Net worth versus net income

By definition, your net worth is the value of your personal assets, (cash and personal possessions) minus all liabilities or debt. Therefore the amount by which your assets exceed your liabilities is considered your net worth.

On the other hand, your net income is what you earn (usually a salary) minus deductions including taxes and pension.

Let us work out Ifeanyi and Susan’s net worth: they are both 24 years old.

Susan has been working since age 18 and has savings of N200,000, a car worth N550,000 and furniture and personal possessions worth around N400,000. She has no debt, so her net worth is N1,150,000 (200,000 + 550,000 + 400 – Zero debts = 1,150,000).

Ifeanyi is a trader and has N300,000 of personal assets and a loan of N350,000 - his net worth is negative N50,000 (300,000 – 350,000 = -50,000)

So who is better off?

On the basis of their current net worth, Susan is better off. For Ifeanyi’s case, having a negative net worth means that he owes more than he owns.

We can comfortably say net worth is what’s really important. Although it may be hard to quantify your true worth, it is easy to quantify your finances. If you've never done it before, perhaps it's time to take inventory and find out exactly how much you're worth. Calculating your net worth will give you an accurate picture of where you stand financially.

As you approach retirement, income (net income) usually reduces. Then all you have is what you've saved over the years, which is your net worth. A healthy net worth might matter less for younger people since there's a lot of time to "make up ground”, but it is something everyone should consider working on.

Net worth can be negative even though one has a good income. What does matter is how much you spend versus how much you have in savings, fungible assets and investments.

source:blog.standardbank.com