8 ms·

Money and wealth

268 points by swombat 13y ago

benjaminwootton 13y ago
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.
- agscala 13y ago
  What do you suggest is better than rental real-estate as a income-producing asset to invest in? Entrepreneurship is great and all but the risk is frighteningly high
  - swombat 13y ago
    The risk is not so high, actually, imho: http://swombat.com/2012/6/18/entrepreneurship-safest-career http://swombat.com/2012/6/18/entrepreneurship-safest-career
    - ForHackernews 13y ago
      The risk is only not-high for people who have a decent safety net to fall back on (spouse, parents, or savings) and/or low obligations (i.e. your children won't go hungry if your startup busts) That's not to disagree with your overall point--yes, you won't LITERALLY DIE--but relatively few people have the luxury to keep swinging and missing in the hopes of getting a hit.
  - mcdougle 13y ago
    dividend stocks seem great if you use dollar-cost averaging, DRIP investing, and you do the research necessary; they also seem like they take a very long time to build up a sizeable portfolio. I really like Rob Walling's description of what he does with software businesses [1] though, and my plan is to do something like that. [1] http://www.softwarebyrob.com/2010/06/24/websites-as-investments/ http://www.softwarebyrob.com/2010/06/24/websites-as-investme...
- tomasien 13y ago
  I think health is a wealth asset of it's own, because if you lack it you'll trade your wealth to get it back if possible. It also gives you the ability to turn your education and intelligence into more tangible wealth, which I will grant you isn't straightforward. But that doesn't mean they aren't assets. A house is like education in a way - it seems to have intrinsic value, you know what YOU paid for it, but the outcomes that can come from trying to sell it vary DRAMATICALLY depending on the how good you are at selling it (and the current market conditions). So it is with my bachelor's from UVa - there have been times where it has gotten me basically minimum wage work and times where it's gotten me $1000/hr jobs, all based on how clever I was about it.
- Robin_Message 13y ago
  You are right; I've worked out the "accumulating savings" part reasonably well, but the "building wealth" is still eluding me. Stock market index funds seemed to be a good answer in the past. By owning them, you share in the economic growth and income of your country (or another country or set of countries) as a whole. Although, the spectre of Japanese-style stagflation for most of the West makes this less appealing at the moment (although even with the flat growth of the past 13 years, there are still dividend returns.) Property is popular because everyone has to live somewhere, the old "buy land, they don't make it any more" proverb, and the funemplyoment nature of buying, improving, renting, and selling property.
  - jonnathanson 13y ago
    I think a lot of people misunderstand what a pain in the ass buying and renting property can be. Unless one is wealthy enough to own multiple properties and have a full-time management company doing all of his work for him, he's going to be taking a fairly hands-on role. Most tennants are flaky. Our perceptions of such might be colored by the fact that -- I assume -- a lot of us here are white-collar professionals making respectable incomes, or who could quickly arrange a steady enough job if needed. Most people aren't like that. Those people are your likely tennants, again, unless you're wealthy enough to afford higher-end rental property. Then there's the legal minefield. Being a developer or landlord makes one person very rich very quickly, and that person is your lawyer. Especially in the Bay Area. People here pretty much threaten lawsuits if they made eye contact with a teenager on the sidewalk, or if their cat's not eating its food, or if they don't care for the weather on any given day. Source: I own a small apartment building in LA and sit on my HOA board in SF. I am the definition of a small-time real estate owner in the uncanny valley: not poor enough to not give a shit, but not nearly rich enough to do so, either. I'm not a full-time landlord; it's more of a nights-and-weekends thing. But it sucks up a not-very-fun proportion of my nights and weekends, and every now and then, it eats into my workday as well. I would recommend landlording to people born into significant wealth, who can buy multiple properties and let a management company deal with the headaches. I would not recommend it as an upward path for those who aren't prepared to make real estate a full-time job, and who can't afford to jump a few rungs up the ladder at the outset.
- onebaddude 13y ago
  >but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments. This period is not unique in this regard. Interest rate is always risk-related. There may been times of higher absolute rates on things like savings accounts, but the real returns and opportunity costs were similar. What I'm saying is, there are plenty of investment opportunities; the stock market just rose almost 30% in 2013.
msrpotus 13y ago
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?
- swombat 13y ago
  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.
- gizmo 13y ago
  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.
  - aliston 13y ago
    Why isn't it optimal? Any other thoughts on what one should look at in order to find an optimal place to put their money?
    - 13y ago
probablyfiction 13y ago
Robert Kiyosaki's claims are pretty hard to verify. Rich Dad, Poor Dad is not a good source for financial information. Edit: Forbes link (http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-poor-dad-bankrupt-dad/ http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-...)
- benjaminwootton 13y ago
  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.)
  - koralatov 13y ago
    I couldn't agree more. It's because of buy-to-let `investors' that rents on one-bedroom flats start at about £550 per month in the city in which I live and only go up from there. That's up by about £250 in the ten years I've lived here, and has continued to climb even during the Recession. Prices to buy have more than tripled during the same period. The net effect of that is that some people got very, very wealthy, others got a little bit wealthier, and the majority got much poorer funding the wealth of the other two groups.
