To make the concept easier to understand, I will reduce it to something more easily understandable. I’ll use the example of a person who owns a house worth $300,000, owns a project car worth $10,000, has $10,000 in savings, and has a retirement plan worth $50,000. The person is worth $370,000. Let’s say the person earns $60,000 over the next year.
The following year, the house is worth $350,000 due to market increases, the project car is completed and worth $30,000, he has $8,000 in savings because some of it was used for whatever it was used for, and his retirement plan is now worth $57,000 with pre-tax contributions matched by the employer and growth. Despite earning only $60,000, and using most of it for living, the person is now worth $445,000.
Income is subject to taxation; growth in wealth is not.