The takeaway from this article is that hoarding cash is not a good store of wealth, and that the key to long-term wealth is to acquire net income generating assets. Great points for sure, but I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.
I'm glad to see someone advocating sensible retirement planning here. Though the post had a few good points about how to perceive wealth vs. money, I cringed at the notion that most stocks are "buy and pray" investments. Stocks have a better risk/return profile than just about any other asset class with a given 10+ year time window over the last century, assuming proper diversification. I should also point out that stocks, by definition, are ownership.
That being said, it is important to further diversify within a stock portfolio by having a good mix US, European, Emerging Market, small/mid/large cap, etc. As one nears retirement, risk can be reduced along with return by shifting into bonds. Again diversification is useful here. Have a good mix of both corporate and government, high quality, high yield, floating rate, inflation protected, etc.
Of course, developing a skill is a way to increase your wealth, as defined by the article, but diversified equity and fixed income holdings are a way to protect that wealth for a time when those skills are no longer relevant, whether it is by the slow erosion of time or a sudden unfortunate event.
> I strongly disagree with his assertions that saving up for retirement is ill-advised and that traditional investments (stocks, etc.) are too volatile and risky to be useful.
With my retirement age ~40 years away, it's not clear to me that locking my money into traditional investments is a good idea: existing historical records are not statistically convincing (to me) over such a term.
A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
When I come to unlock a pension, there's no way to know what the state of the economy will be and where the legislation will have gone. However, if I am dependent on that pension, it puts me in a very vulnerable position where I am likely to be taken advantage of - perhaps by the state or by an uncompetitive financial market.
You talk about tax-advantage, but I would have to retain this over several successive governments. I personally don't believe that it's in the interests of society for significantly wealthy people to retain additional tax advantages. I suppose it's in my personal interest for now to take those advantages, but I don't feel like they can be relied upon, and seem likely be changed over this time period - perhaps even retrospectively.
Anyway, if I am not completely dependent on my retirement savings, but have a means of generating wealth in my retirement, then I am in a much better position.
This is why I find entrepreneurship a good investment: it gives me valued skills that I will most likely retain into older age (even if I fail at first). Whereas, people who remain in traditional jobs have some danger of being obsoleted, or competed out of their jobs in older age.
+1 entrepreneurship is risky and not for everyone.
I have generated wealth by working for other people, diversifying, having low living costs, and getting most happiness out of life from being with friends and family.
In other words, a mixed strategy of setting goals for lots of free time and consuming less than I produce.
Agreed that he misses the point with retirement. "Saving up" for retirement doesnt mean $1M in cash, it usually means $1M in income producing assets pieces of profitable businesses and future promises of more (bonds).
I like how you defined heath, education, and intelligence as the raw materials, but they don't directly give you the return that will make you wealthy. You need to apply those skills in some way to make income generating assets, and that is the tricky part.
For most people, including Robert Kiyosaki, income producing assets basically means buying and renting out property. I disagree with doing that on so many levels and also think it's a terrible investment in todays over inflated market.
Another option is to save and make investments, but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments.
That leaves us with entrepreneurship. That is why we are here and it is probably our best chance, but is never risk free and not a path that the average person will use to build wealth.
This said, building wealth rather than accumulating savings is hard even if you are lucky enough to have all of the necessary ingredients and the right mindset.
Your pillars of health, education and intelligence are important. I'm glad that I have them because whilst I do, I hopefully won't go hungry. They are a safety net. However, I don't think that those alone are a path to building wealth.
I had a sneaking suspicion about the source of the thoughts behind the article as soon as I read the phrase "net income generating assets"—then saw the culprit in "Rich Dad, Poor Dad".
If you're going to read Kiyosaki's books, then you need to also do yourself a favor and read the criticisms thereof. Kiyosaki borders on a fraud, and many of the rich-dad'isms are flat out illegal. Indeed, as far as anyone is able to ascertain, most of Kiyosaki's traceable money comes not from real estate as he claims, but from selling his books and seminars.
Even if it's true, property millionaires are outliers who simply used lots of leverage to accumulate property during a massive credit fueled orgy of speculation.
They got lucky. Those conditions are not likely to return and the path is likely to be much more difficult for anyone trying to do the same today.
I don't admire property speculators such as Kiyosaki. Recklessness rather than brains led many people down this path, and then they were subsequently bailed out with taxpayers money and ZIRP when it all went wrong.
In addition, hoarding property is actually a massive net negative to society.
(I am talking about our breed of buy to let investors here in the UK. I'm not sure if you have the same characters stateside.)
It's some fishy stuff. But reading that book was also the first time that I realized I could have income besides a paycheck from a job; I remember the book fondly, even if its specific advice (if you can call it "specific") is questionable.
I read through this, but I'm a bit lost. You realize you can use money to purchase income generating assets? In fact you realize that most people accumulate money for the purpose of purchasing these income generating assets?
If I have a lot of money I can easily change it into a lot of wealth and a lot of wealth can be liquidated into a lot of money. And no, nobody who is actually rich cares about their education or intelligence because neither of these are able to generate anywhere near the kinds of returns from simply buying up large amounts of income generating assets.
It seems like the author discounts the value of any investments you can purchase, which leads him to the conclusion that entrepreneurship is the way to go. As others have commented, this isn't borne out by history.
No place for comments on the post, so I'll reply here.
I think the definition of wealth that is quoted at the top, and the one I normally use, is different from the one you are using (at least at some points).
As far as I understand the definition, (material) wealth refers to the physical things that you can own or enjoy that are good and useful. So that includes cars, houses, clothes etc. But not things are purely money generating things (like stocks and shares). A house is a good and useful thing in its own right because you can live in it. Stocks and shares, and money itself, are not (apart from the sheer pleasure of seeing a large number on your bank account).
You might also include 'things' that are not quite in the same category as physical possessions, but are things that can be enjoyed - like holidays and gym membership.
