the Mastermind newsletter. We are getting awesome feedback on the Mastermind newsletter. The contents going to be different than the podcast here. It's a little more light hearted. We try to have fun with it on the Mastermind newsletter.

We throw out jokes and memes and all that kind of stuff as well. So if you're interested in that, we will link it down below as well so that you can check that out and to make sure you stay tuned because Index Fund Pro is coming. It's our investing for beginners course. It's coming very soon. So make sure you check that out.

The people on the newsletter will hear about it first before everybody else. So I'm so excited to release that to you guys soon and it should be out very soon here. So today we are going to be talking about growing your net worth versus growing your income. Which one should you focus on?

This is a very important thing to think through because a lot of this has to do with money psychology. But in addition, a lot of this has to do with what are you actively pursuing when it comes to building wealth. Because which one you go after depends on a couple of things. One of which it matters what stage of your wealth building career you're in.

Because if you pursue one, say for example, you pursue your net worth, but you don't have a high enough income, then it's going to be very hard to grow your net worth. Whereas if you pursue that income, then maybe you can grow your net worth a little bit faster. In addition, it depends on your age. If you're just starting out, the same things qualify to see which one you focus on.

So I'm going to break this down today to tell you which one you should focus on long term. And in the short term, depending on your situation, how should you approach this? Because when it comes to building wealth, the two fastest ways to get there is growing your income and net worth, which is why we focus so much time on this podcast on that side of the equation.

You notice we don't talk about penny pinching. We don't talk about clipping coupons. We don't talk about how you can save $5 here and $5 there. Why? Because those problems are not going to help you build wealth over time. What those things are going to do is take your time away from the things that actually matter.

And we want you to focus on $30,000 problems instead of focusing on $3 problems. And this is incredibly important to understand because if you have never thought about it this way, a lot of people teach money. And they teach about money on how you can save on your lattes every single day and how you can cut back when you go out to eat at restaurants with a coupon.

And sure, those things are fine if that you have access to them. You like doing that stuff. If you like to save a couple of bucks, there's nothing wrong with that. Your boy loves saving a couple of bucks, but at the same time, focusing your time on that is a complete waste of time because all you have to do is make one choice, one $30,000 choice per year, and you blow all of those decisions out of the water.

And in addition, what happens if you focus your time on some of those things? It's going to bog down the capacity you have to focus on the $30,000 decisions. So making sure that you focus on the right things is powerful. This is why we want to talk about this today because these are two of the very most important things that you want to focus on.

And you got to figure out which one I need to be doing right now. You should always be focusing on one or the other. Always, always, always be focusing on one or the other, either your net worth, your income, or both. So today what I'm going to do is I'm going to lay out the framework on how you need to think about this.

So first of all, if you're brand new to this, what is net worth worth? What is income? Net worth is your assets minus your liabilities. So you take all your assets, anything from a rental property, your stocks, your house, anything that has value and you subtract it from your liabilities.

Any debts that you have. So say you have credit card debt or you have student loan debt, all of those things or a mortgage or car loan, all of those gets subtracted from the amount to find your net worth. Now, if you're just starting out in life, maybe you have some student loans, you might have a negative net worth. In fact, the average net worth by age, if you look at it, we just did a YouTube video on this and we'll probably do a podcast on it as well.

The average net worth by age for people in their 20s is actually a negative net worth. And that's one of the things that we want to try to help you fix here because the biggest thing that helped me in my 20s, especially my early 20s, was reversing that number. We all, a lot of people start with a negative net worth because of student loans.

A lot of people take out student loans. The cost of student education is rising. So most people actually start with a negative net worth and that is one thing that we want to solve here. So cracking that so that you can flip the script as fast as you possibly can is going to help you build wealth that much faster. Now, how do you calculate income?

