What is Net Worth?
Net worth is everything you own (cash, investments, real estate, retirement accounts) minus everything you owe (mortgage, car loans, student debt, credit cards). A high income means nothing if spending matches or exceeds it. Net worth is the only metric that captures your true financial position. Tracking it quarterly reveals whether you are actually building wealth or just cycling money through your accounts.
Why Net Worth Matters More Than Income
Income is a flow; net worth is a stock. Someone earning $150,000 with zero net worth is financially fragile, while someone earning $50,000 with $500,000 in net worth has years of runway. Net worth determines how long you can survive without income, whether you can retire, and how much financial freedom you truly have. Building net worth requires the gap between income and spending to be consistently positive.
Benchmarks by Age
The book 'The Millionaire Next Door' suggests a benchmark: expected net worth equals age times annual income divided by 10. A 40-year-old earning $80,000 should have $320,000. Exceeding this makes you a 'prodigious accumulator of wealth.' This is a rough guide, but it provides a useful reality check on whether your savings habits match your earning power.