
Money and wealth - swombat
http://swombat.com/2014/1/10/money-and-wealth
======
tomstokes
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.

~~~
ronaldx
> 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.

With my retirement age ~40 years away, it's not clear to me that locking my
money into traditional investments is a good idea: existing historical records
are not statistically convincing (to me) over such a term.

A single stock market crash or economic crisis may not matter over the long
term, but I'm sure you're not suggesting there will be only one such occasion:
it seems more likely that there will be several, which may or may not be timed
in my favour.

When I come to unlock a pension, there's no way to know what the state of the
economy will be and where the legislation will have gone. However, if I am
dependent on that pension, it puts me in a very vulnerable position where I am
likely to be taken advantage of - perhaps by the state or by an uncompetitive
financial market.

You talk about tax-advantage, but I would have to retain this over several
successive governments. I personally don't believe that it's in the interests
of society for significantly wealthy people to retain additional tax
advantages. I suppose it's in my personal interest for now to take those
advantages, but I don't feel like they can be relied upon, and seem likely be
changed over this time period - perhaps even retrospectively.

Anyway, if I am not completely dependent on my retirement savings, but have a
means of generating wealth in my retirement, then I am in a much better
position.

This is why I find entrepreneurship a good investment: it gives me valued
skills that I will most likely retain into older age (even if I fail at
first). Whereas, people who remain in traditional jobs have some danger of
being obsoleted, or competed out of their jobs in older age.

~~~
dragontamer
The stock market has historically never dropped in value over a 15 year
period. If you continually invest through a crash, you will make insane
amounts of money.

Lets say you started investing in 2006 (before the crash), specifically in
SPY. Lets say you put $10,000 / year into SPY.

You'd have spent $80,000 over those years, and today, your SPY holdings would
be worth $118,176.92. You'd make a 47% profit _because_ you invested through a
crash.

Crashes are the most amazing thing for your investment portfolio. Investing
THROUGH a market crash makes insane amounts of money.

\----------------

The risk however, is the day you retire. If you retire during a market crash,
you will lose a lot of money. But a crash during your 40 year investment
period? That's the best possible scenario. Every crash will lead to insane
gains in your portfolio. As others have noted, you can mitigate this risk by
simply moving your money away from stocks as you near retirement age.

Bonds don't make as much money, but they're a lot more reliable.

~~~
ronaldx
> The stock market has historically never dropped in value over a 15 year
> period.

Feel free to clarify this, because I don't agree.

The records of the FT30 index only go back to 1935[0] - which is not nearly
long enough to make reliable predictions about the next 40 years - but still,
it dropped in value in the following 15-year periods (before taking into
account time value of money):

    
    
      1936-1951
      1959-1974
      1994-2009
      1995-2010 (records end)
    

The 20-year periods 1954-1974 and 1989-2009 also.

Still not convinced? The fact that this is a surviving index makes it biased -
indices which show a loss of value are less likely to be retained.

[0][http://www.ft.com/ft30](http://www.ft.com/ft30)

~~~
dragontamer
I believe the American Stock Market has never dropped in value over 15 years.
Other countries serve as a good counter-example however.

Your 2nd point is also a solid counter-argument that I won't belabor much
further.

------
benjaminwootton
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
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
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
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.

------
karmajunkie
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
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.

------
probablyfiction
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-...](http://www.forbes.com/sites/helaineolen/2012/10/10/rich-dad-poor-dad-
bankrupt-dad/))

~~~
benjaminwootton
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
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.

------
RyanZAG
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
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.

------
spookylukey
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.

------
oleganza
"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-...](http://blog.oleganza.com/post/43378777734/on-circulation-of-money)).
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
Of course it is. The article is flawed.

------
larrys
"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.

------
asgard1024
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.

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

------
macco
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.

------
josefresco
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.

------
ionforce
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.

~~~
crntaylor
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
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).

~~~
asgard1024
The problem is that Starcraft is a bad model, because in Starcraft, all the
options are known in advance. In the real world, not so. Someone can invent
something new tomorrow and all of sudden you may find those cash handy.

Also, 2-player Starcraft is an antagonistic game. In the real world, there are
coalitions, and the game is more complicated. Having cash on hand can give you
an edge when the coalitions change.

------
msrpotus
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?