So income is something where you calculate, yes, your W2 income that you make at your job, but in addition, if you have any cash flowing assets, you also calculate that. Now you notice I'm saying cash flowing assets. I'm not saying appreciating assets. Those are two different things. If your house that you live in appreciates $30,000 for the last three years, I'm not counting that as income.

The reason why is that is not predictable. What is predictable is the cash flow you make from a rental property. So deciphering between those two things is something you definitely want to do. If you just have an asset of stocks that appreciate and you have assets of your personal residence and you have your W2 income, then I would just qualify your W2 income for this purpose, the purpose that we are utilizing it for today.

Obviously your net worth is increasing by utilizing those other things, but your income is not increasing. Now if you're heavy into dividend stocks and you're collecting high dividends, I would consider those dividends and income as well because the cash flowing assets. So those are some of the things just to consider, but your income is not just your W2 income.

So just think through that as we go through this exercise. That's the quick, easy way to understand. If you want to know the deep dive of how to calculate your net worth, we have an episode on that. We will link up in the show notes down below on how to calculate your net worth. We have an entire episode dedicated just to that and why net worth is so important.

And we'll talk about some more on why net worth is important today, but that episode covers it in the entire episode. So now let's jump into the income side of the equation. All right, so we're jumping into the income side of the equation, and this is something that you definitely want to think through depending on what stage of life you're in.

So early in life or if you're early in your financial journey, you need to focus on growing your income. Let me explain why. Number one is if you can grow your income early, you can grow your net worth that much faster. So the faster you grow your income, the more dollars that you can start to put towards things that are going to help you build up your net worth.

And the main purpose of growing growing your income, the real reason why you need to be growing your income, and I need you to hear this is not to buy more stuff. It's not to buy the Lamborghini. It's not to buy the massive house. Sure, that is absolutely amazing and you can definitely do that once you get your wealth to a certain point. But when you are just starting out and let's say for example, you get major income bumps because you listen to your boy and you're understanding how to grow your income and you start to get major income bumps and then you spend all those income bumps on things that do not help you grow your net worth.

You are in the same exact position as when you started when you make $30,000 a year graduating college. You need to take those extra dollars and put them towards activities that help you grow your net worth. Doing this early and often can help you grow a massive portfolio and it's actually going to help you grow your income even more and it's going to help you grow your net worth at the same time.

So doing this early when you're young, when you're not making a lot of money, when you have a negative net worth is something that's going to solve a lot of your problems. Growing your income solves a lot of problems early on. Now, it doesn't solve problems for the long term if you spend it all, but it solves a lot of problems early on. The second reason is the math to your first 100K is very clear.

And if you haven't heard our episode where we talk about why your first 100K is the hardest and the math behind it, we will link it up down below so you can check it out. But I'm also going to give you a quick synopsis of it. But you should deep dive into that because to fully understand it, you got to listen to that episode. The quick synopsis is that your savings rate early on is the catapult to building wealth because compound interest has does not have enough dollars there to really kick in.

Now, do all of these accounts need to be in one big account so that you can grow up faster? No, that's not how compound interest works. The way compound interest works is that if you had three separate accounts and we're investing in say a Roth IRA, a standard brokerage account, and your 401K, it's going to compound the same if they're separated out from the three accounts.

It does not compound more if your money is combined together. And we'll do an episode on this. I have one that's coming up. We're going to show you exactly how this works, but just know this now. It does not grow faster if you combine them all together in one account mathematically. But what you need to do is you need to get to that first 100K as fast as you can.

Why? Because once you have $100,000, which can be spread out across accounts, it can be in one account. It doesn't matter. Once you have that first $100,000, then your money starts to accelerate a little more. Now $100,000 isn't a magic number, but it starts to accelerate more and that's a perfect goal to get started with. So you need to get your net worth to that point.

How do you do that? Well, growing your income, because your savings rate is the majority in the early phase because compound interest isn't working. Growing that income is going to be something that is really going to get you there because the more income that you have, the faster you can get to that point so that your wealth can start to grow.

