Wednesday , 21 February 2024

What Is Wealth? (Chapter 2)

Wealth means different things to different people. Some define it narrowly, in dollar terms. Others define it more broadly, using more qualitative elements. This book approaches wealth more in the qualitative sense. However, it forces you to quantify it in terms of a goal. Words: 1362

Before reading the following please read (here) the Preface and Overview of the book WEALTH IF YOU WANT IT on wealth creation by “Monty Pelerin” (a pseudonym) of EconomicNoise.com.

WEALTH BROADLY DEFINED

Wealth defined broadly usually includes the term “happiness.” The “pursuit of happiness” was a key element in Declaration of Independence. It appeared without definition. Referenced in this manner was consistent with the freedom envisioned for citizens. This right to choose what happiness meant was instrumental in the country’s success and prosperity. “Happiness” is the perfect definition of wealth because it incorporates everything.

THE IMPRECISION OF HAPPINESS
A book about happiness is impractical. There is no universally accepted definition of what comprises happiness. The Founding Fathers understood and promised the freedom to pursue it without defining it. (They were wise.) Happiness is wonderful! However, it means little outside the mind of the person pursuing it. That is why writing a book about happiness is impractical. “Happiness” is what you say it is! No one defines that for you!

YOU ARE YOU!
Envision wealth as a spectrum from “happiness” and dollars. My preference would be to tilt toward “happiness.” Money is important, but as a “means,” rather than an “end.” You make your own choice. There is no right or wrong regarding how you define happiness. We all get one chance on this sphere. Live life like it is your last! Don’t let others define your goals.

WEALTH NARROWLY DEFINED

I focus on monetary wealth in the book because its creation is a technical and complicated issue for many. Understanding how to create wealth is easy. The difficulty arises because this knowledge is not readily available.

Everyone should expect to learn about wealth and how to create it. A select group should not control this knowledge. This book attempts to remedy this monopoly of knowledge. It believes the recipe for wealth should be available to all.

ACCOUNTING DEFINITION OF WEALTH

The traditional definition of monetary wealth is “net worth.” Net Worth is easy to comprehend and measure. It is the value of your assets, less the value of your liabilities.

Accountants, bankers and business people use net worth to assess financial strength and value. To determine net worth, follow these steps:

  1. Determine the market value of each owned asset.
  2. Determine the cost of paying off each obligation.
  3. Sum the values for each group.
  4. Subtract total liabilities from total assets.
  5. The resulting figure is your net worth.

Stripped of accounting “babble,” this definition is correct: Net Worth is what remains when you sell all assets and pay off all liabilities. Financial institutions use net worth to determine credit scores and make lending decisions. Nerdwallet provides a spreadsheet to calculate your net worth. Please determine yours now. (Do not worry if it is negative! That is why you are reading this book.)

WEALTH IS RELATIVE

Net worth quantifies wealth. Even then, wealth is still a relative concept. Some consider themselves wealthy, with $10,000 in savings. Others consider themselves poor, with a net worth of $1,000,000. Jeff Bezos or Warren Buffett would consider themselves “ruined” if their wealth fell to “only” $10 million or a $100 million!

Your wealth goal must consider your personal situation. Pay no attention to neighbors or relatives. Assess what is possible for you. Regardless of your situation, you will have a range of possibilities. Where you settle on that range depends on how much you will sacrifice. You (and your family) are the only one(s) to satisfy. Recognize that wealth is a trade-off between current pleasures and future pleasures. You must assess the proper balance between these pleasures.

BOUNDARIES

Limits determine our upside wealth. Here are some limits that affect terminal wealth:

  • Age: Youth provides more time to create wealth
  • Desire or commitment: If you believe wealth is a means rather than an end, then you presumably put less emphasis on its attainment than someone who considers it as a primary goal.
  • Skills and talent: Abilities define potential. Desire and commitment can move one closer to the limit, but cannot remove it.
  • Income: High income should make saving easier. However, it often has an opposite effect. Many “achievers” need to impress neighbors, office mates or classmates with their lifestyle. This insecurity limits saving, often nullifying the income advantage.
  • Luck: Luck plays a part. Having rich parents is luck. A “lucky break” here or there can provide unexpected or undeserved wealth. A bad break does the opposite. Luck is beyond your control. Ignore it and hope it balances out over the long-term.
  • Investing skills: Investing skills are useful, although they are likely overrated. Everyone can gain “investing skills.” Yet the relationship between investing skills and wealth creation is hazy. Is one investment savvy because he has wealth or does he have wealth because he is investment-savvy? Those questions become more profound the longer you invest. Limits are ceilings. You need to consider them when setting goals.