  - scotty79 13y ago
    > In addition, hoarding property is actually a massive net negative to society. I think that progressive task on real estate could help with that. If you own one, two or even three houses, no tax, but if more, tax should grow very fast. Fast enough that it's more economical to sell property than keep it.
- deleted 13y ago
seanhandley 13y ago
There's some great intro videos here that explain a lot of money concepts: http://www.youtube.com/user/PositiveMoneyUK http://www.youtube.com/user/PositiveMoneyUK
tomstokes 13y ago
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.
- mark_l_watson 13y ago
  +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.
- apostate 13y ago
  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.
spookylukey 13y ago
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.
aymeric 13y ago
Any suggestions as to what could be an income generating assets? I can think of shares with dividends, bonds, rental properties, businesses, ... Anything else?
- onebaddude 13y ago
  A business.
perlpimp 13y ago
Just like definition of having a degree and having an eduction. Latter having knowledge and being able to learn more, former having a piece of paper.
waylandsmithers 13y ago
This is very well said and relevant in the context of our fascination with the "Net Worth" of wealthy individuals who often happen to be in technology. Gates, Zuckerberg, Ellison etc. own property/assets that could potentially be sold for billions but are different from those actual amounts in cash. What particularly comes to mind was when Kevin Rose was on the cover of [was it Newsweek? Time?] proclaiming that Digg was worth $60 million or something. He had to state at least once that he did not actually have $60 million in cash on hand.
larrys 13y ago
"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.
ronilan 13y ago
I'd rather paraphrase a great American speaker quoting an old English gentleman: "The wealth of man is not measured by material computation."
mathattack 13y ago
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.
- jlcx 13y ago
  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.
  - dragonwriter 13y ago
    > Money is theoretically supposed to be a store of value as well, but it is not a good store of wealth, due to inflation. Medium of exchange and store of value are the two main functions that "money", as such, can have, but it is misleading to say that money is "theoretically supposed" to serve both purposes. Any particular money is adopted with very specific purposes, and modern fiat money by design has a very limited role as a store of value, being intended primarily as a medium of exchange that is useful as store of value only in the short term (and only secondarily so, as utility as a short-term store of value is essential to utility as a medium of exchange) specifically in order to encourage investment in productive non-money assets as a store of value.
  - mathattack 13y ago
    If you put money in a bank, and get interest, it is a store of value just as much as a bond is. It's not a permanent store of value (inflation, etc) but nothing is. Houses can get taken away in floods, bonds can also get wiped out by inflation, and companies can go kaput.
d_jyllikoski 13y ago
The (money-theoretic) paper that most affected me during economics education was "Money is Memory"; https://research.mpls.frb.fed.us/research/sr/sr218.pdf https://research.mpls.frb.fed.us/research/sr/sr218.pdf It doesn't have much to do with getting wealthy, but it is a very elegant explanation of money as a technology to track members' contributions to society and their deserving of the fruits of society's labour. Money can be modelled as a shared memory, track record, of contributions. If it was evident to my grocer, that those abstract thoughts and lines of code I created had value, I could then have credit for adequate food; if the whole value chain was transparent and inherently obvious to everyone... Can cryptocurrencies displace this (outdated, imperfect) technology?
smrtinsert 13y ago
I stopped at Robert Kiyosaki.
parasight 13y ago
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.
jerf 13y ago
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.
josefresco 13y ago
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.
michaelochurch 13y ago
But, as a more generic category, the fundamental pillars of wealth seem to me to be health (including youth, energy, endurance), education (including work ethic, general knowledge, wisdom, self-knowledge) and intelligence. Health is extremely valuable, but fickle. You can lose it for no good reason and through no fault of your own. One just has to do the best one can. As for education and intelligence, I'm not sure I agree. Those resources are the wealth of the world. It's intelligence and creativity and just raw fucking grit that keep the fucking place from imploding. But many intelligent people end up as excess capacity, unused and maltreated. You need connections and credibility to unlock them. Education used to deliver that, out of the box; that's no longer true. Ultimately, the best security is to be able to reliably get paid, well, for doing something that doesn't harm you to do it. That shouldn't be hard for programmers to arrange, but the age discrimination in our industry is disgusting, so I wouldn't count on being able to get quality jobs at 70, even with full capability and intelligence intact. When you get to that point where you the narcissism of the career world and its perverse (chickenhawking, see here: http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-the-isms-of-venture-funded-technology/ http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-th...) age obssssions go against you, it helps to have a wad of cash. [I]t seems to me that the idea that the best preparation for retirement is to save up a load of money is a horribly noxious lie that has likely led to the bitter disappointment of hundreds of millions if not billions of people. Well, it shouldn't be "money". It should be a portfolio of bonds, stocks, and commodities. (Real estate shouldn't be trusted; there are too many ways for misbehaving neighbors or politicians to fuck it up.) However, the idea that one can keep living off one's talents at the age of 70 is a fantasy. I wish it were that way; ageism is fucked-up and if it affects me in 30 years I am taking a Second Amendment Solution type approach to finally drop a pipe on that shit. Many people have their talents and ability intact at and beyond that age, but I would not want to be applying for programming or business jobs at that age.
