Net Worth instead of Salary: The True Measure of Financial Success

Through my many years of experience as a financial educator and former certified credit counselor with the NFCC, I have found that most people measure their financial success primarily by their annual income. A higher income seemingly means more wealth, right? Not necessarily. What if your salary increases by 10,000 euros annually, but your expenses increase by 15,000 euros? Or you receive a raise of 20,000 euros but simultaneously take out a car loan for 50,000 euros? Has your financial situation actually improved in such a case? Such examples illustrate why income is not always a good indicator of financial success. Instead, I recommend focusing on net worth to properly assess financial health. Many have difficulty distinguishing between gross and net income, but understanding this is the first step towards improving their finances. Gross income refers to income before deductions, while net income is the amount you can actually spend after all deductions. The difference between the two can be substantial depending on individual deductions. Ultimately, net income determines how much is truly available for spending. Net worth, on the other hand, is the value of all your assets minus all debts. It provides a more complete picture of your financial situation, as it not only includes income but also your savings, spending, and debt behavior. Increasing your net worth by reducing debt or increasing assets without incurring new debt can lead to sustainable financial improvements. A higher net worth instead of a higher income can secure financial independence in the long term. If your net worth is large enough, options like early retirement or living off savings are possible. Passive income sources, such as rental income or capital gains, can provide additional financial stability without the need for active work.