In that sense, money and wealth are almost opposites - you have to give up money to get wealth. At the extremes:
You can have millions in the bank and have no wealth - if you refuse to spend it, you'll die of starvation in cold, broken down house; and you can also have no money but plenty of wealth if, for example, you are the owner of a large, entirely self-sufficient farm, with servants etc. who are all paid via the produce of the land and live in buildings you own. Neither are very likely in our economy.
It seems you are mixing into that definition of wealth the ability to get money/wealth. I'd agree that is a form of wealth (in that you would say that person is in an enviable position), but, like money, it is more "potential material wealth" and not really physical/material wealth itself. And the ability to be happy with little material wealth is the best form of wealth, but, by definition, not a part of material wealth itself.
"Money is a medium of exchange for wealth, it is not a store of wealth."
Disagree. To be a medium of exchange, money must have "holding" value (because money does not circulate, but simply switches holders: http://blog.oleganza.com/post/43378777734/on-circulation-of-...). The liquidity of money is in how many people want to hold it in their cash balances. The more people want it - the bigger value of the total supply (regardless if it's slowly shrinking or growing). The more and longer people want to hold cash, the bigger liquidity - the more "wealth" you can reliably "move" from one person to another. E.g. Bitcoin valuation is pretty small right now, so people can't use Bitcoin (yet) to make multi-billion purchases. Because to make multi-billion purchase one of the parties must hold billions and another must be willing to hold billions (and then find others to who give them if they need in the future).
So the money to be a good liquid medium of exchange must be a good store of wealth. And the more wealth it is "storing", the better medium of exchange it is.
"Robert Kiyosaki, author of Rich Dad, Poor Dad (worth reading along with its sequels), proposes that rich people get rich by building their net income generating assets column (i.e. things that generate positive cash flow each month, not "buy and pray" investments like most stocks or houses)"
In short this is the equivalent of "find a good lawyer" type advice. Gee thanks for that tip. (As an aside I have those assets and I've done that type of thing with success).
The problem is finding those assets and not overpaying for them and making a good deal. Just like someone saying "you have to find a woman/man who is this not that!". Ok go find that person.
The other thing that I have observed over many many years (starting in college when I worked for a lawyer and dealt with some of the deals he was involved in) is that many people who have those assets got them by being turned on to them by people that they know (their attorney, a friend, a business associate) so they are out there circulating in the world and get presented (similar in a much smaller way to what Warren Buffet does) with opportunities. Could be a fraternity brother they keep in touch with etc.
That said you still (and this is important) have to know enough to take advantage of the opportunities (so it's not just luck obviously) and of course be the type of person who even is associated with others who have identified opportunities. See [1].
As far as investing in your house well I could spin that the other way. A nice house gives you the opportunity to entertain and meet people. People always like a good party. And if you have a vacation home people will always want to come to your vacation home and stay over. [1] In short, if you have nice things people want to be around you. You meet people. Those people are contacts that can help you with opportunities.
[1] I had a vacation home (actually still do) and had a boat. It is a great way to socialize and entertain. Regardless of whether those people are the type that are truly friends or not there is a business value to making contact with people like that in certain situations.
I disagree with the blog post (although I agree with one of the points, that money are not a wealth storage mechanism).
There are valid reasons to make savings - accumulate money (or any other liquid asset with high exchange value, not necessarily use value - like gold). According to many economists, this is not true; rationally, one should only invest (exchange money for something producing more money later) or consume (make yourself feel better).
The reason to make savings is to postpone the decision to invest or consume (which is irreversible, due to physical nature of the world), and by doing that, you may gain an edge over other people who are forced to make that decision earlier. In other words, you gain power over other people by saving money (which is kind of what Marx what saying about the goals of capitalist - to make more money, ultimately).
Let me give a couple of examples: A rich capitalist (having a lot of money on hand) can survive a strike of his employees forcing them to reduce their demands; temporarily outlive better competition; react to new challenges by investing into technology already proven elsewhere; temporarily reduce prices to drive competition out of the market, and so on. Although in these examples I talk about capitalists, this is true for anybody, but the effect is not so apparent.
Of course, the extent how much one can do that or how much it will help depends on the money distribution in society. You cannot save all the time, and not everybody can save at the same time - otherwise you get a deflation. Thus it's not a sure-fire way to gain power, because nothing is. The blog post calls it "personal freedom", but it's not just that; that's very individualistic view of what's going on.
And since there are valid reasons to accumulate money, they are not just a medium of exchange. Whether or not the result (power over other people) is "wealth" depends on personal taste, I guess.
"In practice, it seems people who know how to maintain wealth would never keep a large sum in cash around, but quickly turn it into net income generating assets"
Warren Buffet famously holds large sums of cash or cash equivalents from time to time. Dumping your cash into overpriced assets just to keep your cash balance low is no smarter than hording cash.
The article is flawed. It distinguishes between having money and making money - this is very questionable.
From a scientific view wealth == money. Wealth is measured in money, something is worth x dollar. How this money is stored is another question, it can be stock, gold or whatever.
From a philosophical point of view wealth can be whatever you want it to be. I think the view of the author is quite sane and i agree with him on that; but please don't tell me , this is the right definition of wealth.
BTW I am reading Hackers & Painters right now and pg has a similar concept of wealth.
What's lacking is is a call for diversification. Along with that pile of cash you should also have money making enterprises. If you have one without the other, the risks are higher for a complete loss. Money can rot like potatoes but if you keep the farm running you could also end up with a failed farm when you're too old to fix it and no saved potatoes in your basement to sustain you.
For the gamers in the house, this sounds quite similar to StarCraft and Magic: The Gathering.
In both games, unspent minerals/gas/mana is seen as a bad thing. Either you have your sights set on something specific a little expensive (battlecruiser/expansion), you are building an army for an upcoming attack, or you are reinvesting it back into your economy.