ionforce 13y ago
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.
- Dewie 13y ago
  I feel like real time strategy games makes me think a lot about investment and a sort of compounding interest (making workers, expanding), investing resources in tech vs. army vs. making all armies better in the long haul (upgrading army), attacking early and have a worse late-game v.s. playing defensively ... Some RTS are, to a surprising degree, a lot about economy and balancing the short term v.s. the long term when it comes to your own resources.
- crntaylor 13y ago
  Disclaimer - I've never played Starcraft or Magic: The Gathering. But I expect that in both of them, just like in real life, there is some value to having unspent liquid assets, in that they give you optionality. Unspent liquid assets can be converted at a later time into marines/computing hardware/other 'real' assets, depending on what is most needed at the time. If you turn all of your liquid assets into illiquid assets as soon as you get them, you lose that optionality.
  - ionforce 13y ago
    You know, I hear what you're saying, but I don't think I've ever heard that. Usually better players will give newer players a simple heuristic like "don't let your mineral count go over 1000", which seems generous even. Something more hard core would be like 800. The point is, there aren't many scenarios where "saving" your money would be a good thing. Except for "expensive" purchases, which usually hover around 400 and no higher. Units and buildings (things you spend money on) in StarCraft also cost time. So if you wait until the actual time you need things to request their construction, it's already too late. So there's some forecasting going on so that you can soak up the construction time. Also, your economy is a forever investment. If you aren't attacking, you're building/expanding. So there's essentially never an ideal moment, there's always a fall through case. You're always spending your money on something. The one possible exception to this would be the Zerg, who play in a more reactive style. Which means that their per unit construction time is on average less than the other races (as I'm saying this, I'm actually just guessing that, watch me be wrong). The point is, the Zerg are more reactive than they are forecasting, so maybe in this scenario, some amount of saving would be apropos. But still, you are spending on your economy until the last possible moment and then transitioning into an army. Zerg happen to specialize in "on the field" adaptation and parallel construction, making their throughput higher for shorter amounts of time. But it could be argued that none of that money was "optional" or idle. I knew that I was saving for an army and as I was scouting I knew I was saving for a specific kind of army. Maybe burn 2/3 on unit construction and save that last 1/3 to use their on the field adapt ability (like baneling morph).
3am 13y ago
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.
oleganza 13y ago
"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-money 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 13y ago
  Of course it is. The article is flawed.
RyanZAG 13y ago
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.
- wmf 13y ago
  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.
dkrich 13y ago
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.
natural219 13y ago
I'm surprised nobody has mentioned the PG article that makes pretty much the same point. One of my favorite essays by him, incidentally. http://paulgraham.com/wealth.html http://paulgraham.com/wealth.html
- swombat 13y ago
  Hah. I forgot he wrote one (even though I've quoted him in some of my articles). It does make similar points in his "Money Is Not Wealth" section in there. It's not very surprising that others have said this - it's a sensible idea that's fairly well understood by some... but thoroughly misunderstood by others (still, and probably forever).
- auvi 13y ago
  I was going to post the same link and found that you already did. I totally agree.
deleted 13y ago
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pmorici 13y ago
"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. http://www.forbes.com/sites/sharding/2013/09/20/has-warren-buffett-nailed-another-market-top/ http://www.forbes.com/sites/sharding/2013/09/20/has-warren-b...
a8da6b0c91d 13y ago
Cash is a hedge against deflation. Many vast fortunes have been made by people who held cash, rode deflation down, and then bought assets at the bottom. You want a substantial fraction of your portfolio as cash to hedge deflation, just as you want a fraction in hard assets to hedge stagflation. You of course want a fraction in income generating ventures and equities that do very well in an environment of growth, as advocated here, but failure to hedge the other two conditions has often proved ruinous. We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash. We haven't had a serious bout with stagflation in 40 years. Historically, deflationary and stagflationary downturns have been common. All the points in the article are highly valid, but it seems to overlook these critical reasons to hold quite a bit of cash and hard assets.
- mullingitover 13y ago
  > We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash. Coincidentally we're not tying the money supply to stuff we dig out of the ground, growing the money supply is now only as difficult as turning on the printing press. Unless that changes, I don't see how deflation is a serious threat anymore.
  - a8da6b0c91d 13y ago
    Debt based currencies deflate when a lot of debts go bad. When somebody declares bankruptcy and debt goes bad, that's money going "poof" and disappearing from the banking system, with knock-on effects. That's what happened in the 30s and nearly happened in 08. Whether or not the gold convertibility window is open doesn't much figure into it. If the US government were to partially default on its debts, or a lot of banking sector debt were to go bad, the value of US dollar cash would sky rocket as people scrambled to deleverage. This happened in 08. This happened in Japan in the 90s.
