Earning a solid income can go a long way to boosting your financial position. But growing your wealth is key to gaining financial independence.

People often confuse income with wealth. They're similar but they're not interchangeable. Understanding how they work together can help you plan for your future more confidently.

But first things first. Let's make sure you understand what we mean when we talk about income and wealth.

Income is a stream of money you likely receive regularly. You may earn an active income, which could include money you receive from a wage, salary or side gig. Or you may earn passive income, such as interest or dividends from investing.

Wealth — or net worth — is how much you would have left over if you sold everything you owned and then settled all your debts.

Contents

How to calculate your wealth
Why keeping an eye on your wealth is important
1. Live the lifestyle you can afford, not the one you want
2. Clear your debt
3. Build up your 'what if' fund
4. Invest for the future
5. Make sure you're covered

How to calculate your wealth

Keeping an eye on your wealth, or net worth, can help make sure you're on track for meeting your goals.

There are online tools that can help you work yours out. Moneysmart has a calculator which calculates your savings, superannuation and investments against any outstanding debt you may have. The difference between the two is how financially wealthy you are.

Why keeping an eye on your wealth is important

A high income doesn't always make you wealthy.

It's natural to expect that if you have good income, you should be wealthy and vice versa, but it's not a universal truth.

You could be earning a decent income and still be in financial difficulty. Or you could be on a lower income, but well on your way to becoming wealthy.

A good marker of 'wealth' is when you feel you have financial independence.

Here are some tips that could help turn your income into wealth:

1. Live the lifestyle you can afford, not the one you want

When your income increases, it can be tempting to match your spending with your pay, as you can 'afford' to live a better lifestyle.

But if you're exhausting your income or spending more than you earn, then you aren't growing your wealth, regardless of what you earn.

Lots of people spend nearly all they have, with a small amount left over. Even when their income grows, they don't save any more money. They continue to spend what they have.

Common examples are elite athletes who can have high incomes in their capacity as sportspeople, thanks to sponsors and product endorsers when they are competing. But once their careers are over, they may be in a radically different position.

Keeping an eye on your spending as your income increases is a good idea.

We've spoken about him before, but Warren Buffet is one of the world's richest men with a net worth of around $100 billion. He credits his wealth to his simple tastes. Dubbed the 'Oracle of Omaha', Buffet has lived in the same home in Omaha, Nebraska since 1958. He drives a second hand car. And he also eats the same thing for breakfast every day, spending less than $4 each time.

2. Clear your debt

It's hard to grow your wealth if you don't know what you owe.

Tally up all your debts from credit cards, holidays, student debt and any other mortgages or loans. Don't forget to add any Buy Now Pay Later products you might be using. When you know what's outstanding you'll have a clear picture of what you need to do to chip away at it.

Can you make extra repayments or negotiate a lower rate?

Freeing yourself from debt will help you to regain confidence and control and go a long way to increasing your wealth.

3. Build up your 'what if' fund

When you've got money squirrelled away, you're free to live life on your own terms.

The feeling of security that comes with having cash for a rainy day or when you're in a jam can be a huge help. That's the power of financial independence.

You determine what helps you to sleep better at night. Is it a dollar figure? Is it $5,000 or six months of salary? Whatever works for you, work towards building it up.

4. Invest for the future

Once you've built your emergency fund, keep up those saving habits to fund a pool of money for longer term growth. Many people make the mistake of putting their 'now' self first. Your 'now' self wants to go on holidays, buy a car or treat yourself.

That means your future self, who wants to buy a house and live well in retirement, might never really get there.

So do yourself a favour and think about how investing could help you on your way.

You might want to invest in what you feel comfortable in and what you know. If you can't wrap your head around cryptocurrency or hedge funds, they may not be the best options for you.

Many people like to buy assets they can see and touch, which is one reason why investment properties are a popular choice. Remember, make sure to do your research and consider seeking independent financial advice before making any major investment decisions.

5. Make sure you're covered

You and your ability to earn an income are your most important assets.

Make sure you've thought about your options when it comes to protecting yourself (or your family), such as if you fall into bad health or become critically ill and can't work again.

Don't be fooled into thinking it can't happen to you.

Having appropriate insurance cover in place can give you and your loved ones peace of mind if unforeseen things happen.

These steps should help set you up for a financial future you can sustain. They may not be sexy or quick, but they are ways to help you one day, grow your wealth, and also work towards financial independence.

Nicole Webb

Invest in your future, so you can live the life you want to live