In none of those cases are you letting your money sitting around without purpose. An army of 500 mineral marines is definitely going to beat a player with no army and 500 minerals.
This makes sense but then what are some useful ways to use cash to build wealth if not buying stocks and other investments? I'm a young guy with plenty of money in the bank (in the tens of thousands; obviously not enough to retire but I could quit my job and do nothing for a while) and basically no debt. I find and I'm sure I'm not alone here with this feeling that, while I could spend a lot more money, I'm perfectly happy spending significantly less than I make. Right now, it's mostly in a bank, waiting for me to spend it on god knows what. Any advice on how to use it to build wealth?
Until you've figured out what to do with it, just buy shares VTI. Vanguard Total Stock Market. Or get the admiral version if you're in the US. Essentially it's a tiny fraction of ownership of all publicly traded companies. As long as the economy doesn't go completely down the drain it's a very good place for your money. It's not the optimal place for your money, of course, but compared to sticking your money in a checking or savings account it's a no-brainer.
Figuring out what to do with your money isn't easy. So until you've got a good plan, go with a sensible default. That's VTI. Every day you procrastinate on this you're simply burning money.
Ideal situation for growing your money, imho: using your expertise, try and figure out some kind of investment that looks very risky to people who don't have your expertise, but isn't risky to you because you know the market better than most people. Invest in that, managing the risk sensibly, and you should be able to grow your money.
If you don't have any such areas of expertise, then the best thing you can do with your money is use it to learn - gain one or more or many of these areas of expertise.
This really depends on your specific goals, your time frame and other aspects of your financial situation. Personal financial planning doesn't have to be complicated, but you need to be aware of your investment options and which are suitable for a given goal and/or time frame.
When will you need the money? In one year, or not until retirement? What are you planning on doing with the money? (If you don't have any plans, at least have an idea of when you might need to withdraw it)
Probably the biggest factor going to be your time frame. If you are going to need the money in 1-5 years (say for a house down payment), I would stay away from equity/stocks; in general, the proportion going towards equity should decrease as the time available decreases, because the volatility can result in negative returns. If you're going to need it in less than a year, just dump it in a savings account or similar where principal is guaranteed.
At the polar opposite is if you're just concerned about long-term growth. Then, I would in invest in a broad-market ETF like some of the Vanguard ones. Come up with an asset-allocation plan that ensures an acceptable level of risk.
Personally, I'm not a huge fan of directly investing real estate for the purposes of producing rental income. I just don't have any concern for property management, maintenance or dealing with tenants.
If you do go down this route, be sure to do the analysis and compare the expected income and risk with the alternatives (i.e. stocks/bonds, etc.)
This is one area the author of the article falls short in. There's lots of mention of "income generating assets" (with somewhat of preference to real assets) but not really any thought given to the different risks associated with each.
There seems to be an oversimplification that the only way to increase your wealth is to own assets that produce a cash flow (i.e. stocks that pay dividends, properties that generate rental income) with no focus given to capital gains. Capital gains have traditionally been a huge part of wealth gains and furthermore, may be more tax-efficient. None of this is mentioned, instead anything that doesn't produce a cash flow is hand-wavingly dismissed as "buy and pray".
> what are some useful ways to use cash to build wealth if not buying stocks and other investments?
This article lacks the humility to recognize that a large collection of publicly traded companies are going to have much more time, experience, and resources (wealth and leverage of it) to properly manage a company toward profitability.
There are also intangible assets. e.g. Some people give to charity to get into the right networks.
Being able to afford time off work to build an open-source project, having the money to pay people to do some of the work (graphic design, documentation): you can build a high-value consultancy this way.
Two ideas:
Buy bitcoin mining equipment.
Have a kid and use money to spend maximum time with him/her doing cool stuff so he/she grows to be awesome and thankful to you.
This is also why wealth redistribution works far less well than people who imagine it as money redistribution think it will. Part of the wealth is tied up in the owner, and that can't be redistributed without loss, sometimes great loss.
Let's take a concrete example. Suppose that class warfare rhetoric utterly wins, and as its first scalp The People decide that the filthy rich Bill Gates needs to have 100% of his wealth confiscated for the good of The People. For simplicity, let's assume that 100% of his wealth is in Microsoft stock. So, The People United take all of his stuff. What do they get? Well, they don't several billion dollars. They get "several billion dollar's worth" of Microsoft stock. Well... that didn't accomplish much. We can't clothe or feed the people Microsoft stock. We need to liquidate it into money to get anywhere, and The People aren't too happy about the filthy capitalist stench of suddenly owning that much stock anyhow, so they immediately sell it all. Of course, dumping all that stock on the market at once immediately sends the price plunging; depending on how foolish The People in terms of wanting to be rid of it immediately it could well plunge to nearly zero. The People destroyed billions of dollars of wealth to obtain probably hundreds of millions of dollars, and quite possibly destroyed Microsoft in the process, hardly a net gain. The stock was as valuable as it was partially because it was in Bill Gates' hands.
In practice, you can't just "claw" wealth from the wealthy and hand it to "the poor" and have the effect you're expecting. You can certainly destroy large amounts of wealth, and yes, the poor will come away with something, but it's far less efficient than the "it's all just money" model leads you to believe. You aren't taking "$100 dollars" away from the wealthy and giving "$100 dollars" to the poor; at scale, you're moving a $100 asset out of the hands of "the wealthy" and into the hands of "the poor", and that's not going to produce the results you were looking for. And again, let me emphasize, it does work to an extent, it just doesn't work as well as you might naively think.
