There are two numbers that act as primary barometers of our financial well-being in life. The first is annual income. It’s the most common measure that people use to determine their financial status in the world. It can be compared to the incomes of other people in the same line of work, as well as those in other professions. Less well-known, but at least as important is net worth, which is a measure of your financial assets, less any debts that you owe.
Net worth can actually be the more important of the two, because it more accurately measures how well you manage your money. The higher your net worth, the better the job you’re doing at handling your finances – unless of course the reason for the high number is an inheritance.
Why Net Worth Is Important Even When You Are A Student
You’re a student at university – why should you be the least bit concerned about net worth, or about the importance of tracking it? Most people, especially young ones, are practically obsessed with income as a measure of financial success. Though that makes sense at an early age, when you have few assets, it can also be a liability as you get older.
Related: Calculating Your Net Worth
Yes, it is important to earn the highest income you can, but what is ultimately even more important is how much of that income you are able to keep. If you are not aware of the importance of net worth, it is possible that you can focus entirely on income, and view enjoying life and acquiring more stuff as the ultimate purpose of it.
If you begin to key in on net worth, and its importance on your life, it’s something that you will begin to improve as soon as you graduate. And given the time value of money, that is the very best time.
You shouldn’t obsess on net worth, but you should be aware of it – and the importance it holds on the rest of your life.
Net Worth Starts Low, But Increases Over Time
As a student, you probably have a negative net worth. If you have a large amount of student loan debt, and little or no financial assets, then this is certainly the case. But it is important to recognize that this situation is not – and should not – be permanent.
Once you graduate and begin earning money, you’ll be able to gradually increase your financial assets and pay down your debt. As you do, your net worth will go from negative to positive, and eventually to very positive.
Make Your Plans Early, And Measure Your Success Against The Standard
What is a good net worth, and what is an inadequate one? There is no right answer here, but there are some statistics available from national averages and they can provide useful guidelines.
As you can clearly see, average household net worth tends to rise with age, peaking in the 55 to 64-year-old age bracket, just before retirement. This information is useful because it gives you an idea what typical net worth is at varying ages. It can help you to establish targets for yourself, which will help you to determine what specific strategies you want to use in regard to asset accumulation, investment mix and debt levels.
Income Is Important Early In Life, But Net Worth Is More Important With Age
We can think of the relationship between income and net worth as being inverse over the course of your life. In your 20s and 30s, you’ll be relying primarily on your income for your financial survival. But as you enter your 50s – and certainly your 60s – you should rely more on your net worth than on your income.
Ultimately, your net worth should be large enough to provide investment income that will replace your earned income once you retire.
While it is true that increasing your income early in life is a critical part of your financial success, saving, investing and growing your money becomes the real key over time. It will do you no good, for example, if you are 60 years old and earning over $100,000 per year – but with a negative net worth. You’ll probably never be able to retire in that situation.
Your target should be to steadily increase your net worth as you get older, which is something that you will be doing as a natural part of saving money for retirement, and paying down – and paying off – debt. The earlier you embrace this concept, the sooner you will be able to adopt strategies that will increase your wealth in the years ahead.
You probably already know the importance of income in your financial life, but have you ever given much thought to net worth?