    - aliston 13y ago
      If a private debtor defaults and declares bankruptcy, then the money supply contracts and you get deflationary pressure. I'm curious, though, why you believe the US would see deflation if it were to default? The Eurozone countries tended to deflate, but there are plenty of examples of countries that went the other way -- Germany, Argentina, Mexico... I don't think the US will default any time soon, but if we were to get near that point, we would inflate our way out.
macco 13y ago
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.
downandout 13y ago
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.
dclowd9901 13y ago
One of those terrific articles that comes along, tells you something you already knew, but does it in a way that crystallizes it into an actionable direction. Bravo. I've been struggling to figure out what to do with the money I've been accumulating in my Bay Area tech job. I thought to put it into a house, but after reading this article, I think I'd really like to give entrepreneurship a serious go (whereas in the past, I might've done it as a side gig). Few people can claim to have that level of influence from their writings.
aj_ycombinator 13y ago
This describes money as a store of energy: http://morphius.blogspot.in/2013/02/money-is-energy.html http://morphius.blogspot.in/2013/02/money-is-energy.html
karmajunkie 13y ago
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.
- KingMob 13y ago
  Came here to say this. Kiyosaki should not be listened to by anyone. His advice consists of banal generalities at best, and outright fraud at worst.
01Michael10 13y ago
I have to disagree with this part of the author's post... "But surely, having a lot of money, say a billion dollars, is the same as being wealthy? In theory, perhaps. 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, and those who do not (e.g. lottery winners) often quickly find that the seemingly infinite pile of cash has evaporated into nothing." You are a regular working class dude and all the sudden come into 100 million? 350 million? 1 billion dollars? The LAST thing you really need to do is "invest" that money to generate income. That's how most lottery winners lose their money is by making bad "investments". You already have more money then you would have earned in a lifetime 1000x or so over that you can't possibly spend so why would you "risk" any of it? You live off the bank interest and have a really nice "modest" existence. Oh and... Stay away from money grabbing relatives but you do, of course share some of your good fortune.
- yen223 13y ago
  > "The LAST thing you really need to do is "invest" that money to generate income." > "You live off the bank interest" Where does the bank interest come from, if not investments?
  - 01Michael10 13y ago
    Depositing your money in a bank...
    - thedufer 13y ago
      Where is the bank getting money to pay you interest? By making investments. The fact that you're one level removed from the decision-making doesn't make it less of an investment.
      - 01Michael10 13y ago
        Ummmmm Really? The Bank is taking the risk not you. Never heard of insured accounts? Granted, there are no guarantees in life but money in the bank is pretty solid. You may stuff a couple mill under your mattress if it makes you feel better...
asgard1024 13y ago
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.
normloman 13y ago
This guys only 33 and hes already talking like some grey-bearded arm chair philosopher. "Listen closely sonny, here's what you should do if you want to retire comfortably like me." Reading "Rich Dad / Poor Dad" does not make you an expert on personal finance. Being CEO of a startup make you an expert on being successful.
avighnay 13y ago
This blog piece has a lot of rich learnings for financial well being. What I disagree with is the author's stance on savings. It is dangerous because the 'unwealthy' minds are going to read 'saving is not good' as 'go spend'
rushiagr 13y ago
You said twice that children with great education are one of the biggest wealth. I'd have loved if you had given an example of how exactly. I'm curious to listen
- yen223 13y ago
  From a cold, dispassionate economic point of view, you "invest" 18-25 years worth of blood, sweat, love, and tears raising your children. In return, they will start supporting you once they're capable of generating more than enough income to sustain themselves, hopefully before your retirement years.
Kronopath 13y ago
It's interesting that he defines the three most important pillars of wealth to be health, education, and intelligence -- with the exception of intelligence (which is effectively fixed), these are commonly provided as public services in most countries so that everyone has equal access to them. Taken through this lens, it's clear how social services lay the groundwork for the wealth of a nation.
aklein 13y ago
I think everyone should know some basic macroeconomics, which elaborates some of these points. I just finished [1] and it fundamentally changed how I think of wealth. I used to think only of current value, but the key insight is that assets derive value as claims on future output. Money is not only a medium of exchange, it's also a (temporary!) store of value, and a unit of account as well. It is a tool, but certainly not an end in itself. [1] http://www.amazon.com/Concise-Guide-Macroeconomics-Managers-Executives/dp/1422101797/ref=sr_1_1?ie=UTF8&qid=1389375740&sr=8-1&keywords=concise+guide+to+macroeconomics http://www.amazon.com/Concise-Guide-Macroeconomics-Managers-...
RestlessMind 13y ago
What are the net income generating assets? I thought stock market is the best of them all, particularly if one has a longer time horizon (>20yrs). But the article says stocks are a bad idea. In that case, where should I be putting my money?
rphlx 13y ago
> ... entire lives in a period of unprecedented monetary stability. Money is so stable nowadays that it sort of looks like a store of wealth In which country? The USD has lost around 90% of its commodity purchasing power since 1971. > a small, steady, controlled inflation is really the ideal situation I would agree up to the rate of population growth (1-2% or so). But US M2 expanded 8.4% last year, which is clearly far beyond what's needed to prevent the atrocious horrors of deflation.

