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Does Wealth Come From Owning Assets?

May 29, 2008
The traditional definition of assets defines an asset as anything you own that has some monetary value. While this definition is correct and may seem logical, it is completely unhelpful when it comes to wealth creation. For example, the car sitting in your driveway or even the television sitting in your lounge room are assets under this definition. The wealthy are rich because they own lots of assets aren't they? But how are either of these "assets" helping you become wealthy. Well in short; they're not!

It is true that to be wealthy, you need to own lots of assets, but these assets must be of a certain type. In the world of wealth creation we need to define assets differently so that we can easily distinguish between assets that help you become wealthy like stocks or investment real estate and assets that don't help you at all, like the car and TV we just looked at. In terms of wealth creation we can define assets as either Good assets or Bad assets

Good assets, when owned, put money in your bank account. They are things like stocks, bonds, mutual funds, commodities, investment real estate, futures, options, hedge funds, and so on. All these assets have the ability to put money in your pocket. These are commonly called investments.

Bad assets take money out of your bank account. They are things your car, house, clothes, TV, stereo, mobile phone, furniture, CDs, Xbox, boat, and so on. Bad assets take money out of your pocket in three main ways. They cost you money to buy, they usually cost you money to maintain and they have an opportunity cost, which represents the forgone opportunity and benefits that could've been earned or received from that opportunity.

The types of assets you own as well as the amount of you own largely determines which wealth class you're in. The problem is that people often don't distinguish between good and bad assets. The table below summaries the connection between asset type and wealth class:

Poor: Little to no Bad Assets and No Good Assets (Investments)

Middle Class: Loads of Bad Assets and Little to no Good Assets

Wealthy: Minimal Bad Assets and Loads of Good Assets (compared to their wealth)

People have three main potential income sources:

1. Active - your salary
2. Passive - real estate, royalties from patents, license agreements and owned businesses
3. Portfolio - paper investments such as stocks, bonds and mutual funds

We can break down assets into three categories that map to the three possible income categories:

1. Individual - employed and self-employed
2. Passive investments
a. real estate, royalties from patents, license agreements
b. businesses
3. Portfolio investments - paper investments such as stocks, bonds, mutual funds and insurance

The wealthy are wealthy because they own passive and portfolio type assets that produce passive and portfolio income. They don't have to rely on individual-type assets for income, which are limited because individuals can only work so many hours. Passive and portfolio assets aren't limited in this way. These assets will continually provide income whether their owner works or not and can be owned to a theoretically unlimited degree, which means that the income they produce is theoretically unlimited. The wealthy know this, which is why they concentrate their energies on acquiring as much passive- and portfolio-type assets as they can.

The poor don't realize this, which is why they earn an individual type income and concentrate on getting marginal increases in their salaries that are always limited. The table below summarizes your class by asset ownership. What does your income and asset profile look like?
About the Author
Emlyn Scott is the founder of Rich1Percent , investor and wealth creation author. He is a wealth creation and finance expert with 4 post graduate qualifications and has amassed a multi-million dollar investment portfolio.
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