And as your wealth starts to grow, it's going to spit off cash and it's going to grow for you. You don't have to do the work to grow it. It's actually going to grow without you lifting a finger, depending on what type of assets that you invest in, which is why we love stocks so much, because you don't have to lift a finger. I love diversifying into stocks and real estate.

That's the two things that I love to invest in. And by doing that, you allow your money to start working for you and grow so that you don't have to focus so much time on your income. And hustling and putting that sweat in and having to do all of those things #3 if you can create more income early, it gives you more options to grow your wealth.

So what does this mean? A lot of people who don't make a lot of money early on, they have to focus on maybe one asset that they can invest in. Because if you start investing in real estate and you have no money, it becomes very difficult to focus on growing your income, focusing on that real estate asset. Because usually if you don't have any money, you need a partner to do this.

And so you're putting in all the sweat equity and all the time. But growing your income allows you opportunity to invest in all sorts of things. You can invest in boring businesses like we talked to Cody Sanchez on this podcast. You can invest in farmland. You can invest in real estate. You can invest in the market with more dollars so it can compound faster.

There's so many different things that you can do. If you grow your income, that's going to allow you to have more investment opportunity and diversify your portfolio even more. You can even put a higher number into crypto or anything like that where it's speculative #4 growing your income early is going to help you get about 10X ahead.

Because people who grow their income, it allows them to get their dollars starting to work for them earlier. And what I mean by that is the dollars that are in your 20s, for example, the earliest point in your journey that you're in right now, you can't get any younger. So the earliest point in your journey that you're in right now, those dollars are the most valuable dollars that you will ever invest.

As time goes on, those dollars do not grow as much as they do today. So dollars that you invest 10 years from now will not compound as fast as the dollars that you invested today. Keep that in your mind as you make purchasing decisions because if you're making a major purchasing decision and you realize if I get these dollars invested, I don't have a ton of dependence around me.

Maybe you're not married, maybe you're married or you're not married, you don't have kids, you don't have a lot of dependence around you will investing those dollars early on while it's just you is going to be very powerful for your life. And understanding how powerful it can be is something where we actually break this down an index fund pro when it comes out, you're going to see this broken down where I'm going to talk about a lot early be on in the course on how impactful it is to invest your dollars.

The reason why I talk about it so much is because it's one of the most motivating things you can ever see. We have multiple lessons on just this because it shows you if I invest this amount of money early on, it grows to this amount of money. And I'm talking about just a couple $100 a month grows to millions of dollars if you can do it right.

So this is one of the most motivating, powerful things that you can do with your dollars. Number 5, growing your income early. And this is what people don't talk about, but it's actually a real thing. I've experienced this throughout my younger years and it's a very real thing. And some people may push back on this, but I'm just showing you how people are.

This is the money psychology of most people is that growing your income early allows you to get some of the stuff that you want so you can focus on your net worth later. What does that mean? That means it helps you buy some stuff to get it out of your system. You need to buy some stuff to get out of your system if you're always thinking about, oh, what if I got this fancy car?

What if I got this fancy house? What if I got this fancy boat? It doesn't matter what it is. Sometimes you have to buy the thing to realize it's not everything. It's all cut out to be what really matters. And what a lot of people find out over time is what they want is they want their time and they want their time back so they don't have to slave away at a job every single day.

So they need to grow their income so they can grow their net worth, so they don't have to slave away at that job every single day. And so sometimes you just got to get it out of your system. You're not going to really know until you experience it, and most people have to experience it first. Now, one caveat to this is some people experience it and it's not fulfilling, but psychologically they just want more.

So they think the next thing is going to fulfill them and the next thing and the thing after that. And that's not the case. That's not what actually happens. So you got to make sure that when you do this, you understand that I'm trying to figure out what's good for me and what's not good for me. And so growing your income allows you to have some of those things and allows you to see what's it like to have this fancy thing and does it actually fulfill me?

