Wealth is often equated with money and assets. This essay outlines the concept of Wealth and dives deeper into Financial Wealth.
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Why Understand Wealth?
I recently asked the question “what is wealth?” to a few people I know, and their answers indicated that the concept isn’t clear even to some of the brightest minds and successful people.
(It is not their fault. Today’s education system does not give enough importance to subjects like economics and finance critical to understanding the day to day life. This is a tragedy – all people are engaged in some form of economic activity and need this knowledge, but not everyone needs to know history, physics, or biology in their day to day life.)
Many people have their life goal as being wealthy and devote a significant portion of their life to the achievement of this goal. It is essential to understand the concept of wealth to ensure you aiming for the correct goal.
What is wealth?
Wealth refers to “an abundance of valuable possessions or property,” or “a plentiful supply of a particular desirable thing.”
We equate wealth with money or, more specifically, assets – physical or financial. However, wealth refers to the state of abundance of desirable things – money, or assets being just one form of desirable things.
What are the Different Types of Wealth?
There are different views but I found the following classification to be quite adequate.
1. Physical Wealth (Health)
Health refers to “the state of being free from illness or injury.” When you lose the wealth of health, you are no longer in a position to
2. Time Wealth (Freedom)
Time refers to “the indefinite continued progress of existence and events in the past, present, and future regarded as a whole.”
While freedom refers to “the power or right to act, speak, or think as one wants” or “the state of not being imprisoned or enslaved.”
3. Social Wealth (Relationships)
For many, social wealth is their status in the society. This status is earned through lifestyle, education, or vocation. Status refers to “the relative social or professional position; standing.”
I prefer to interpret social wealth as the strength of relationships we have.
4. Financial Wealth (Money)
Refers to “the abundance of valuable financial assets or physical possessions, which can be converted into a form used for transactions.”
The rest of this essay focuses on financial wealth because most people associate it with the word ‘wealth’.
Wealth, Asset and Expense
Let’s understand the distinction between Wealth, Asset, and Expense.
Financial Wealth, as we read above, refers to:
The abundance of valuable financial assets or physical possessions, which can be converted into a form used for transactions.
We will revisit this later in the essay.
Asset
An Asset is anything valuable that stores value and can be exchanged for money.
For example, a car, a precious painting, jewellery, a deposit in the bank, or money invested in a business are all assets.
Expense
An expense is anything you spend money on, where it’s value is consumed immediately or within a very short time.
For example, a meal at a restaurant, the groceries you purchased, a movie you saw, or the Uber ride you took while going home after the movie.
Productive Assets vs. Non-Productive Assets
The traditional definition of wealth treats an accumulation of assets or possessions as wealth.
By this definition, gold is treated as wealth, on par with a rented property, or money in an interest-bearing deposit.
But it is necessary to distinguish between
- non-productive assets that are passive stores of value (like gold, an antique vase), and
- productive assets (like rented property or interest-earning deposits or money invested in a business).
The distinction between a productive and non-productive asset is crucial to understanding wealth.
You don’t want to spend an entire life to be wealthy, only to find you have acquired assets (gold, a collection of coffee cups, or cars), or worse, everything was expense creating no lasting value beyond day to day existence.
What is Financial Wealth?
Wealth is an asset that produces income (or, more specifically, cash flow) without you spending time.
The key attributes of wealth are:
- It must be an asset
- It must generate income
- No time is spent to earn the income.
Anything that is wealth is an asset. But not all assets are wealth.
Only assets that generate income without you spending time to earn it are wealth.
Let’s look at different examples to get these concepts clear.
- Gold/Jewels. It is not wealth as it doesn’t generate any income. It is, however, an asset and can be exchanged for money.
- Household Goods. Not wealth as there is zero income. It may not even be an asset; it is expense unless it is beautiful vase from the 15th century, in which case it may be an asset!
- Cars. Not wealth if it is meant for personal use. It is an asset as it can be sold for money. However, it is a depreciating asset as it loses value over time, even if not used.
- Rented property. Earns income while you sleep. It is wealth.
- Self-occupied or Vacant property. It doesn’t earn income, and hence it is not wealth. It is an asset as it can be exchanged for money. It is usually (not always and not guaranteed) an appreciating asset whose value increases in time.
- Interest-earning deposit in a bank. Earns money while you sleep. It is wealth.
- Books. For an author, a book is a piece of wealth. It generates income whenever you and me purchases it on Amazon or in a bookstore.