268 points by swombat 13y ago

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.

agscala 13y ago
What do you suggest is better than rental real-estate as a income-producing asset to invest in? Entrepreneurship is great and all but the risk is frighteningly high
- swombat 13y ago
  The risk is not so high, actually, imho: http://swombat.com/2012/6/18/entrepreneurship-safest-career http://swombat.com/2012/6/18/entrepreneurship-safest-career
  - ForHackernews 13y ago
    The risk is only not-high for people who have a decent safety net to fall back on (spouse, parents, or savings) and/or low obligations (i.e. your children won't go hungry if your startup busts) That's not to disagree with your overall point--yes, you won't LITERALLY DIE--but relatively few people have the luxury to keep swinging and missing in the hopes of getting a hit.
- mcdougle 13y ago
  dividend stocks seem great if you use dollar-cost averaging, DRIP investing, and you do the research necessary; they also seem like they take a very long time to build up a sizeable portfolio. I really like Rob Walling's description of what he does with software businesses [1] though, and my plan is to do something like that. [1] http://www.softwarebyrob.com/2010/06/24/websites-as-investments/ http://www.softwarebyrob.com/2010/06/24/websites-as-investme...
tomasien 13y ago
I think health is a wealth asset of it's own, because if you lack it you'll trade your wealth to get it back if possible. It also gives you the ability to turn your education and intelligence into more tangible wealth, which I will grant you isn't straightforward. But that doesn't mean they aren't assets. A house is like education in a way - it seems to have intrinsic value, you know what YOU paid for it, but the outcomes that can come from trying to sell it vary DRAMATICALLY depending on the how good you are at selling it (and the current market conditions). So it is with my bachelor's from UVa - there have been times where it has gotten me basically minimum wage work and times where it's gotten me $1000/hr jobs, all based on how clever I was about it.
Robin_Message 13y ago
You are right; I've worked out the "accumulating savings" part reasonably well, but the "building wealth" is still eluding me. Stock market index funds seemed to be a good answer in the past. By owning them, you share in the economic growth and income of your country (or another country or set of countries) as a whole. Although, the spectre of Japanese-style stagflation for most of the West makes this less appealing at the moment (although even with the flat growth of the past 13 years, there are still dividend returns.) Property is popular because everyone has to live somewhere, the old "buy land, they don't make it any more" proverb, and the funemplyoment nature of buying, improving, renting, and selling property.
- jonnathanson 13y ago
  I think a lot of people misunderstand what a pain in the ass buying and renting property can be. Unless one is wealthy enough to own multiple properties and have a full-time management company doing all of his work for him, he's going to be taking a fairly hands-on role. Most tennants are flaky. Our perceptions of such might be colored by the fact that -- I assume -- a lot of us here are white-collar professionals making respectable incomes, or who could quickly arrange a steady enough job if needed. Most people aren't like that. Those people are your likely tennants, again, unless you're wealthy enough to afford higher-end rental property. Then there's the legal minefield. Being a developer or landlord makes one person very rich very quickly, and that person is your lawyer. Especially in the Bay Area. People here pretty much threaten lawsuits if they made eye contact with a teenager on the sidewalk, or if their cat's not eating its food, or if they don't care for the weather on any given day. Source: I own a small apartment building in LA and sit on my HOA board in SF. I am the definition of a small-time real estate owner in the uncanny valley: not poor enough to not give a shit, but not nearly rich enough to do so, either. I'm not a full-time landlord; it's more of a nights-and-weekends thing. But it sucks up a not-very-fun proportion of my nights and weekends, and every now and then, it eats into my workday as well. I would recommend landlording to people born into significant wealth, who can buy multiple properties and let a management company deal with the headaches. I would not recommend it as an upward path for those who aren't prepared to make real estate a full-time job, and who can't afford to jump a few rungs up the ladder at the outset.
onebaddude 13y ago
>but interest rates are currently so low that it's almost impossible to get escape velocity through low risk investments. This period is not unique in this regard. Interest rate is always risk-related. There may been times of higher absolute rates on things like savings accounts, but the real returns and opportunity costs were similar. What I'm saying is, there are plenty of investment opportunities; the stock market just rose almost 30% in 2013.

msrpotus 13y ago

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?

swombat 13y ago
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.
gizmo 13y ago
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.
- aliston 13y ago
  Why isn't it optimal? Any other thoughts on what one should look at in order to find an optimal place to put their money?
  - 13y ago

probablyfiction 13y ago

Robert Kiyosaki's claims are pretty hard to verify. Rich Dad, Poor Dad is not a good source for financial information. Edit: Forbes link (http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-poor-dad-bankrupt-dad/ http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-...)

