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Net worth is the best assessment of personal wealth, measured by calculating the value of all a person’s assets and subtracting all their liabilities. Folks making $30k can save half their income, consistently raising their net worth over time, while folks making $340k can live paycheck to paycheck or even have enough debt to have a negative net worth. This is why retirement calculators often incorrectly estimate retirement dates since they focus on salary instead of living expenses.
Net worth and income are entirely different concepts. One measures how well you accumulate wealth while the other measures your earning potential. We usually focus on the accumulation of wealth, pushing aside income to focus on savings rates since savings rates more accurately indicate how long it will take you to reach your FI Number.
But income is not a totally useless metric. Analyzing your income and net worth together shows how well you are accumulating wealth given your salary.
Does Higher Income = Higher Net Worth?
No. But it can.
Higher income provides increased potential for a high net worth, but it does not necessarily result in a higher net worth by dollar figure or percentage of income. In other words, if the person with a $340k income has a 50% savings rate each year, the individual with a $30k income simply cannot accumulate as much wealth in terms of actual dollar figure. However, they can create as much wealth in terms of percentage, by also saving 50% of their income.
Since most of us did not always track our savings rate, comparing our current income to the wealth we have already accumulated (net worth) and our age is a useful measurement to gauge how long we can expect the journey to financial independence to take.
Wealth Accumulation
In The Millionaire Next Door, Thomas J. Stanley divides wealth accumulators into three categories based on a comparison of net worth and salary:
UAWs: Under Accumulators of Wealth
AAWs: Average Accumulators of Wealth
PAWs: Prodigious Accumulators of Wealth
In other words, UAWs are those not accumulating wealth to their full potential, AAWs are accumulating wealth at a respectable rate, and PAWs are accumulating wealth at an admirable rate. How do you know where you stand? First use the following formula:
You can also use this calculator to quickly calculate your target net worth if you have more complicated income. Next, compare your target net worth to your actual net worth. Stanley categorizes UAWs, AAWs, and PAWs based on this target net worth number:
UAW: Your actual net worth is less than half of your target net worth.
AAW: Your actual net worth is close to your target net worth (more than half the target net worth but less than double your net worth).
PAW: Your actual net worth is double your target net worth, or higher.
Before you stress out about these numbers, some disclaimers: This formula is tougher on you if you are younger because your investments have not experienced enough compound interest over time to truly grow. If you are under age 40 and hit the AAW mark, you should feel accomplished. Additionally, if you are a job hopper or negotiated a large raise, your current salary may be significantly higher than your average salary over your working years, making it extremely difficult to be a PAW (or even an AAW if it is a recent adjustment).
I am an AAW as a job hopper who just negotiated a promotion and raise that took effect in May. While these categories are extremely ambitious, I love them for goal setting. For example, I set a big financial goal to hit that exact target net worth number that formula gave me for by my 30th birthday. Since setting that goal, my salary has grown by about $50k, making those numbers now obsolete. But the target net worth still helps financial goal-setting. Your own numbers will change over time, particularly if you are working to generate more income, but this target net worth can be a useful, if ambitious, benchmark to gauge net worth progress in terms of income.
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