Does it bring me joy? Or is it just an extra thing that I have to impress other people? And so you try to figure that out. What do you value more, your time and experiences in allowing yourself to do whatever you want with that time or do you value stuff? And so it helps you get it out of your system a little bit. And then number six is your income allows you to create investment buffer.

So having an investment buffer early on, if you don't know what an investment buffer is, it's when you get some extra cash into your investment so that when a downturn comes and there's a pullback, you're not as worried about it because the amount that you have in your investments is significant enough to get you closer to your financial independence number.

So it allows you to get more dollars in there early and often so that you have some extra cash available that you can invest or so that you have some extra investments available in case of a downturn. So you don't have to be drawing down your investments all the time. So these are some of the things that early and often you want to be growing your income because of.

But there are some downsides to your income. Things like your income is taxed like crazy. And we're going to talk more about this when we get in the net worse side. But your W2 income is one of the least efficient ways to make money. It is one of the worst ways to make money tax wise. You're getting taxed out the wazoo when it comes to your W2 income.

In addition #2A downside to your income is you can't control the outcome because unless you're making money at your own job and giving yourself AW2, you can't control which most likely or not, if you own the company, you can't control the outcome of what's going to happen.

So if you work for a corporate company or you work for a blue collar company, it doesn't matter what you're doing. You can get a new boss that doesn't like you. The company could get sold, a department can get shut down, the company could go bankrupt. There's a number of different things that could be happening when you can't control the outcome.

So it's another downside to your W2 income. And then the third downside is sooner or later you're not going to want to work anymore. It always happens to everybody unless you're doing something you absolutely love. Like I don't think I'm ever going to want to stop doing this. Helping people build wealth. But at the same time, a lot of people get to the point where they're not going to continue to work on what they want to be working on.

So thinking through how you want to handle that is why for the majority of your life, once you grow your income, you want to focus on growing your net worth. So let's get into why you want to grow your net worth. All right, So here is why you should focus on growing your net worth more over time.

Your net worth is something where I have spent a lot of time as of late focusing on growing my net worth. And by doing this, you truly become and start to build wealth. Because here's one thing I want people to understand is if you never heard our episode called rich verse wealthy, Rich verse wealthy breaks this down in a deep dive.

But what is talks about is that rich people have a high income, but they spend all their income. Wealthy people have a high net worth and they have a lot of time. So depending on which one you want to have, if you want to make a lot of money, that's completely fine. But putting it towards your net worth and building your net worth is how you go from being rich to being wealthy.

And you want to become wealthy because wealth allows you freedom of time, freedom of your energy, it allows you to own businesses, it allows you to own real estate, allows you to own all of these different things, but still have freedom with your time. And so you're making a lot more when you're wealthy and you have a lot more time when you're wealthy. So just relying on your income, you want to focus and shift your mindset towards the majority, going towards your net worth.

As you start to build that wealth up, as that income starts to rise and you don't have to have a crazy high income, as long as you have a long time horizon, you can still become very wealthy. I believe anybody in this world can build wealth. That is the mission of this podcast is to teach people that. And so understanding that early on and starting to get those dollars working for you is how you get to this point.

But the first reason is because you have a much higher feeling of security with your net worth than your income. Like we talked about, your income could go away at any point in time. Your income could absolutely disappear. And this is one of the best benefits to having a really high net worth because all of a sudden when you have a really high net worth, you have what we call F you money, meaning that if somebody wants you to do something, you don't have to do it because you have a high net worth and you can walk away from that job at any point in time.

You have enough money there to cover for you for life and so having that high feeling of security is one of the best parts of building wealth. Because guess what? Once you achieve this point, money stress pretty much goes away for the most part unless you're starting to invest in some aggressive businesses and doing a bunch of other things.

