Gilbert Index

Net Worth Thinkers vs Income Thinkers

There are two types of money thinkers: the Net Worth Thinker and the Income Thinker. One is characteristic of a Financially Free person or someone on their way to Financial Freedom. The other, that of a Sucker. I.e., most American consumers.

If you’re serious about reaching Financial Freedom, you’re probably already a Net Worth Thinker and know that being an Income Thinker means you’re a Sucker.

And if you’re a Net Worth Thinker, you probably already exhibit the behaviors that naturally follow from being a Net Worth Thinker:

1: Saving
2: Avoiding Debt
3: And Tying Spending to your Values (Practicing Frugality)

And as it happens these three behaviors together form a much wiser personal finance strategy than worrying about increases to your yearly salary because they’re how you build your Net Worth. Which means they’re how you reach Financial Freedom.

The reason a Net Worth Thinker is better suited to achieve Financial Freedom than an Income Thinker is because Net Worth keeps you focused on useful information and what actually matters, while Income does not.

For instance if you’re endgame is Financial Freedom, what number tells you if you’re Financially Free? Net Worth? Or Yearly Income?

Answer: your Net Worth.

What does your Yearly Income tell you?

It tells you how much money you generated in the year. Y ya. And is that useful information? Yes, but to a limited extent because 1) it doesn’t tell you anything about debts and 2) if you spend all your Income, your Net Worth doesn’t move. And you’re no closer to Financial Freedom. Net Worth is what matters in the end.

Suppose you earn $250,000 dollars in a year and spend all of it. That means you saved nothing that year. But if you earn $50,000 and save $25,000 of it, your Net Worth has increased $25,000 dollars.

You might be saying to yourself: but what if I earn $250,000 and only spend $25,000? That would give me $225,000 in savings. Clearly it’s better to earn $250k and spend $25k than to earn $50k and spend $25k. Doesn’t this prove I should be focused on increasing my income?

And I would respond: it proves you should be focused on Saving and Practicing Frugality, which is what you’re doing when you earn $250k and spend $25k. And so it proves the virtues of Net Worth Thinking because Saving and Practicing Frugality are what you get when you adopt Net Worth Thinking. That’s the whole deal.

Income Thinking exists because the tax system is based around Income and because businesses want you concerned with Income. And most people are employed by businesses, i.e., are employees.

A company wants you to want higher and higher pay, year after year because it keeps you working like a motivated hamster moving and twitching its little body, but going nowhere, on a running wheel. A company wants you thinking: “Next year I can make six digits.” A company does not want you thinking: “If I save 75% of my Income this year and next year, my Net Worth will be large enough so I can quit this job the following year, never having even earned six digits, and then do what I really want to do.”

Consider this: do you think a business is a Revenue Thinker? (meaning Income Thinker)? Or Profit Thinker (meaning Net Worth Thinker)?

Of course a business concerns itself with both because it needs to generate enough revenue to cover expenses and liabilities. But a business, a for-profit business, if it’s worth its salt, is 100% a Profit Thinker (equivalent to a Net Worth Thinking Individual) because profits are how businesses survive over the long term.

And if you follow this thinking, what are you?

You’re a business too. Whether you like to think of yourself that way or not, you’re a business. You’re a ball of flesh that generates cash flow, spends money, invests, and directs resources to accomplish things. You’re a for-profit business. Which means your personal finance strategy should put the profit front and center. The profit, the amount of money you have after expenses and liabilities. Which means you should don the robe of a Net Worth Thinker.

Don’t play the Income Game. The Income Game—where you’re worried about what other people make, worried about a bonus or promotion, worried about being a “high income earner”—is a sucker’s game. It’s the hamster wheel. It’ll keep you running and running in place. The Income Game keeps you wanting more and more, unsatisfied and unhappy.

Income is important only if you’re Saving it and Not Going into Debt. And a High Income is useless if you don’t know how much money you need to retire, meaning you don’t know what Net Worth you need to never work again.

Income Thinking is also self-limiting because it presupposes you must earn an “Income,” something Net Worth Thinkers know isn’t true. The game is Financial Freedom and in this game you need money. And that money doesn’t have to come from an Income or Salary as traditionally envisioned. You can earn money from multiple sources: a side project, a job, a source of passive income, dividends and interest, and on. This is an entrepreneurial mindset, and a state of mind Net Worth Thinking puts you in.

The bottom line: if you become a Net Worth Thinker, you put yourself in better position to reach Financial Freedom.

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