Politics being what they are, people are going to assume that I'm a fan of this truth because I'm saying it. I'm not. It would actually be really cool if redistribution worked as easily as people thought it does! I mean, seriously, awesome. How wonderful it would be if equality could be engineered so trivially! And let me be clear, no sarcasm there. However, it is still true, and it is something we ignore at our own peril. Also, does that mean all our social engineering schemes are hopeless? Well, no, again regardless of whether I'm a fan of them or not, but it does mean that, again, it's harder than we'd like to produce the results we're looking for, and it's a lot easier to overestimate the benefit to the poor and underestimate the damage to the wealthy and the general societal wealth (and even if you don't really care about the wealthy, you ought to care about the general societal wealth) that such schemes can have.
Liquidity is an irrelevant side issue. Gates would have exactly the same problem if he tried to sell all that microsoft stock to buy turnips; he could destroy billions of dollars of wealth just as easily as the people you so despise. (In fact, if you turn it around, Gates doesn't really have 100 billion dollars. He has something that looks like it's worth that much, but only for as long as he doesn't try and use it. If you destroyed 99% of his shares, you wouldn't be destroying any actual wealth - Gates' life wouldn't become any less comfortable, and microsoft would still exist and still be making the same products. So you're not damaging the societal wealth at all).
The interesting question is who will make better use of the dollars, or indeed microsoft shares. And the available evidence is that the poor make much more efficient use of their money than the rich (indeed on some level they have to, because someone 1000x as rich as me certainly isn't getting 1000x the value from their money). They spend money rather than hoarding it, improving the economy, and each marginal dollar improves their lives much more than it would for a rich person.
This just seems like a complaint about illiquidity of certain assets, which is a legitimate concern, but also a pretty commonly addressed one, because it already arises semi-frequently. If you were one of Sam Walton's heirs, for example, you can't just dump all your Wal-Mart stock on day 1. But if you want to turn that in-practice-fairly-illiquid holding into more liquid and diversified holdings, you are not SOL. It might take a few years, but it's perfectly possible to liquidate most such positions without destroying them, and it's done routinely. There are even financial folks who specialize in exactly that, who you can hire if you'd like.
Strawman. Safety net programs aren't about "wealth redistribution", they're income redistribution. Further, there are social factors and goals beyond aggregate economic growth to consider.
Following the logic of this post, you can't redistribute wealth, only money. ” The People” don't want to own companies, they want enough money to feed their families. The problem isn't that Bill Gates has a lot of money, it's that wealth is a system of exponential growth. It is somewhat unfair that his money allows him to make more money at such an outsized rate.
Taxes are a way to put wealth on an logarithmic scale instead of an exponential one. We don't want to forcibly take money from rich people, we want to make it harder for them to make more of it. The point of the post its that wealth is related to having something that can be traded for value. Higher taxes (potentially to support a Basic Income) would leave the rich with their ”wealth” while taking only money from them, hopefully leveling the playing field for everyone else.
In my experience, as part of my family is from ex communist societies, when you distribute money, there is concentration of power.
A government powerful enough to distribute all assets is super powerful, and those that control this government(the party) have all the power.
Having all the power, they have all the material resources for them, their families and friends, even when they don't have "money". They want a car, they ask for a car with any excuse and the day after they have the car, they want to travel and so on.
The rest of the society live in conditions of near slavery. They could ask for a car, as they are "equal", but it takes years to come, and when it comes, it is a horrible car you could not choose anything about.
Also corruption is levels of magnitude bigger than anything in something near capitalistic(even paying more than 40% to the state) societies. If your wife is beautiful and the people of the party wants to fuck with her, they will blackmail her with the working conditions of her family. The same party that controls the media and justice and the only company that hires people.
That was the reason my family emigrated, all at once.
Bill Gates is a special case -- I would imagine the vast majority of stock (surely over 95%, maybe 99%) does not have value because of who owns it.
Also, if the rich are sitting on wealth which loses values as soon as it is spent, perhaps quite a lot of the "wealth" was never really there in the first place? (although there we are perhaps getting into philosophy)
I have always found it odd people who are so against wealth (or income) redistribution always talk about the taking of money from the rich to the poor. Where have you been the last 30 years (in the US)? The only redistribution has been from the working poor and middle class to the rich.
Really against wealth redistribution? Talk about a bottom up approach to tweaking our economy instead of trickle down...
As far as I know there are no proposals to redistribute wealth by seizing assets from wealthy people. They mostly revolve around increasing taxation.
Right now, when Bill Gates wants to use some of his wealth that is tied up in Microsoft stock, he has to sell it. When he sells it, he pays a capital gains tax of 15%. If we increase that tax, Bill gets less money and more of it goes to the government to be redistributed according to the wishes of the people (in theory!). There's no question of what the government is going to do with a bunch of stock.
This is a really salient point. I would go a step further and ask whether or not that $100 is better in the hands of a wealthy person (in the context of this article - a person who would put that money to work in the local/national economy to make more of it), or in those of the poor person. Certainly the latter can put it to great use buying necessities of life, but in the hands of the former it might increase the latter's ability to find a productive job. I'm not really a fan of trickle-down economics, but I think it's more realistic than Robin Hood economics, for the reason you espouse.
I agree that in theory it would be awesome if wealth redistribution worked the way we think it might. I'd love to live in a Trekkie world where everybody seems to have all needs and wants met. In reality, redistribution is very much like throwing money away, considering the long-term impact of such. I think people are mostly either wealth generators or destroyers. Money in the hands of a benevolent generator has the possibility of benefiting many (even though in practice only a few wealth generators actually benefit the average person). In the hands of a destroyer it benefits only them, and only for a short time. Trickle down sucks, but it might be the most realistic option.
That said, while redistribution doesn't work, getting rid of tax shelters and deductions for the wealthy would.
He claims that wealth does not come from owning "buy and pray" assets like stocks and homes, yet most individual net worth gains in this country over the last 50 years have been as a result of owning exactly those two things.
I get his point, but by defining wealth as ownership of "net income generating assets" I think he is ignoring history.
