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Are You Income or Balance Sheet Wealthy?

I was re-reading some of the research done by Dr. Thomas J. Staley on millionaires next door and it reminded me of this important distinction. On his blog, Dr. Staley wrote that based on his research:

“Most millionaires measure success by net worth, not income. Instead of taking their money home, they plow as much as they can into their businesses, stock portfolios and other assets. Why? Because the government doesn’t tax wealth; it taxes income. And the more income you bring home for consumption, the more the government takes.”

It’s a good perspective to have. To build your net worth, you need to grow your appreciating assets. A car is not an appreciating asset. Neither is a boat, horse, big screen television, expensive trips, or golf membership in an exclusive course. There are two types of appreciating assets: paper (stocks, mutual funds, your business, etc.) and real assets (real estate). Think about it: are you growing your income wealth or your balance sheet wealth?