“Rich people focus on their net worth. Poor people focus on their working income.”
– T. Harv Eker, Secrets of the Milionaire Mind
What are you more likely to talk about – your net worth or your working income? I know I personally am more likely to be chatting about a raise or bonus, not my net worth (probably because it’s negative, given my student loan debt!).
Well, recently, I re-read T. Harv Eker’s New York Times best selling book, “Secrets of the Millionaire Mind”. In it, Eker says that rich people discuss their net worth while poor people discuss their working income. As someone who looks forward to raises and who is more likely to be chatting about my working income, I am interested in learning why it might be better to think about net worth and the bigger picture.
Your working income is your salary or money that you receive periodically (if you’re not a salaried-employee). It’s the cash you bring in every pay-period. Discussing a possible raise, bonus, or making more money via side hustles are all examples of working income.
Whenever someone asks “how much money do you make?” they’re referring to your working income. Working income is separate from passive income, which is money made not based on your time or “work” (think investments and compound interest).
According to Eker, working income is an important part of your net worth, but it’s only one of four parts.
Your net worth is the value of your assets minus your liabilities. So, if you want to calculate your net worth, add up your assets then subtract your liabilities from your assets (I do this in an excel file so I can track it over time). Eker says that net worth can be divided into four parts: income, savings, investments, and simplification.
As stated above, your working income is what you bring in every pay period. This gives you control over most financial choices, but focusing on it solely, according to Eker, is short-sited.
Passive income is another part of income that contributes to your net worth. Passive income, in general, is earned outside of working (of course you still have to do something with your money to earn passive income, but you’re not paid passive income based on the time you work, as you are in a salaried job, for example).
Saving money from your working income and passive income is the second part of net worth. If you can manage your money effectively so that you build a substantial savings, you’ll be increasing your net worth.
After saving up so that you have a financial cushion, you then have money to begin investing. This is the third component of net worth. If you make investing a hobby, you can really get into it and build your net worth faster than you would otherwise.
Simplifying your lifestyle is the final component of net worth. Basically, if you can decrease your cost of living, you will be able to put your money elsewhere (savings and investments), which will increase your net worth. And if your income increases, don’t let your expenses increase (like the Joneses would). Focus on minimizing and simplifying so you free up more money.
How To Track Your Net Worth
If you want to begin tracking your net worth, I recommend using an excel spreadsheet so you can edit the document and keep a running account over time. Whether you check your net worth yearly or monthly, here’s how to do it.
- Make a list of all your assets. This includes your house, car, savings, stocks, bonds, other investments, retirement acounts, property, etc. Anything that’s worth something goes on this list. If you have an emergency fund, vacation fun, and a college education fund, they all should be listed separately in a list and added up for your total number of assets.
- Make a list of all your liabilities. Here, you want to account for all your debt. Add up your mortgage, car loan, student loans, personal loans, medical debt, and any other debts you have.
- Subtract your liabilities from your assets. Set up a formula in your spreadsheet to subtract your liabilities from your assets. Make sure you have the date somewhere, too. And in a month or so, check back and do the calculation again. This way, you’ll begin to focus on your net worth.
So, Which Is Better To Measure?
Obviously, you want to know how much money you’re making regularly in addition to actively managing your finances. There’s no doubt that paying attention to your income is really important. But, I agree with Eker – that’s not the whole picture and it’s not enough.
Recently, J. Money said that tracking his net worth “religiously” was one of the habits that contributed to him becoming a millionaire by age 27.
Your net worth is the true measure of your financial reality, in my opinion. In order to have a full picture of your financial foundation, you need to track your net worth.
And I’ll end with a life hack that I love: What you focus on expands. So if you focus on your net worth, you’ll begin to see it expand, too.
Which do you discuss, your working income or net worth?
Do you think there’s value in focusing on your net worth?
Do you care what rich people do?