Very good comments, though I disagree on just one point: Money is a medium of exchange for wealth, it is not a store of wealth.
It actually is a store of wealth. Money buys investments, which is where you store wealth. Money is easily transferable in and out of interest bearing accounts, which is a way to store wealth.
The fact that you can buy investments with money makes it a medium of exchange. Money is theoretically supposed to be a store of value as well, but it is not a good store of wealth, due to inflation. With current central bank policy (or at least Fed policy in the US), most interest bearing accounts are not currently a good way to store wealth, because after adjusting for inflation, their low interest rates mean that you are actually losing wealth over time.
I know there is a lot of truth in this article but I personally find it quite hard to decide what assets to invest the cash I own. I don't have enough to buy property but it is still too much to keep it in cash. As I know little about the stock market I see funds as a promising investment.
You get it, swombat (at least in my humble opinion). Thank you for posting that, I hope that it helps some people understand the distinction between currency and assets that produce returns.
edit: Just thinking further on it... I tend to approach things by thinking of pathological cases. In the case of a deflationary or flat currency, I think currency hoarding is a rational response economically even though it's unproductive and leads to high concentrations of wealth. On the other end, inflation that's too high will lead to an economy that is very illiquid and prone to solvency crises. There is a high incentive to minimize cash on hand and maximize debt. In my lifetime I've really come around on the value of a managed and low inflation to having a productive society.
I like the article and agree with the main points, but I don't really understand the fixation on terminology. Who really cares about what one person defines as wealth vs having money?
Isn't the real point here that people who are capable of making a living will always have means to live and those who don't may get by from time to time when they come into money but don't have a lasting ability to generate it for themselves?
On a larger scale, I think this same idea could be used to describe the success and failure of most companies. Companies that can create products or services that sell will succeed in the long run whereas those that have large cash reserves but no ability to produce products or services that sell will eventually run out of cash and fail.
[+] [-] tomstokes|12 years ago|reply
He never explicitly gives any advice for acquiring net income generating assets, but reading between the lines (and given the context) the advice is to pursue entrepreneurship. While I strongly encourage people to pursue entrepreneurship when it makes sense for them to do so, I don't think it's a substitute for proper retirement planning and long-term investment as this article seems to suggest. And it's certainly not good retirement planning advice for anyone who doesn't already understand the basic differences between money, wealth, and assets as this article seems to imply.
Given the failure rate of entrepreneurs and start-ups on average, it seems quite strange to dismiss traditional retirement planning and long-term savings as too risky while encouraging entrepreneurship as the solution in the same article. Traditional retirement investment vehicles (low-overhead diversified ETFs with a mix of bonds, ratio depending on years until retirement, combined with taking advantage of tax-advantaged accounts such as 401Ks, IRAs, etc) isn't anywhere near as risky, especially over the long term. Remember, a single stock market crash in your 20s or 30s is going to have virtually no impact on your retirement savings in your 50s and 60s. When saving for retirement, you have to consider the timeframe involved. By the same token, risky entrepreneurship isn't all that risky when you're young.
[+] [-] apostate|12 years ago|reply
That being said, it is important to further diversify within a stock portfolio by having a good mix US, European, Emerging Market, small/mid/large cap, etc. As one nears retirement, risk can be reduced along with return by shifting into bonds. Again diversification is useful here. Have a good mix of both corporate and government, high quality, high yield, floating rate, inflation protected, etc.
Of course, developing a skill is a way to increase your wealth, as defined by the article, but diversified equity and fixed income holdings are a way to protect that wealth for a time when those skills are no longer relevant, whether it is by the slow erosion of time or a sudden unfortunate event.
[+] [-] ronaldx|12 years ago|reply
With my retirement age ~40 years away, it's not clear to me that locking my money into traditional investments is a good idea: existing historical records are not statistically convincing (to me) over such a term.
A single stock market crash or economic crisis may not matter over the long term, but I'm sure you're not suggesting there will be only one such occasion: it seems more likely that there will be several, which may or may not be timed in my favour.
When I come to unlock a pension, there's no way to know what the state of the economy will be and where the legislation will have gone. However, if I am dependent on that pension, it puts me in a very vulnerable position where I am likely to be taken advantage of - perhaps by the state or by an uncompetitive financial market.
You talk about tax-advantage, but I would have to retain this over several successive governments. I personally don't believe that it's in the interests of society for significantly wealthy people to retain additional tax advantages. I suppose it's in my personal interest for now to take those advantages, but I don't feel like they can be relied upon, and seem likely be changed over this time period - perhaps even retrospectively.
Anyway, if I am not completely dependent on my retirement savings, but have a means of generating wealth in my retirement, then I am in a much better position.
This is why I find entrepreneurship a good investment: it gives me valued skills that I will most likely retain into older age (even if I fail at first). Whereas, people who remain in traditional jobs have some danger of being obsoleted, or competed out of their jobs in older age.
[+] [-] mark_l_watson|12 years ago|reply
I have generated wealth by working for other people, diversifying, having low living costs, and getting most happiness out of life from being with friends and family.
In other words, a mixed strategy of setting goals for lots of free time and consuming less than I produce.
[+] [-] maerF0x0|12 years ago|reply
[+] [-] benjaminwootton|12 years ago|reply
For most people, including Robert Kiyosaki, income producing assets basically means buying and renting out property. I disagree with doing that on so many levels and also think it's a terrible investment in todays over inflated market.
Another option is to save and make investments, but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments.
That leaves us with entrepreneurship. That is why we are here and it is probably our best chance, but is never risk free and not a path that the average person will use to build wealth.
This said, building wealth rather than accumulating savings is hard even if you are lucky enough to have all of the necessary ingredients and the right mindset.
Your pillars of health, education and intelligence are important. I'm glad that I have them because whilst I do, I hopefully won't go hungry. They are a safety net. However, I don't think that those alone are a path to building wealth.
