What is Wealth?

Definition of Wealth

“Wealth” means having an abundance of something desirable. This can be tangible, like money and property, or intangible, like good health or freedom.

Intangible Wealth

Just because something doesn’t have a monetary value does not mean it is worthless. Having strong connections with friends and family, freedom to make personal choices, and being known as trustworthy are often identified as part of a person’s wealth.  They are intangible, not capable of being bought or sold, but they add value to an individual’s life. Businesses can also have intangible wealth. If the public opinion about a company and its products is generally positive, this reputation is seen as adding value to the company’s value, even though it might not be possible to assign a specific dollar value to that goodwill.

Tangible Wealth

If you can buy and sell something, then it has a tangible value (meaning “can be obtained”). Tangible wealth includes things like cash, bank deposits, property, stocks, and bonds.

Monetary vs Non-Monetary Assets

When you are building wealth, you want to start building up your assets, both monetary and non-monetary.

Your “Monetary” assets are directly related to money. They will be part of your spending plan – how much cash you have in the bank, how much income you are going to get next month, and how much money you currently have in your emergency fund. Since we can spend these funds on very short notice, they are also called “Liquid Assets”. Stocks and bonds, which are less liquid, are also considered “monetary assets” because you will almost always know their exact value in dollars.

Your “Non-Monetary Assets” are less liquid – you usually cannot spend them directly, and it takes time to convert them into cash. This includes things like property, furniture, machines, and vehicles. All of these items are useful and definitely have some value, but until you actually need to sell them you might not know exactly how much they are worth.

Both monetary and non-monetary assets are used to determine your total wealth. For most individuals, the biggest portion of their total wealth will come from non-monetary assets such as cars, a home, and property.

Building Wealth Through Investing

The idea of “building wealth” refers to investing in tangible assets, with the aim to have your investments grow over time. This includes financial steps to have cash reserves in bank accounts, investing in stocks, purchasing bonds, and buying property. Building your wealth should occur throughout your lifetime as you learn to spend wisely, save regularly, and invest carefully. These habits will allow you to “put your money to work”.

Investing vs Gambling

When people think about “using money to make money”, either investing or gambling comes to mind. When you want to grow your own wealth, knowing the difference will allow you to get rich slowly, or force you to keep working for your next paycheck.

Financial Goals

Setting and keeping financial goals is key to building wealth. For example, you might set a goal to save $300 for your first stock purchase. First, you need to review your spending plan and identify areas where you could trim spending. Those extra dollars could then be allocated to your savings goal. Each month, as you follow your spending plan, you’ll be able to see how close you are to your goal.

Setting goals provides an incentive to maintain control of your spending, and reaching those goals will help you build your wealth. These are some examples of financial goals, and how you might work to attain them.

Beat Your Savings Account

In this case, you already have a few hundred dollars saved up in your Savings Account, but you want to get more of a return than the tiny interest rate. Your “Financial Goals” for this account would focus on:

• Liquidity, or how quickly you can convert your investment into cash if you need to spend it in an emergency, and
• Risk, or how likely it is to lose some (or all) of your investment. If you are investing your first set of savings, you likely want to avoid risky investments, and
• Reward, or how much you can grow your investment. Beating your savings account is a very reasonable goal – you will not need to pick very risky investments.

Prepare For Retirement

Now you are starting to look ahead, and you want to make sure your money is put to work so you can eventually quit your job and live the high life when you’re ready to retire. In this case, your financial goals would start to consider tax implications. These include:

• Short Term vs Long Term Gains: “Short Term” gains happens when you sell an asset within a year of buying it. This is taxed at a much higher rate than “long term” gains, which can eat into your profits.
• Dedicated Retirement Accounts, like an IRA or RRSP account. These are special tax-advantaged accounts designed for retirement, with much lower tax burdens than normal investing accounts.

These same considerations come up not just for retirement, but for other long-term wealth-building strategies (like preparing to buy a home or saving up for a child’s education).

In Retirement

When you are finally ready to retire, you would switch your financial goals again, this time focusing on income and low risk. “Income Investing” means that your asset pays you a steady amount of money each month or year that you can live on, without selling off the asset itself (this is also called “Asset Preservation”). Income Investing includes things like:

• Bonds that pay a specific interest rate every year;
• Residential Real Estate Investing, like owning apartments or houses that you rent out for steady income;
• Or investing in stocks that specifically pay a dividend every year, like many banks and utilities companies. If you can earn enough from the dividends themselves, you never need to sell the underlying stock, preserving your wealth.

Challenge Questions

1. What assets do you currently own? How could those assets help you accumulate wealth for your future?
2. Setting goals to build wealth are key to helping you have a successful, happy future. You don’t have to be filthy rich. You just need enough money to support the lifestyle you’d like to live. Thinking about your future, what is one financial goal you’d like to have for yourself in your 20’s? What choices would help you reach that goal? (Students could choose from a goal for their 20’s, 30’s, 40’s, etc.)

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