Money and Wealth, are not quite the same thing and the results from a simple search will show why there is some misunderstanding about what these are. A good way to understand this distinction is to determine if gives you more money or it frees up your time in addition to giving you money.
In our illustration we will create a fictional character James and if you happen to be reading this and your name is James, the story ends well so keep reading.
What is Money
James has a white collar job, works 50 hours a week and as expected he gets paid a the end of the month. James gets paid cash in his bank account for however many hours and days he worked in the month so his labour is represented by that salary. He has traded his time for money. This leads one of the ways you can define money.
Money can be defined as a temporary store of your labour
If James leaves some of that money in the bank as cash for a long period of time it will not be able to purchase the same thing in a few years from now. It will lose its purchasing power due to the effect of inflation on money.
Money loses value over time
James spends some of the money from his wages on living expenses and a number of holidays during the year. He realises he needs some travelling gear and a suitcase so he purchases a travelling bag paying with the money he has saved. This transaction can be see as an exchange of value. Through his purchase the seller has earned some profit on the item they sold to him and James now has the bag he needs to travel.
Money is a medium for exchanging value.
Considering we are not in the Middle Ages or ancient times, money is the medium of transacting. In many cases if James wants to buy a car, clothing or groceries, he can pay cash rather than offer some alternate form of barter. Money can easily be translated to any form of value or service he needs since it is widely accepted as a medium for transacting.
Money is Liquid
As a shrewd individual James follows Wealth Sigma on all our platforms and over time he has gained insights on how to invest better. He decides to use some of this savings to purchase a property and rent it out on short lets or as a serviced apartment. One of the reasons he chose to do this is to earn some rental income and see the value of the property go up over time.
Money can buy Wealth but is not Wealth.
James may choose to keep the property or sell it later and use the money to purchase another asset. This could be a commodity such as Gold, a piece of art or anything that can store value for a prolonged period. Completing this purchase means he has used money from the sale of an asset to purchase another.
Money is a way of moving Wealth
After the Second World War the US dollar was backed by Gold and to understand how the banking system works, we need to see how people transacted goods and services. In ancient times, commodities such as gold or anything else that was a considered valuable was weighed against fruits and other small objects in order to determine how much they are worth.
To minimise the risk of losing your precious commodity due to theft or carelessness, you would deposit it in the care of a credible third party and was issued a promissory note – a piece of paper allowed you to buy goods or services with the equivalent of the commodity, in this example gold.
Wealth can be considered as gold while the piece of paper that gives you access to trade the value of that gold, as Money. As long as your money is backed by gold, technically its value it tied to gold, but we know this is not the case today. Long story beyond the scope of this article.
What is Wealth
Continuing our story, James has now acquired several rental properties that generate money at the end of the month. In addition to that, he has decided to buy shares that pay a dividend and with the little time he has, he teaches people how to buy property and avoid any pitfalls.
Wealth is having assets that generate money for you.
He has both physical and digital assets that produce money to because he has seen an opportunity to solve a problem or meet a need. He has created a course where he shares knowledge on how to buy properties. James looks for properties that are derelict, brings them back to life and sells them for a profit or rents them out long term.
Wealth is obtained by creating value
James has been closely watching certain neighbourhoods and noticed several developments have been announced so he buys even more properties in that area. James sees an opportunity in commercial real estate as more people are returning to the office since the effect of Covid-19 is subsiding. Over a period of time these properties are going up in value as more people invest in the area, move into the area to live and work.
Wealth if invested properly gains value over time
As James’ investments have good returns, he is now able to leave his job, register a Company, hire a small team and spend his time the way he chooses. He spends a bit more time with his children and makes more time to work out. He has the freedom to decide how he spends his time.
Wealth is measured in time not in currency
Unlike money, James cannot use his property or his investment in precious metals in exchange for a service. If wants to pay for his holidays, he needs to pay for it with cash and depending on the assets he has, it will take some time to sell it and obtain the cash from it.
Wealth is illiquid
On his return from his holiday, James is looking to diversify his investment portfolio, so he purchases more art, gold, adds bonds to his portfolio, some ETFs, creates more courses and in this process he creates more value to people.
Wealth is an abundance of valuable possessions
Final Note
Creating wealth is a process that can take time and the results you get will depend on how much money, knowledge and time you can have in addition to other factors. Using our fictional character James, we can see how he moved from working a regular job, to creating value hiring people and being in control of time and other resources.
What should be evident from this is the transition from having, to knowing and then doing. As you advance in your wealth acquisition, you are likely to have more illiquid assets such as precious metals, art and prime real estate. Use your time and effort to do what matters. Getting money is good but is only a start. The ultimate goal is to build Wealth.