benjaminwootton 13y ago
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.)
- koralatov 13y ago
  I couldn't agree more. It's because of buy-to-let `investors' that rents on one-bedroom flats start at about £550 per month in the city in which I live and only go up from there. That's up by about £250 in the ten years I've lived here, and has continued to climb even during the Recession. Prices to buy have more than tripled during the same period. The net effect of that is that some people got very, very wealthy, others got a little bit wealthier, and the majority got much poorer funding the wealth of the other two groups.
- scotty79 13y ago
  > In addition, hoarding property is actually a massive net negative to society. I think that progressive task on real estate could help with that. If you own one, two or even three houses, no tax, but if more, tax should grow very fast. Fast enough that it's more economical to sell property than keep it.
deleted 13y ago

seanhandley 13y ago

There's some great intro videos here that explain a lot of money concepts: http://www.youtube.com/user/PositiveMoneyUK http://www.youtube.com/user/PositiveMoneyUK

tomstokes 13y ago

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.

mark_l_watson 13y ago
+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.
apostate 13y ago
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.

spookylukey 13y ago

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.

aymeric 13y ago

Any suggestions as to what could be an income generating assets? I can think of shares with dividends, bonds, rental properties, businesses, ... Anything else?

onebaddude 13y ago
A business.

perlpimp 13y ago

Just like definition of having a degree and having an eduction. Latter having knowledge and being able to learn more, former having a piece of paper.

waylandsmithers 13y ago

This is very well said and relevant in the context of our fascination with the "Net Worth" of wealthy individuals who often happen to be in technology. Gates, Zuckerberg, Ellison etc. own property/assets that could potentially be sold for billions but are different from those actual amounts in cash. What particularly comes to mind was when Kevin Rose was on the cover of [was it Newsweek? Time?] proclaiming that Digg was worth $60 million or something. He had to state at least once that he did not actually have $60 million in cash on hand.

larrys 13y ago

"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.

ronilan 13y ago

I'd rather paraphrase a great American speaker quoting an old English gentleman: "The wealth of man is not measured by material computation."

mathattack 13y ago

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.

jlcx 13y ago
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.
- dragonwriter 13y ago
  > Money is theoretically supposed to be a store of value as well, but it is not a good store of wealth, due to inflation. Medium of exchange and store of value are the two main functions that "money", as such, can have, but it is misleading to say that money is "theoretically supposed" to serve both purposes. Any particular money is adopted with very specific purposes, and modern fiat money by design has a very limited role as a store of value, being intended primarily as a medium of exchange that is useful as store of value only in the short term (and only secondarily so, as utility as a short-term store of value is essential to utility as a medium of exchange) specifically in order to encourage investment in productive non-money assets as a store of value.
- mathattack 13y ago
  If you put money in a bank, and get interest, it is a store of value just as much as a bond is. It's not a permanent store of value (inflation, etc) but nothing is. Houses can get taken away in floods, bonds can also get wiped out by inflation, and companies can go kaput.

d_jyllikoski 13y ago

The (money-theoretic) paper that most affected me during economics education was "Money is Memory"; https://research.mpls.frb.fed.us/research/sr/sr218.pdf https://research.mpls.frb.fed.us/research/sr/sr218.pdf It doesn't have much to do with getting wealthy, but it is a very elegant explanation of money as a technology to track members' contributions to society and their deserving of the fruits of society's labour. Money can be modelled as a shared memory, track record, of contributions. If it was evident to my grocer, that those abstract thoughts and lines of code I created had value, I could then have credit for adequate food; if the whole value chain was transparent and inherently obvious to everyone... Can cryptocurrencies displace this (outdated, imperfect) technology?

smrtinsert 13y ago

I stopped at Robert Kiyosaki.

parasight 13y ago

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.

jerf 13y ago

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.

josefresco 13y ago

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.

michaelochurch 13y ago

But, as a more generic category, the fundamental pillars of wealth seem to me to be health (including youth, energy, endurance), education (including work ethic, general knowledge, wisdom, self-knowledge) and intelligence. Health is extremely valuable, but fickle. You can lose it for no good reason and through no fault of your own. One just has to do the best one can. As for education and intelligence, I'm not sure I agree. Those resources are the wealth of the world. It's intelligence and creativity and just raw fucking grit that keep the fucking place from imploding. But many intelligent people end up as excess capacity, unused and maltreated. You need connections and credibility to unlock them. Education used to deliver that, out of the box; that's no longer true. Ultimately, the best security is to be able to reliably get paid, well, for doing something that doesn't harm you to do it. That shouldn't be hard for programmers to arrange, but the age discrimination in our industry is disgusting, so I wouldn't count on being able to get quality jobs at 70, even with full capability and intelligence intact. When you get to that point where you the narcissism of the career world and its perverse (chickenhawking, see here: http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-the-isms-of-venture-funded-technology/ http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-th...) age obssssions go against you, it helps to have a wad of cash. [I]t seems to me that the idea that the best preparation for retirement is to save up a load of money is a horribly noxious lie that has likely led to the bitter disappointment of hundreds of millions if not billions of people. Well, it shouldn't be "money". It should be a portfolio of bonds, stocks, and commodities. (Real estate shouldn't be trusted; there are too many ways for misbehaving neighbors or politicians to fuck it up.) However, the idea that one can keep living off one's talents at the age of 70 is a fantasy. I wish it were that way; ageism is fucked-up and if it affects me in 30 years I am taking a Second Amendment Solution type approach to finally drop a pipe on that shit. Many people have their talents and ability intact at and beyond that age, but I would not want to be applying for programming or business jobs at that age.

ionforce 13y ago

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.