For the most part, your personal net worth, especially if it's invested in specific investments, is something that has a much lower stress level. Imagine not ever having to stress about money again. A couple of things do that. Having a nice fat, juicy emergency fund does that. In addition, having your investments in place and having a high net worth, because having those two things allows you to not have to think and worry and stress and be anxious about money.

That is one of the best things that having a big net worth does is it allows you to have that feeling of security. So there's a very freeing feeling about spending money produced by your principal and being able to spend those dollars that your dollars are producing where you don't have to work too much anymore.

Number 2, when you have a high net worth, there's a lot less temptation to have to go blow it all away because when you have a high net worth, you're living off that income, you're living off those assets. And so the last thing you want to do is you did all this work to build it up here is go back to having to earn AW and two income again to go back to a traditional job.

So what you're doing here is you are in essence, much less tempted to go out and just blow money on anything. So this is something that a lot of people overtime will realize. And once you get that time, freedom, once you get that freedom of time, you don't ever want to lose it. You don't ever want to lose your time.

So making sure that you don't blow it by spending too much money is something that will help you overtime. So this is a great benefit to building up that net worth #3 this is a very big one is the government goes after your income, not your net worth. So we briefly just touched on this, but your income is.

Tax at a much higher rate than your investments are. There's a reason why high net worth individuals like to get as much dollars as possible into businesses, into real estate, and into stock investments. Now. Short term investors within the stock market get taxed very high.

Long term investors within the stock market get taxed very low. We have a tax episode on how your investments are taxed coming out, so make sure you're subscribed to check that out. But how your investments are taxed is significantly lower than you earning an income. Now the light bulb that needs to go off here, if you didn't know, this is something that's going to absolutely change your life because the more dollars that you get into your investments, the less dollars you have going to Uncle Sam.

This is just another added benefit to investing your money. For example, if you're a long term investor, long term capital gains are minimal in comparison to taxes on your income. So for example, depending on what your tax bracket is on long term capital gains, you're going to be taxed between zero, 15%, or 20% of your income.

It depends on where your tax bracket is. If you're in a low income tax bracket, you're going to tax 0% on your investment gains. And in addition, investments also have things like the 401K, the Roth IRA that allows you to forego taxes. You don't have to pay taxes on certain income that comes your way.

Real estate. Why do you think billionaires shelter so much money in real estate? And why do you think 90% of millionaires put money into real estate? The reason why is there's a number of tax benefits and it's a tax shelter for a lot of people. So investing those dollars into those investments means that your net worth is growing and you're not getting taxed as much.

So meaning your net worth is going to grow even faster by doing that. So the more dollars you get in there, the better off you are going to be with your net worth #4 Another reason to do this is the child tax credit. So you've seen people before where they fraudulently claim children on their tax return so that they can get more money back.

Well, as you start to make more money, the child tax credit actually phases out. And the threshold for married couples is 55,000 bucks filing separately and 75,000 for single head of household, 110,000 for married couples filing jointly.

And for every $1000 of income above your threshold, your child tax credit is reduced by $50.00. So if you have kids and you have a high net worth, your child tax credit is not phased out because it's not AW 2 income that you have coming depending on the type of asset that you're living off of.

But as your income rises, if you're relying on owning your income, your child tax credit could be phased out, which is a significant amount of money every single year depending on how many kids you have. The fifth reason is you're building true wealth. When you focus on just making money every single month or every single year, chances are you're going to be more short sighted than a person who generates wealth through equity in a business.

Meaning a lot of people who earn a high income, the reason why they spend all their money is because they're short side and they think that income is never going to run out. Please, if you take nothing away from this episode, it will always run out at some point in time. Overtime, your income will go down, will go lower, so you have to prepare for your financial future by investing those dollars.

And if you're short sighted because your income is high right now, you need to protect yourself with assets. And this is one of the keys that you need to understand, especially for high income earners. Number six, your net worth is more concealable. What do I mean by this? It is much harder for people to understand how wealthy you actually are.