[+] [-] karmajunkie|12 years ago|reply
If you're going to read Kiyosaki's books, then you need to also do yourself a favor and read the criticisms thereof. Kiyosaki borders on a fraud, and many of the rich-dad'isms are flat out illegal. Indeed, as far as anyone is able to ascertain, most of Kiyosaki's traceable money comes not from real estate as he claims, but from selling his books and seminars.
[+] [-] KingMob|12 years ago|reply
[+] [-] probablyfiction|12 years ago|reply
Edit: Forbes link (http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-...)
[+] [-] benjaminwootton|12 years ago|reply
They got lucky. Those conditions are not likely to return and the path is likely to be much more difficult for anyone trying to do the same today.
I don't admire property speculators such as Kiyosaki. Recklessness rather than brains led many people down this path, and then they were subsequently bailed out with taxpayers money and ZIRP when it all went wrong.
In addition, hoarding property is actually a massive net negative to society.
(I am talking about our breed of buy to let investors here in the UK. I'm not sure if you have the same characters stateside.)
[+] [-] tjr|12 years ago|reply
[+] [-] onebaddude|12 years ago|reply
That said, the core philosophy of Rich Dad, Poor Dad is a good lesson: make your money make money by buying "assets" and avoiding "liabilities".
[+] [-] unknown|12 years ago|reply
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[+] [-] aymeric|12 years ago|reply
[+] [-] RyanZAG|12 years ago|reply
If I have a lot of money I can easily change it into a lot of wealth and a lot of wealth can be liquidated into a lot of money. And no, nobody who is actually rich cares about their education or intelligence because neither of these are able to generate anywhere near the kinds of returns from simply buying up large amounts of income generating assets.
[+] [-] wmf|12 years ago|reply
[+] [-] spookylukey|12 years ago|reply
I think the definition of wealth that is quoted at the top, and the one I normally use, is different from the one you are using (at least at some points).
As far as I understand the definition, (material) wealth refers to the physical things that you can own or enjoy that are good and useful. So that includes cars, houses, clothes etc. But not things are purely money generating things (like stocks and shares). A house is a good and useful thing in its own right because you can live in it. Stocks and shares, and money itself, are not (apart from the sheer pleasure of seeing a large number on your bank account).
You might also include 'things' that are not quite in the same category as physical possessions, but are things that can be enjoyed - like holidays and gym membership.
In that sense, money and wealth are almost opposites - you have to give up money to get wealth. At the extremes:
You can have millions in the bank and have no wealth - if you refuse to spend it, you'll die of starvation in cold, broken down house; and you can also have no money but plenty of wealth if, for example, you are the owner of a large, entirely self-sufficient farm, with servants etc. who are all paid via the produce of the land and live in buildings you own. Neither are very likely in our economy.
It seems you are mixing into that definition of wealth the ability to get money/wealth. I'd agree that is a form of wealth (in that you would say that person is in an enviable position), but, like money, it is more "potential material wealth" and not really physical/material wealth itself. And the ability to be happy with little material wealth is the best form of wealth, but, by definition, not a part of material wealth itself.
[+] [-] oleganza|12 years ago|reply
Disagree. To be a medium of exchange, money must have "holding" value (because money does not circulate, but simply switches holders: http://blog.oleganza.com/post/43378777734/on-circulation-of-...). The liquidity of money is in how many people want to hold it in their cash balances. The more people want it - the bigger value of the total supply (regardless if it's slowly shrinking or growing). The more and longer people want to hold cash, the bigger liquidity - the more "wealth" you can reliably "move" from one person to another. E.g. Bitcoin valuation is pretty small right now, so people can't use Bitcoin (yet) to make multi-billion purchases. Because to make multi-billion purchase one of the parties must hold billions and another must be willing to hold billions (and then find others to who give them if they need in the future).
So the money to be a good liquid medium of exchange must be a good store of wealth. And the more wealth it is "storing", the better medium of exchange it is.
[+] [-] macco|12 years ago|reply
[+] [-] larrys|12 years ago|reply
In short this is the equivalent of "find a good lawyer" type advice. Gee thanks for that tip. (As an aside I have those assets and I've done that type of thing with success).
The problem is finding those assets and not overpaying for them and making a good deal. Just like someone saying "you have to find a woman/man who is this not that!". Ok go find that person.
The other thing that I have observed over many many years (starting in college when I worked for a lawyer and dealt with some of the deals he was involved in) is that many people who have those assets got them by being turned on to them by people that they know (their attorney, a friend, a business associate) so they are out there circulating in the world and get presented (similar in a much smaller way to what Warren Buffet does) with opportunities. Could be a fraternity brother they keep in touch with etc.
That said you still (and this is important) have to know enough to take advantage of the opportunities (so it's not just luck obviously) and of course be the type of person who even is associated with others who have identified opportunities. See [1].
As far as investing in your house well I could spin that the other way. A nice house gives you the opportunity to entertain and meet people. People always like a good party. And if you have a vacation home people will always want to come to your vacation home and stay over. [1] In short, if you have nice things people want to be around you. You meet people. Those people are contacts that can help you with opportunities.
[1] I had a vacation home (actually still do) and had a boat. It is a great way to socialize and entertain. Regardless of whether those people are the type that are truly friends or not there is a business value to making contact with people like that in certain situations.
[+] [-] asgard1024|12 years ago|reply
There are valid reasons to make savings - accumulate money (or any other liquid asset with high exchange value, not necessarily use value - like gold). According to many economists, this is not true; rationally, one should only invest (exchange money for something producing more money later) or consume (make yourself feel better).
The reason to make savings is to postpone the decision to invest or consume (which is irreversible, due to physical nature of the world), and by doing that, you may gain an edge over other people who are forced to make that decision earlier. In other words, you gain power over other people by saving money (which is kind of what Marx what saying about the goals of capitalist - to make more money, ultimately).