Dewie 13y ago
I feel like real time strategy games makes me think a lot about investment and a sort of compounding interest (making workers, expanding), investing resources in tech vs. army vs. making all armies better in the long haul (upgrading army), attacking early and have a worse late-game v.s. playing defensively ... Some RTS are, to a surprising degree, a lot about economy and balancing the short term v.s. the long term when it comes to your own resources.
crntaylor 13y ago
Disclaimer - I've never played Starcraft or Magic: The Gathering. But I expect that in both of them, just like in real life, there is some value to having unspent liquid assets, in that they give you optionality. Unspent liquid assets can be converted at a later time into marines/computing hardware/other 'real' assets, depending on what is most needed at the time. If you turn all of your liquid assets into illiquid assets as soon as you get them, you lose that optionality.
- ionforce 13y ago
  You know, I hear what you're saying, but I don't think I've ever heard that. Usually better players will give newer players a simple heuristic like "don't let your mineral count go over 1000", which seems generous even. Something more hard core would be like 800. The point is, there aren't many scenarios where "saving" your money would be a good thing. Except for "expensive" purchases, which usually hover around 400 and no higher. Units and buildings (things you spend money on) in StarCraft also cost time. So if you wait until the actual time you need things to request their construction, it's already too late. So there's some forecasting going on so that you can soak up the construction time. Also, your economy is a forever investment. If you aren't attacking, you're building/expanding. So there's essentially never an ideal moment, there's always a fall through case. You're always spending your money on something. The one possible exception to this would be the Zerg, who play in a more reactive style. Which means that their per unit construction time is on average less than the other races (as I'm saying this, I'm actually just guessing that, watch me be wrong). The point is, the Zerg are more reactive than they are forecasting, so maybe in this scenario, some amount of saving would be apropos. But still, you are spending on your economy until the last possible moment and then transitioning into an army. Zerg happen to specialize in "on the field" adaptation and parallel construction, making their throughput higher for shorter amounts of time. But it could be argued that none of that money was "optional" or idle. I knew that I was saving for an army and as I was scouting I knew I was saving for a specific kind of army. Maybe burn 2/3 on unit construction and save that last 1/3 to use their on the field adapt ability (like baneling morph).

3am 13y ago

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.

oleganza 13y ago

"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-money 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 13y ago
Of course it is. The article is flawed.

RyanZAG 13y ago

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.

wmf 13y ago
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.

dkrich 13y ago

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.

natural219 13y ago

I'm surprised nobody has mentioned the PG article that makes pretty much the same point. One of my favorite essays by him, incidentally. http://paulgraham.com/wealth.html http://paulgraham.com/wealth.html

swombat 13y ago
Hah. I forgot he wrote one (even though I've quoted him in some of my articles). It does make similar points in his "Money Is Not Wealth" section in there. It's not very surprising that others have said this - it's a sensible idea that's fairly well understood by some... but thoroughly misunderstood by others (still, and probably forever).
auvi 13y ago
I was going to post the same link and found that you already did. I totally agree.

deleted 13y ago

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pmorici 13y ago

"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. http://www.forbes.com/sites/sharding/2013/09/20/has-warren-buffett-nailed-another-market-top/ http://www.forbes.com/sites/sharding/2013/09/20/has-warren-b...

a8da6b0c91d 13y ago

Cash is a hedge against deflation. Many vast fortunes have been made by people who held cash, rode deflation down, and then bought assets at the bottom. You want a substantial fraction of your portfolio as cash to hedge deflation, just as you want a fraction in hard assets to hedge stagflation. You of course want a fraction in income generating ventures and equities that do very well in an environment of growth, as advocated here, but failure to hedge the other two conditions has often proved ruinous. We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash. We haven't had a serious bout with stagflation in 40 years. Historically, deflationary and stagflationary downturns have been common. All the points in the article are highly valid, but it seems to overlook these critical reasons to hold quite a bit of cash and hard assets.

mullingitover 13y ago
> We haven't had a serious bout with deflation in 80 years so people have grown overly biased against cash. Coincidentally we're not tying the money supply to stuff we dig out of the ground, growing the money supply is now only as difficult as turning on the printing press. Unless that changes, I don't see how deflation is a serious threat anymore.
- a8da6b0c91d 13y ago
  Debt based currencies deflate when a lot of debts go bad. When somebody declares bankruptcy and debt goes bad, that's money going "poof" and disappearing from the banking system, with knock-on effects. That's what happened in the 30s and nearly happened in 08. Whether or not the gold convertibility window is open doesn't much figure into it. If the US government were to partially default on its debts, or a lot of banking sector debt were to go bad, the value of US dollar cash would sky rocket as people scrambled to deleverage. This happened in 08. This happened in Japan in the 90s.
  - aliston 13y ago
    If a private debtor defaults and declares bankruptcy, then the money supply contracts and you get deflationary pressure. I'm curious, though, why you believe the US would see deflation if it were to default? The Eurozone countries tended to deflate, but there are plenty of examples of countries that went the other way -- Germany, Argentina, Mexico... I don't think the US will default any time soon, but if we were to get near that point, we would inflate our way out.

