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How much do you earn... is the wrong question

Why our net worth is a better tool to follow than income

Hello fellow Protagonists,

How much do you earn?

It is a direct question isn't it. How many of us have been asked this question at some point. I have also completed job applications that have asked me to enter my current income in order to apply (you cheeky devils).

Money can be quite a touchy subject for us, maybe it is to do with the way we approach the subject of personal finance. Like asking pit sweat inducing questions such as this.

My main gripe with this question is that there are only a small handful of things you can do with any response given. Yes, some can use it to help create financial plans, influence career choices or to check if we are capable of paying back a debt. Let's be real here, the majority of people asking this question only want to do one thing... compare.

Income is an easy comparison that requires minimal information and processing. Let's say that person A earns £20K a year and person B earns £30K a year. All we know from this information is that person B makes more money. That is it. Anything else would be speculating or assuming.

I hope this sparks further conversation but can you really see it?

We can then add the problem of comparing ourselves to other people. If all we know is that the other person makes more or less than us then this leaves our minds to do what they do best. Could it change our perception of the other person. Could it change our perception of ourselves. Could thoughts around fairness, greed or jealousy enter the minds of either person.

Rhetorical questions adventurers, we know the drill.

This is all occurring with what we know is minimal information. The less information we are given the more we need to "fill in the gaps" and we fill gaps with all kinds of crap. Like knocking through a stud wall and finding it insulated with calippo tubes and play-doh.

What have we even gained from this sharing of information on income. I am not sure if either person would leave this short exchange with anything that would better their personal understanding or situation.

So what is a more helpful, useful approach?

We can learn valuable lessons from understanding and following our net worth

Net worth is simply the value of all the things we own (assets) minus all the things we owe (liabilities). Assets could be things like savings, investments and house capital. Liabilities could be debts, student loans and mortgages.

This is what we will tend to hear when reading news articles on the rich list of the world. It is about what those people are worth rather than what they earn and for good reason, it is a more useful piece of information.

What tracking net worth does that income does not is in the ability to monitor our behaviours. By doing this we can learn more about ourselves. Let's say that we get a nice pay rise but our net worth does not increase alongside it. This could mean a few things but chances are you are spanking all your new coinage. It is up to you what you do with it but at least you are aware of the context.

Lets return to person A and B from earlier. Their incomes are the same as before but person A says they have a net worth of £100K and person B has a net worth of £80K. Now the information has become more tangy.

Person B's income is still higher but now they may be inquisitive into how person A has a higher net worth. This may start further conversation where the two people could learn something about their behaviours or financial strategies. Even if there is no further conversation, Person B may now be encouraged to look deeper into their own personal situation.

Person B could still decide to justify the reasoning behind the difference and there may be a valid reason. We also can't assume that Person A is just better with money at this point, for example it may be from an inheritance or lottery win. What it does help is provide context and a little self-reflection.

That is why the best person to compare our net worth with is ourselves

Tracking our net worth enables us to visualise where our wealth comes from. It may be in our house (please read), in pensions or other investments. We can then use this information to decide where we want to shift our net worth. Do we want to diversify (spread out) what we own, or are we happy keeping it in a few simple areas that we understand.

Tracking net worth enables us to monitor our behaviours and priorities

After all, Buff folk like us are interested in monitoring and improving ourselves.

If you do not know what your net worth is, I encourage you to work it out and begin to track how it moves (monthly has worked well for me). You will start to see trends and patterns eventually.

There are many tools that can be used to help us work out our net worth. I aim to create my own in the future, for now here is one (it is in dollars but a nice simple version).

What can be measured can be managed

I want to link this post with another around how to view our net worth when comparing it to national statistics.

Have you been tracking your net worth already? What did you learn?



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