Let me give a couple of examples: A rich capitalist (having a lot of money on hand) can survive a strike of his employees forcing them to reduce their demands; temporarily outlive better competition; react to new challenges by investing into technology already proven elsewhere; temporarily reduce prices to drive competition out of the market, and so on. Although in these examples I talk about capitalists, this is true for anybody, but the effect is not so apparent.
Of course, the extent how much one can do that or how much it will help depends on the money distribution in society. You cannot save all the time, and not everybody can save at the same time - otherwise you get a deflation. Thus it's not a sure-fire way to gain power, because nothing is. The blog post calls it "personal freedom", but it's not just that; that's very individualistic view of what's going on.
And since there are valid reasons to accumulate money, they are not just a medium of exchange. Whether or not the result (power over other people) is "wealth" depends on personal taste, I guess.
[+] [-] pmorici|12 years ago|reply
Warren Buffet famously holds large sums of cash or cash equivalents from time to time. Dumping your cash into overpriced assets just to keep your cash balance low is no smarter than hording cash.
http://www.forbes.com/sites/sharding/2013/09/20/has-warren-b...
[+] [-] macco|12 years ago|reply
From a scientific view wealth == money. Wealth is measured in money, something is worth x dollar. How this money is stored is another question, it can be stock, gold or whatever.
From a philosophical point of view wealth can be whatever you want it to be. I think the view of the author is quite sane and i agree with him on that; but please don't tell me , this is the right definition of wealth.
BTW I am reading Hackers & Painters right now and pg has a similar concept of wealth.
[+] [-] josefresco|12 years ago|reply
[+] [-] ionforce|12 years ago|reply
In both games, unspent minerals/gas/mana is seen as a bad thing. Either you have your sights set on something specific a little expensive (battlecruiser/expansion), you are building an army for an upcoming attack, or you are reinvesting it back into your economy.
In none of those cases are you letting your money sitting around without purpose. An army of 500 mineral marines is definitely going to beat a player with no army and 500 minerals.
[+] [-] msrpotus|12 years ago|reply
[+] [-] gizmo|12 years ago|reply
Figuring out what to do with your money isn't easy. So until you've got a good plan, go with a sensible default. That's VTI. Every day you procrastinate on this you're simply burning money.
[+] [-] swombat|12 years ago|reply
If you don't have any such areas of expertise, then the best thing you can do with your money is use it to learn - gain one or more or many of these areas of expertise.
[+] [-] stygiansonic|12 years ago|reply
When will you need the money? In one year, or not until retirement? What are you planning on doing with the money? (If you don't have any plans, at least have an idea of when you might need to withdraw it)
Probably the biggest factor going to be your time frame. If you are going to need the money in 1-5 years (say for a house down payment), I would stay away from equity/stocks; in general, the proportion going towards equity should decrease as the time available decreases, because the volatility can result in negative returns. If you're going to need it in less than a year, just dump it in a savings account or similar where principal is guaranteed.
At the polar opposite is if you're just concerned about long-term growth. Then, I would in invest in a broad-market ETF like some of the Vanguard ones. Come up with an asset-allocation plan that ensures an acceptable level of risk.
Personally, I'm not a huge fan of directly investing real estate for the purposes of producing rental income. I just don't have any concern for property management, maintenance or dealing with tenants.
If you do go down this route, be sure to do the analysis and compare the expected income and risk with the alternatives (i.e. stocks/bonds, etc.)
This is one area the author of the article falls short in. There's lots of mention of "income generating assets" (with somewhat of preference to real assets) but not really any thought given to the different risks associated with each.
There seems to be an oversimplification that the only way to increase your wealth is to own assets that produce a cash flow (i.e. stocks that pay dividends, properties that generate rental income) with no focus given to capital gains. Capital gains have traditionally been a huge part of wealth gains and furthermore, may be more tax-efficient. None of this is mentioned, instead anything that doesn't produce a cash flow is hand-wavingly dismissed as "buy and pray".
[+] [-] smileysteve|12 years ago|reply
This article lacks the humility to recognize that a large collection of publicly traded companies are going to have much more time, experience, and resources (wealth and leverage of it) to properly manage a company toward profitability.
[+] [-] danielharan|12 years ago|reply
Build your network: -Spend some of the cash inviting people out to lunch. -Go to conferences, if possible giving talks
Get skills: -Formal education -Workshops -Autodidacting, take time off work
Buy assets: -real estate -index funds -angel investing -bootstrapping
There are also intangible assets. e.g. Some people give to charity to get into the right networks.
Being able to afford time off work to build an open-source project, having the money to pay people to do some of the work (graphic design, documentation): you can build a high-value consultancy this way.
[+] [-] scotty79|12 years ago|reply
[+] [-] parasight|12 years ago|reply
[+] [-] jerf|12 years ago|reply
Let's take a concrete example. Suppose that class warfare rhetoric utterly wins, and as its first scalp The People decide that the filthy rich Bill Gates needs to have 100% of his wealth confiscated for the good of The People. For simplicity, let's assume that 100% of his wealth is in Microsoft stock. So, The People United take all of his stuff. What do they get? Well, they don't several billion dollars. They get "several billion dollar's worth" of Microsoft stock. Well... that didn't accomplish much. We can't clothe or feed the people Microsoft stock. We need to liquidate it into money to get anywhere, and The People aren't too happy about the filthy capitalist stench of suddenly owning that much stock anyhow, so they immediately sell it all. Of course, dumping all that stock on the market at once immediately sends the price plunging; depending on how foolish The People in terms of wanting to be rid of it immediately it could well plunge to nearly zero. The People destroyed billions of dollars of wealth to obtain probably hundreds of millions of dollars, and quite possibly destroyed Microsoft in the process, hardly a net gain. The stock was as valuable as it was partially because it was in Bill Gates' hands.