If you're the type of person who doesn't like this out in the open and doesn't like for people to know how wealthy you are. It is much easier to conceal your net worth than your income. So you can spread your net worth across all different types of investments. You can spread across all various things. And if you're really worried about people figuring out how much you're worth or how much you're making and all that stuff, well, your net worth is a very easy way to hide it, to spread it across things because people will look you up and people will try to figure this out.

And so if you're worried about that, it's another amazing way to conceal how much you're worth. Number six, your net worth requires more knowledge. So not everybody can achieve this. Not everybody can achieve a high net worth unless they have the knowledge, which is why this podcast was created, because we're trying to spread this knowledge to as many people as possible.

You have to have a high higher level of financial acumen to actually get to some of these levels of net worth. Otherwise, most people, and you can see this for people who comment on videos on YouTube or tick tock or whatever else, most people have no idea what they're talking about when it comes to money.

And this is the saddest thing that can happen because what we want to do is change that. But most people literally have no idea and they are absolutely sure of themselves. You have to have some sort of a financial acumen to actually build up your net worth. And so by doing this, by understanding how money works and understanding what you need to focus on is going to allow you to grow it that much faster.

So here's really what I want you to understand with this episode. In the short run, if you are just getting started by growing, your income is something you definitely want to focus on. And then taking those extra dollars and putting them towards your net worth so that it can grow over time is incredibly powerful. As you start to progress and as you get older, what you want to do is you want to make sure that you are focusing the majority of your time on growing that net worth and getting that net worth and that nest egg as big as possible because that is how you build generational wealth.

And your net worth is what you can pass down to generations. But in addition, your net worth is your safety net and what keeps you safe and allows you to live the life that you want. Your net worth is what what is going to get you to that point specifically outside of your personal residence. Now your personal residence truly is a whole other story.

It's obviously including your net worth, but you want the majority of it to not be in your personal residence. This is one key that you need to understand because your personal residence, I hate to break it to you, is not a very good investment. It's a great thing to have for lifestyle, for your family, for your household, for everything you want in life.

It gives you joy, it gives you fulfilment. Absolutely all of those things are absolutely true. I own my residence. I've always owned my residence, but at the same time, your personal residence is not a good investment. So what I'm talking about here with net worth, your personal residence is included, but I want you to focus on getting the majority of it outside of your personal residence and getting it into assets that either cash flow or assets that appreciate over time, meaning stocks, bonds, real estate, businesses.

All of these things are going to help you grow your net worth and help you provide a bulletproof safety net. This is how you bulletproof your finances. This is growing that net worth over time and focusing your time on doing that. So grow that, come early, make that income grow over time, and then put those extra dollars towards your net worth.

Now, if you're spending too much as you grow your income, you're going to have to cut back a little bit. We have an episode coming out very soon on how to do this step by step, how to cut back on your expenses and how to do it, but in a way that's not very painful. So if you are doing that, make sure that you understand that as well so that you can get every extra dollar you need into your net worth.

If you guys have any questions, make sure you hit me up. Instagram, TikTok at Mastermoney Co follow us on Spotify, Apple podcast. So whatever podcast player you love listening to this podcast too. And thank you so much for leaving those five star rating reviews. And if you haven't done so yet, please leave a five star rating and review on Apple podcast, Spotify, or wherever else you listen.

Grab the Mastermind newsletter down below. We got a bunch of great tips coming out for next week. In addition, make sure you're getting ready because Index Fund Pro is coming. And one thing I didn't mention, well, I'll mention at the end here, we're also going to have coaching released. So you're going to actually be able to talk to me one-on-one with coaching that's going to be released with mastermind.co when the website releases in September.

So that's also going to be available to you if you want to check that out. So just be on the lookout for that newsletter folks. You guys will get the notification on that first. So make sure you are checking that out. Thank you guys so much. We will see you on the next episode.