macco 13y ago

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.

downandout 13y ago

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.

dclowd9901 13y ago

One of those terrific articles that comes along, tells you something you already knew, but does it in a way that crystallizes it into an actionable direction. Bravo. I've been struggling to figure out what to do with the money I've been accumulating in my Bay Area tech job. I thought to put it into a house, but after reading this article, I think I'd really like to give entrepreneurship a serious go (whereas in the past, I might've done it as a side gig). Few people can claim to have that level of influence from their writings.

aj_ycombinator 13y ago

This describes money as a store of energy: http://morphius.blogspot.in/2013/02/money-is-energy.html http://morphius.blogspot.in/2013/02/money-is-energy.html

karmajunkie 13y ago

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.

KingMob 13y ago
Came here to say this. Kiyosaki should not be listened to by anyone. His advice consists of banal generalities at best, and outright fraud at worst.

01Michael10 13y ago

I have to disagree with this part of the author's post... "But surely, having a lot of money, say a billion dollars, is the same as being wealthy? In theory, perhaps. 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, and those who do not (e.g. lottery winners) often quickly find that the seemingly infinite pile of cash has evaporated into nothing." You are a regular working class dude and all the sudden come into 100 million? 350 million? 1 billion dollars? The LAST thing you really need to do is "invest" that money to generate income. That's how most lottery winners lose their money is by making bad "investments". You already have more money then you would have earned in a lifetime 1000x or so over that you can't possibly spend so why would you "risk" any of it? You live off the bank interest and have a really nice "modest" existence. Oh and... Stay away from money grabbing relatives but you do, of course share some of your good fortune.

yen223 13y ago
> "The LAST thing you really need to do is "invest" that money to generate income." > "You live off the bank interest" Where does the bank interest come from, if not investments?
- 01Michael10 13y ago
  Depositing your money in a bank...
  - thedufer 13y ago
    Where is the bank getting money to pay you interest? By making investments. The fact that you're one level removed from the decision-making doesn't make it less of an investment.
    - 01Michael10 13y ago
      Ummmmm Really? The Bank is taking the risk not you. Never heard of insured accounts? Granted, there are no guarantees in life but money in the bank is pretty solid. You may stuff a couple mill under your mattress if it makes you feel better...

asgard1024 13y ago

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.

normloman 13y ago

This guys only 33 and hes already talking like some grey-bearded arm chair philosopher. "Listen closely sonny, here's what you should do if you want to retire comfortably like me." Reading "Rich Dad / Poor Dad" does not make you an expert on personal finance. Being CEO of a startup make you an expert on being successful.

avighnay 13y ago

This blog piece has a lot of rich learnings for financial well being. What I disagree with is the author's stance on savings. It is dangerous because the 'unwealthy' minds are going to read 'saving is not good' as 'go spend'

rushiagr 13y ago

You said twice that children with great education are one of the biggest wealth. I'd have loved if you had given an example of how exactly. I'm curious to listen

yen223 13y ago
From a cold, dispassionate economic point of view, you "invest" 18-25 years worth of blood, sweat, love, and tears raising your children. In return, they will start supporting you once they're capable of generating more than enough income to sustain themselves, hopefully before your retirement years.

Kronopath 13y ago

It's interesting that he defines the three most important pillars of wealth to be health, education, and intelligence -- with the exception of intelligence (which is effectively fixed), these are commonly provided as public services in most countries so that everyone has equal access to them. Taken through this lens, it's clear how social services lay the groundwork for the wealth of a nation.

aklein 13y ago

I think everyone should know some basic macroeconomics, which elaborates some of these points. I just finished [1] and it fundamentally changed how I think of wealth. I used to think only of current value, but the key insight is that assets derive value as claims on future output. Money is not only a medium of exchange, it's also a (temporary!) store of value, and a unit of account as well. It is a tool, but certainly not an end in itself. [1] http://www.amazon.com/Concise-Guide-Macroeconomics-Managers-Executives/dp/1422101797/ref=sr_1_1?ie=UTF8&qid=1389375740&sr=8-1&keywords=concise+guide+to+macroeconomics http://www.amazon.com/Concise-Guide-Macroeconomics-Managers-...

RestlessMind 13y ago

What are the net income generating assets? I thought stock market is the best of them all, particularly if one has a longer time horizon (>20yrs). But the article says stocks are a bad idea. In that case, where should I be putting my money?

rphlx 13y ago

> ... entire lives in a period of unprecedented monetary stability. Money is so stable nowadays that it sort of looks like a store of wealth In which country? The USD has lost around 90% of its commodity purchasing power since 1971. > a small, steady, controlled inflation is really the ideal situation I would agree up to the rate of population growth (1-2% or so). But US M2 expanded 8.4% last year, which is clearly far beyond what's needed to prevent the atrocious horrors of deflation.