~~~
gizmo
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
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?

~~~
grosskur
Really, there's no such thing as "optimal" because no one has a crystal ball.
A portfolio of 100% VTI is indeed diverse, tax-efficient, and has low
expenses. Personally, I'd add some amount of VXUS (international stocks) for
further diversification and MUB (tax-free municipal bonds) for safety. You
could do very well with just these three ETFs, often known as a "lazy"
portfolio:

[http://www.bogleheads.org/wiki/Three-
fund_portfolio](http://www.bogleheads.org/wiki/Three-fund_portfolio)

Keep in mind, though, that there are no guarantees. Stocks will have bad
years, and you should expect that some years they will lose 50% of their
value. The key is to choose an allocation that you can live with so you don't
panic and sell when things get bad. Keep contributing and rebalance regularly
(once or twice a year is usually enough). Tune out all the noise and stick to
your plan. Even with these dips, most people expect stocks to perform better
than any other asset class in the long term (20+ years).

I'd also recommend The Little Book of Common Sense Investing:

[http://www.amazon.com/dp/0470102101](http://www.amazon.com/dp/0470102101)

It's written by John Bogle, who founded Vanguard to bring diversified, low-
cost investing to the masses. Vanguard is different from other companies in
that it's client-owned. The Bogleheads forum is pretty good for this kind of
investment advice:

[http://www.bogleheads.org/](http://www.bogleheads.org/)

You might also check out Wealthfront and Betterment. They are software-based
financial advisors that use Modern Portfolio Theory and the Black-Litterman
model to allocate your money optimally given their assumptions about expected
returns and correlations between asset classes:

[http://www.blacklitterman.org/intro.html](http://www.blacklitterman.org/intro.html)

[https://www.wealthfront.com/whitepapers/investment-
methodolo...](https://www.wealthfront.com/whitepapers/investment-methodology)

[https://www.betterment.com/portfolio/](https://www.betterment.com/portfolio/)

------
jerf
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.

~~~
CJefferson
Bill Gates is a special case -- I would imagine the vast majority of stock
(surely over 95%, maybe 99%) does not have value because of who owns it.

Also, if the rich are sitting on wealth which loses values as soon as it is
spent, perhaps quite a lot of the "wealth" was never really there in the first
place? (although there we are perhaps getting into philosophy)

~~~
gaius
If there is a revolution, then _all_ financial assets are worthless overnight,
stocks, bonds, whatever. Even physical assets lose a lot of their value - a
factory that can't get raw materials and can't get their product to retailers
is worth a great deal less than an identical factory with identical workers
that is a going concern.

------
downandout
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.

------
mathattack
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
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
> 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.

------
parasight
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.

------
3am
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.

------
dkrich
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.

------
aklein
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-...](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)

------
smrtinsert
I stopped at Robert Kiyosaki.

------
dclowd9901
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.

------
ronilan
I'd rather paraphrase a great American speaker quoting an old English
gentleman:

 _" The wealth of man is not measured by material computation."_

------
d_jyllikoski
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?

------
waylandsmithers
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.

------
rphlx
> ... 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.

------
Kronopath
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.

------
perlpimp
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.

------
avighnay
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'

------
natural219
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
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).

------
RestlessMind
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?

------
aj_ycombinator
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)

------
rushiagr
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
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.

------
aymeric
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
A business.

------
normloman
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.

------
seanhandley
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)

------
michaelochurch
_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-th...](http://michaelochurch.wordpress.com/2013/12/14/vc-istan-6-the-
isms-of-venture-funded-technology/)) 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.

------
a8da6b0c91d
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
> 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
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
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.

------
01Michael10
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
> "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
Depositing your money in a bank...

~~~
thedufer
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
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...

~~~
thedufer
I know of no definitions under which investments must be risky. Investments
are "a commitment (of time, money, etc) in order to earn a return" (not a
direct quote, but a fusion of Merriam-Webster's definitions of invest and
investment). Nowhere in there (or any of the other definitions of
invest/investment) is risk mentioned.

~~~
01Michael10
All investments are guaranteed returns? News to me... All my money into Target
stock! All investment implies risk and I wouldn't learn financials (or
anything) merely from Merriam-Webster definitions.