SKILLS AND MOTIVATION

Sports provide a useful way to illustrate the relationship between skills and motivation.

SKILLS

Skills are a gift. Motivation determines what you make of the gift. No matter what I do, or how hard I try, I will never hit a baseball like Ted Williams, dance like Ali, run a football like Jim Brown, play golf like Tiger, dunk a basketball like Michael! Those are skills far outside my abilities. I accept that. When you set your goals, it is important that you accept your limits.

MOTIVATION

Skills define outer boundaries. Motivation defines how close we get to those boundaries. The men referenced above have/had remarkable skills. That did not make them legends. Others were likely as talented (perhaps more so) yet we don’t consider them legends. When incredible ability and incredible motivation come together, legends occur. One without the other may allow success, but not legendary success.

An old professor of mine used the term “neurotic competitor” to reference extreme motivation. He believed that the “best and brightest” did not automatically rise to the top of their organization. People with less measurable talent rose more frequently than the data or statistics would suggest. These outcomes occurred from extreme motivation. His descriptor, “neurotic,” was used to explain the extraordinary commitment that produced these outcomes. “Neurotic” was appropriate (not pejorative) in his mind because of the sacrifice implied. It was also abnormal. Much success came at the expense of family and other traditional activities. His observation was not judgmental. Rather, it was an attempt to explain the discrepancy between raw talent and achievement.

How much is “neurotic competitiveness” responsible for great athletic achievements? Are Bezos, Buffett or Gates smarter than their competitors or merely more “neurotic?”

SACRIFICE VS. ACHIEVEMENT

The concept of the “neurotic competitor” is worth thinking about. Allocating more time and effort to any goal enhances the chance of reaching it but doing so reduces the time and effort available for other goals. Consider the trade-offs necessary when you decide on a goal. Make sure you understand and agree with the implications. Long after you leave this planet, memories of how you treated family and others, particularly those who could not help in pursuit of your goals, will remain.

IMPORTANT CONSIDERATIONS

The establishment of goals requires substantial introspection. You need to look at yourself realistically and prioritize what is truly important. The pursuit of wealth should be a goal among others. It need not be the dominant goal. Determine your general life goals and their relative importance before trying to define a wealth goal. When ready, work on your wealth goal. Five factors are important:

  1. Your motivation for wealth (regardless of the level).
  2. Your willingness to change behavior.
  3. Your ability to save.
  4. A reliable investment vehicle to grow savings?
  5. The level of wealth appropriate for you.

Understanding the creation of wealth is easier than achieving it. Achieving it also requires commitment, behavioral change, and sacrifice.

If you are interested in success, regardless of how you define it, take charge of your life. Planning is essential. Happiness, regardless of what that implies, requires commitment and planning. Do not depend on luck! Do not think that you may win the lottery.

The above post is a slightly edited (…) except from Chapter 2 of a book entitled Wealth If You Want It by “Monty Pelerin” (a pseudonym) of EconomicNoise.com.

Pelerin has a doctorate degree in Finance from Syracuse University, an MBA from the University of Chicago and an undergraduate degree in economics from Duke University. He can be reached at [email protected] if you have any questions (put HELP in the subject line to attract my attention). Permission is granted to copy this post for non-commercial purposes with proper attribution.

Additional Contents of WEALTH IF YOU WANT IT

1. “Wealth If You Want It” & How To Get It: An Introduction

Wealth creation is a right if you choose to exercise it but you must understand the economics and politics of wealth and this book helps you do just that. It deals with how to improve your wealth, your financial independence and your quality of life. Words: 910

2. Wealth: Don’t Get Discouraged (Chapter 1)

Wealth provides independence and security. For our purposes, wealth is a relative thing; something you define, in reasonable terms, for your situation. I approach wealth in terms you can understand and achieve. Words: 572

Editor’s Note:

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