There is this common misconception among people that net worth or wealth translates to actual liquid money or income. If you look at net worth and wealth vs income, both are very different. Your most important value and shell of financial security is your net worth, not your income.
I have been frequently observing people calling out billionaires for having a massive net worth and not contributing accordingly. In all the wrongs in the world, whether a billionaire cancellation movement should exist or not is another debate. However, people do need to understand the facts before they lay the basis for a movement. If Jeff Bezos is worth almost a trillion dollars, that does not equate to him having a trillion dollars lying around to spend. Confused? Don’t worry, just stick around! In this post, we are going to be debunking the net worth myth.
Also Read: Myths about wealth
The primary difference between wealth and income is that wealth means how rich you are, while income is how much you make in a certain period of time. You could make less than your brother in a year, yet have a higher net worth Let’s take a look at wealth and income separately, and understand how this might be possible.
Income is defined as the taxable income and wages one obtains through working. You can get this by doing a job, or by running a business. Now the income that you make is most likely not to make you wealthy on its own. Now you might be asking, what if I have a really good salary? That makes me wealthy right? No, not necessarily. You might be making $50,000 in a year, but you could also be spending more than that. This leaves you in debt, and certainly not wealthy.
On the other end of the spectrum, imagine you’re making $20,000. Now that is way less than before, however, what if you were to keep your spending lower than what you make? You wouldn’t be in debt and would have a better net worth. And what if you invest some of that excess amount and earn profits on it? That would make you even wealthier right? So bottom line, higher income does not equate to more wealth.
Net Worth in simpler words is what you own minus what you owe. So your total assets minus your debt would equate to your net worth or debt. As you can see this is way different than income. When we talk about millionaires and billionaires, we’re talking about their net worth (wealth), and not income. In order to become a millionaire, you do not have to make $1 million in a year, you have to have a net worth equivalent to that.
If you look at billionaires and evaluate their wealth vs income, you will see a big difference. For example, Mark Zuckerberg takes a salary of just $1 annually from Facebook. However, as you might know, he is one of the world’s richest people. However, if the future of Facebook meant it shutting down, a majority chunk of Mark’s wealth would go away. Why? Because most of the billionaires have their wealth tied up in the companies that they own. i.e Jeff Bezos and Amazon, Warren Buffet and Berkshire Hathaway, Bill Gates and Microsoft.
A billionaire does not have a billion dollars in liquid cash or in the bank either. Instead, they have accumulated most of it in assets. Realistically speaking, you don’t become a billionaire just through income. You need to have had created something special and scalable to the point that it puts a “dent in the universe”. Jeff Bezos, Bill Gates, and Mark Zuckerberg are examples of people that created life-changing companies that have grown colossally over the years.
Similarly, the common notion that billionaires should save the world by donating their billions is absurd. Firstly, to reiterate, the wealth these people have accumulated is not liquid, and is tied up in company shares. Secondly, giving away money like that simply is not feasible. For example, if Jeff Bezos decided to give $30 billion of his wealth in donations, the operations, stakeholders, and value of Amazon would be severely affected. Because although the Amazon founder will be using his wealth, it would still be tied up with the company.
Financially, net worth is your real overall financial position. Now that you have understood what net worth and wealth vs income means, you may be able to better evaluate where you stand financially, and make changes accordingly. If you have any questions, feel free to contact us at PACE Business.