We all know people that we consider to be rich. We look up to them, we admire them, we aspire to be like them - we want to be them!
The rich have beautiful homes. Their homes are located in the most posh neighborhoods: Boca Raton, Malibu, Beverly Hills, Bel Aire.
The rich drive expensive cars; Porsche, Bugatti, Maserati, Ferrari.
The rich have the finest clothes and attend the most exclusive events; Cannes Film Festival, Milan Fashion Show, Sundance, the Oscars, the Emmys. They appear on Dancing with the Stars and have their own reality shows.
The rich vacation in the most exotic locations; the south of France, Aruba, Cancun, Monaco, Hawaii, the Caribbean, Fiji. They arrive there in private jets whether they borrowed it, leased it or they own it. The truly rich don't fly first class.
The rich are healthy with the best skin because they have the best doctors. They have the most beautiful or handsome significant others.
How do you know when you are rich? You know you're rich when you have a rich neighbor or co-worker or fellow small business owner or golf partner and you have a fatter bank account than they do or you spend more on your extravagant lifestyle.
You know you're rich when you spend more money than someone you think is rich.
And that's a key. Being rich is about spending money. It's about spending money to maintain - or attain - the lifestyle you believe is "rich." Whatever you believe is the amount of money required to live the lifestyle of the rich is the amount of money you must obtain in order to spend it.
Being rich is a lifestyle. It is a series of choices based on a pattern of spending. Anybody can be rich if they spend enough whether they earn it, inherit it, beg it, borrow it or steal it. How you got the money is secondary to having the money.
So what is wealth? Being rich is a state of mind but being wealthy is a statement of fact.
Okay. So what does that mean? From our discussion we have learned that being rich is all about the money you have and the money you spend.
Being rich is having enough money to spend on the lifestyle you desire - it is largely a construct of your mind. The toys, the houses, the clothes, the cars; these are all choices you make to appear rich and feel rich.
Being wealthy is a statement of fact. Wealth is not how much money you spend, it's how much you have and it's how much you own.
Yet being wealthy is much more specific than that: Wealth is the passive income you receive from the assets you own.
We're going to step back a bit. If you had Economics 101, you know there is something called the "Factors of Production." The Factors of Production are the inputs, resources and processes used to produce something. In Classical Economics there are only four Factors of Production: Land, Labor, Capital and Entrepreneurship.
Land includes the natural resources from which the raw material required to make something comes. Labor is the action applied to those resources. Capital is the equipment required to affect change upon those resources and Entrepreneurship is the process of directing the action to produce goods.
If you possessed these Factors of Production and if you worked them, they would generate an income that would support a lifestyle. If you wanted to improve your living standards and live a more affluent lifestyle, all you would have to do is acquire more of the Factors of Production.
Today, modern economists may include intellectual property or may differentiate capital into working capital, fixed capital (the machinery and equipment involved in the production of goods) and financial capital.
For our purposes we are going to rename these and reclassify the Factors of Production as the Factors of Wealth:
- Real Estate
- Equipment, Machinery and Tools
- Intellectual Property
- Labor
- Capital
Intellectual property includes copyrights, patents and processes that you can license.
Labor is the action applied to the inputs that produce goods and services and Capital we restrict to Financial Capital.
In and of themselves, these factors - or assets - are worthless. In order to produce worth; in order to produce wealth, these factors must be acted upon and that is where the Factor of Labor comes in.
Not only must we act on these assets but we must also sell the goods and services produced. Whatever you are able to sell at a profit is your income. It is easy to acquire more income, you simply acquire more assets that can be worked.
The secret of wealth is this: Acquire more assets and sell more products to more people.
Whereas rich is directly tied to the state of your money and is dependent upon the vagaries of the market, wealth is only indirectly tied to the booms and busts of the business cycle.
If you own a lot of assets like factories, office buildings and warehouses then your income will be more directly related to market cycles than assets like apartment buildings, offices leased to the government, medical facilities and insurance companies.
Other assets are also less exposed to market fluctuations; copyrights, equipment you lease out for commodity transportation, licenses, timber rights and certain natural resources, among others.
Riches are very shortsighted looking at only what you can spend today. Wealth takes the long view; what can you acquire today to produce more passive income tomorrow? Rich is tactical. Wealth is strategic.
People will always need to eat so you may want to invest in agricultural assets, including cattle ranches. Vineyards may be a good investment. It is unfortunate, but wars and hostilities between nations and peoples will most likely increase over time so investing in defense industries and shipyards may also be good investments.
Regardless of what happens in the 'real world," governments will only grow making investments in facilities and residential assets that you rent to federal and state governments a possible favorable asset sector to own.
All the products that people require on a regular basis need to be moved from where they are produced to where they are consumed suggesting that trains, freight companies, cargo companies and trucking firms may prove a viable investment.
As the population ages, more and more people will require healthcare and the pharmaceuticals to maintain their health. Investing in hospitals, health care facilities and pharmaceuticals could be a lucrative means of building wealth.
In every asset purchase you consider, you must perform due diligence with that asset to assess its profit potential and its exposure to taxes and liabilities, law suits and insurance claims.
Due diligence is the process of obtaining the facts about an investment required to make a reasonable assessment about the value, worth and potential cash flow of that asset.
Our definition of wealth hinges upon income or cash flow. So if you find what sounds like a great investment such as a factory selling for 10 cents on the dollar that produces canned beans, that sounds like a great investment until you discover that the factory is losing a million dollars a year and has liabilities that it will never be able to repay. Instead of bringing you money each month, it's costing you money each month. As Robert Kiyosaki, author of the "Rich Dad" series of books noted, such an investment is not an asset, it is a liability.
Robert's definition of an asset is anything that puts money into your pocket on a periodic basis while a liability does just the opposite - it takes money away from you.
That's a great definition because it focuses like a laser on the key principle of wealth - an asset that produces income.
Is it better to be rich or wealthy?
If you focus on being rich, your riches fluctuate with how the economy moves. Many "rich" people are living in a state that is precariously close to being broke. Many rich people have borrowed their way to the lifestyle they enjoy with debt far above their means. They risk losing everything they have chasing the phantom of being "rich."
Those who are wealthy can choose to be "rich" or not. They have the option of choosing the flashy lifestyle or they can choose a more conservative lifestyle.
If you choose wealth, the choice of lifestyle is an option you have. You can choose to use a portion of your income to finance a lifestyle of the "rich and famous" or you can use that same portion of income to invest in more wealth. The choice is yours and no one can judge you for whatever choice you make.
As long as a portion of your income is being used to invest in more wealth, you will never have to worry about going broke or being in so much debt that you are unsure if you will ever pay it off.
Being rich is about looking rich. You choose a lifestyle that others call 'rich." When you make this choice, you cannot make any other choice. Being wealthy is choosing the lifestyle you desire. Both are choices. Choosing to be rich is fraught with uncertainty. Your lifestyle is dependent upon the vagaries of the economy, good times and bad times, market fluctuations and business cycles. Choosing wealth is a certainty.
Choosing wealth is choosing tangible assets that throw off positive cash flow and protecting those assets with insurance and business entities so that they cannot be easily taken from you.
As you gain more wealth, your capacity to acquire additional assets will only increase. If you choose to focus on building wealth and the positive cash flow and passive income it produces, you will always have the option to choose the lifestyle you desire.
Is it better to be rich or wealthy?
The choice is yours.
Copyright 2016 by Perry Jones, All rights reserved.