In practice, you can't just "claw" wealth from the wealthy and hand it to "the poor" and have the effect you're expecting. You can certainly destroy large amounts of wealth, and yes, the poor will come away with something, but it's far less efficient than the "it's all just money" model leads you to believe. You aren't taking "$100 dollars" away from the wealthy and giving "$100 dollars" to the poor; at scale, you're moving a $100 asset out of the hands of "the wealthy" and into the hands of "the poor", and that's not going to produce the results you were looking for. And again, let me emphasize, it does work to an extent, it just doesn't work as well as you might naively think.
Politics being what they are, people are going to assume that I'm a fan of this truth because I'm saying it. I'm not. It would actually be really cool if redistribution worked as easily as people thought it does! I mean, seriously, awesome. How wonderful it would be if equality could be engineered so trivially! And let me be clear, no sarcasm there. However, it is still true, and it is something we ignore at our own peril. Also, does that mean all our social engineering schemes are hopeless? Well, no, again regardless of whether I'm a fan of them or not, but it does mean that, again, it's harder than we'd like to produce the results we're looking for, and it's a lot easier to overestimate the benefit to the poor and underestimate the damage to the wealthy and the general societal wealth (and even if you don't really care about the wealthy, you ought to care about the general societal wealth) that such schemes can have.
[+] [-] lmm|12 years ago|reply
The interesting question is who will make better use of the dollars, or indeed microsoft shares. And the available evidence is that the poor make much more efficient use of their money than the rich (indeed on some level they have to, because someone 1000x as rich as me certainly isn't getting 1000x the value from their money). They spend money rather than hoarding it, improving the economy, and each marginal dollar improves their lives much more than it would for a rich person.
[+] [-] _delirium|12 years ago|reply
[+] [-] rmah|12 years ago|reply
[+] [-] hooande|12 years ago|reply
Taxes are a way to put wealth on an logarithmic scale instead of an exponential one. We don't want to forcibly take money from rich people, we want to make it harder for them to make more of it. The point of the post its that wealth is related to having something that can be traded for value. Higher taxes (potentially to support a Basic Income) would leave the rich with their ”wealth” while taking only money from them, hopefully leveling the playing field for everyone else.
[+] [-] forgottenpaswrd|12 years ago|reply
A government powerful enough to distribute all assets is super powerful, and those that control this government(the party) have all the power.
Having all the power, they have all the material resources for them, their families and friends, even when they don't have "money". They want a car, they ask for a car with any excuse and the day after they have the car, they want to travel and so on.
The rest of the society live in conditions of near slavery. They could ask for a car, as they are "equal", but it takes years to come, and when it comes, it is a horrible car you could not choose anything about.
Also corruption is levels of magnitude bigger than anything in something near capitalistic(even paying more than 40% to the state) societies. If your wife is beautiful and the people of the party wants to fuck with her, they will blackmail her with the working conditions of her family. The same party that controls the media and justice and the only company that hires people.
That was the reason my family emigrated, all at once.
[+] [-] panarky|12 years ago|reply
If you insist on confiscating Bill Gates' wealth, maybe you could hold the stock as an income-generating asset and redistribute the dividends.
[+] [-] CJefferson|12 years ago|reply
Also, if the rich are sitting on wealth which loses values as soon as it is spent, perhaps quite a lot of the "wealth" was never really there in the first place? (although there we are perhaps getting into philosophy)
[+] [-] 01Michael10|12 years ago|reply
Really against wealth redistribution? Talk about a bottom up approach to tweaking our economy instead of trickle down...
[+] [-] imgabe|12 years ago|reply
Right now, when Bill Gates wants to use some of his wealth that is tied up in Microsoft stock, he has to sell it. When he sells it, he pays a capital gains tax of 15%. If we increase that tax, Bill gets less money and more of it goes to the government to be redistributed according to the wishes of the people (in theory!). There's no question of what the government is going to do with a bunch of stock.
[+] [-] drharris|12 years ago|reply
I agree that in theory it would be awesome if wealth redistribution worked the way we think it might. I'd love to live in a Trekkie world where everybody seems to have all needs and wants met. In reality, redistribution is very much like throwing money away, considering the long-term impact of such. I think people are mostly either wealth generators or destroyers. Money in the hands of a benevolent generator has the possibility of benefiting many (even though in practice only a few wealth generators actually benefit the average person). In the hands of a destroyer it benefits only them, and only for a short time. Trickle down sucks, but it might be the most realistic option.
That said, while redistribution doesn't work, getting rid of tax shelters and deductions for the wealthy would.
[+] [-] downandout|12 years ago|reply
I get his point, but by defining wealth as ownership of "net income generating assets" I think he is ignoring history.
[+] [-] mathattack|12 years ago|reply
It actually is a store of wealth. Money buys investments, which is where you store wealth. Money is easily transferable in and out of interest bearing accounts, which is a way to store wealth.
[+] [-] jlcx|12 years ago|reply
[+] [-] parasight|12 years ago|reply
[+] [-] 3am|12 years ago|reply
edit: Just thinking further on it... I tend to approach things by thinking of pathological cases. In the case of a deflationary or flat currency, I think currency hoarding is a rational response economically even though it's unproductive and leads to high concentrations of wealth. On the other end, inflation that's too high will lead to an economy that is very illiquid and prone to solvency crises. There is a high incentive to minimize cash on hand and maximize debt. In my lifetime I've really come around on the value of a managed and low inflation to having a productive society.
[+] [-] dkrich|12 years ago|reply
Isn't the real point here that people who are capable of making a living will always have means to live and those who don't may get by from time to time when they come into money but don't have a lasting ability to generate it for themselves?
On a larger scale, I think this same idea could be used to describe the success and failure of most companies. Companies that can create products or services that sell will succeed in the long run whereas those that have large cash reserves but no ability to produce products or services that sell will eventually run out of cash and fail.