- Software. It is wealth if it generates income.
- Media. Wealth for some folks who own the rights to media (songs, movies, TV shows, video games) that generates income.
- Patent. It is wealth if it generates income.
- Job. Generates income, but you are obligated to spend time – hence not wealth. In a job, you have sold your time in return for salary. Your employer has purchased or rented your time in exchange for money.
(Note: There’s nothing wrong with a job, and most people have commitments that necessitate them into an employment. There’s also a bit of orthodox thinking in the Job vs. Business debate. Read my essay You are a Business of ‘One’.)
- Business. A profitable business is wealth, as it keeps earning money when you are asleep. A business owner spends time in her business, but some of it is by choice and not an obligation. The income earned is not directly proportionate to the time spent. When a profitable business becomes loss-making, it stops being wealth though it may still be an asset if it can be sold for money.
- Art (painting or sculpture). Not wealth. Though, if hung in an art gallery that generates income from visitors, then it may classify as wealth. If hung in your home, it may be an asset (if it could be sold for money), or it may be pure expense.
- Dinner at a fancy restaurant. Its an expense. It is neither wealth nor an asset.
- Travel. It is an expense. It is neither wealth nor an asset.
Bottomline:
Wealth generates income when you are sleeping.
Financial Wealth as a Goal
The classification of an Asset as Wealth is not permanent.
What is wealth today may not be wealth tomorrow if it stops generating income. Asset that doesn’t generate income today, may start generating it tomorrow and will get classified as wealth.
Business owners invest their time in their business to ensure it keeps generating income even though there is no obligation to do so. They are spending their time ‘protecting‘ their wealth.
Understanding this distinction between Wealth, Asset, and Expense is vital so that you can focus on the right goal.
The goal should be to spend your time and money creating wealth (income-generating assets) and not merely assets or expenses. The aim for creating wealth is to break the correlation between time spent and money earned. Because time is the most precious resource in life.
There will be expenses incurred in living. However, spending everything you earn on expenses won’t help you become wealthy, if that’s your goal.
The formula to be become wealth is simple:
To become wealthy
– spend less than you earn,
– invest the savings for creating financial wealth (income-generating assets),
– leverage the power of compounding to grow wealthy over time.
A penny saved is a penny earned. But the same penny, if invested, builds wealth.
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What’s your Financial Wealth?
As an exercise make an inventory of your assets and wealth.
What’s your Net Worth?
- Dig out that notebook or create a simple spreadsheet.
- Start listing your assets (anything valuable and can be exchanged for money).
- It is alright if the numbers are guesses and not accurate down to the last penny. Refer to examples earlier in the essay.
- Did you borrow any money for purchasing assets (like home) or expenses (that trip to Switzerland). This represents money you owe the bank or someone else. These are your liabilities.
Net worth = Assets – Liabilities
How wealthy are you?
Review the list of assets you have created.
- How many of the assets earn income while you sleep?
- Put a column against each asset and classify any asset that earns income as wealth.
- Review what portion of assets constitute wealth.
- What is the total income you make every year while you sleep? I like to even find out how much you make every day.
- Are there assets that are not earning money right now, but you could easily convert into wealth? For example, turn that spare bedroom into Airbnb, rent out the vacant property, move money from the current account to an interest-earning deposit account, and so on.
- From the examples earlier in the article, which assets could you create that would classify as wealth?
Perspectives on Wealth
I leave you with a few perspectives on wealth to mull over. They provide food for thought.
Seek wealth, not money or status.
Wealth is having assets that earn while you sleep.
Money is how we transfer time and wealth.
Status is your place in the social hierarchy.
Naval Ravikant, Founder of AngelList
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It is better to measure your success by what you do not have to do, rather than just what you possess.
This line of thinking makes wealth a matter of more than just money.
@Wealth_Theory on Twitter
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Real wealth is not about money.
Real wealth is:
– not having to go to meetings
– not having to spend time with jerks
– not being locked into status games
– not feeling like you have to say ‘yes.’
– not worrying about others claiming your time and energy
Real wealth is about freedom.
@JamesClear, Author of Atomic Habits
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Peace of mind is the highest wealth.
@Kpaxs
I have listed the Twitter handles in case you want follow these people.
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Loved your insights. James Clear’s quote is my favourite.
Thanks Karthik. Its one of my favourites too!
Wonderful article Satya. Way to go….Keep writing
Thanks Girish. Will do!