Personal Finance Concepts You Should Know – Concept 4: Wealth Creation


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The concept presented today deals with how wealth is created.  Understanding what creates wealth, and what destroys wealth, is important for things such as choosing a career, what you do while your on the job, and even your understanding of how government policies will affect you and the economy as a whole.

Wealth is not a fixed pie

The first thing to understand is that the amount of wealth in the world, your nation, or even your city or household is not fixed.  It is created and destroyed every day.  When someone builds a house, they have created wealth.  When someone finds a nugget of gold on the ground, they have created wealth.  If someone develops a new app for a phone, they have created wealth.

Wealth is destroyed when people consume things or when valuable items are allowed the decay and waste away.  If you eat a hamburger, steal a phone app, or let your car run out of oil and seize up the engine, you have destroyed wealth.  Virtually every form of wealth will waste away with time.  An example of an exception is a piece of land, although a developed piece of land will return to its unimproved state given time.

Because wealth is constantly being created and destroyed, the amount of wealth available is not fixed.  Just because some people are rich does not mean that others will need to be poor.  Taking wealth from wealthy people is not the only way to make those that are poor wealthier.  In fact, taking wealth from people who are using it in a productive way and giving it to people who are less effective at its use will lead to a reduction in wealth.  For example, if you took away ownership of McDonald’s franchises and gave the restaurants away to the fry cooks, it is likely that many of the restaurants would close within a year because the fry cooks would not know how to run a business, destroying both the value of the restaurant itself and the wealth that it generates each day.

Work making things of value creates wealth

If a person takes a bunch of logs and turns them into a cabin, he has created wealth.  Likewise, if a person mixes water, lemon juice, and sugar together in a large jug, then takes it to a place where people are hot and thirsty with cups and ice, she has created wealth.  Wealth is created when someone uses his time to make something that is more valuable to people than it was when he started.

This does not mean that all work creates wealth.  Someone could spend a lot of time and effort building sandcastles at the beach, but unless his creation of those sand castles filled a need that someone had, he would have created no wealth.  Note that creation of wealth and filling of needs are intimately linked.  The greater the need, the more wealth that was created.

Wealth creation mainly requires thinking of others and their needs.  Those wanting to become wealthy need to think of a product or a service that others need and then spend their time fulfilling that need.  An artist who “paints for herself” and therefore makes pictures that she likes but no one else would want to own has created no wealth.  Someone who paints pictures that look good in someone’s living room has created wealth.  Someone who creates a masterpiece that many people want to view has created a great deal of wealth.  Note that you can create wealth for yourself – for example, creating a tool that makes your life better – but mainly it involves fulfilling the needs of others.

You cannot expect to receive more wealth from others than you create

The amount of wealth you create has nothing to do with your needs.  Just because you need to have an apartment in New York City, food, clothing, and money for entertainment does not mean that you will receive enough money to pay for these things regardless of your job.  If what you produce during your working hours in a month is worth $1,000, you can’t expect to receive $3,000 because this would mean that someone else was creating $3,000 worth of wealth and only receiving $1,000 in return.  If you want to earn more money, you have to produce more wealth, either by working more or learning to use tools to be more productive while you are working.

Tools allow us to create wealth more rapidly

Tools can range from physical tools, like a hammer or a shovel, to skills such as math and writing.  Tools allow us to be more productive, meaning we can create wealth faster, or do things that are more valuable, such as write a good novel.  As stated above, the more wealth you create, the more wealth you can receive for your efforts.  If you want to make more money, learn to use tools that fill the needs of others.

You can gain wealth by allowing others to use your wealth

Wealth can be used to create wealth, and one of the easiest ways for people who don’t have the tools that can create huge amounts of wealth, such as a medical degree or the skills needed to run a hedge fund, is to allow others to use your wealth in exchange for a portion of the wealth they create with it.  For example, you can invest in a company that uses your wealth to buy tools that they need to create wealth, then receive a portion of the wealth they create in exchange.  Doing this, you can then have the wealth that is created reinvested to create even more wealth.

You gain wealth by creating more than you destroy

If you use the wealth you create from work to buy things like food, clothes, cable TV, a phone plan, electricity, drinks, and coffee from Starbucks, you are destroying that wealth.  If the rate of destruction is equal to the rate or creation, you will never increase the amount of wealth you have.  On the other hand, if you use some of that wealth to buy gold bars, the amount of wealth you have over time will increase since the amount of gold you have will increase over time.  Furthermore, if you use the wealth you create to save up and buy apartments that you can then rent, you are buying things of value that actually fill the needs of others and thereby create wealth for you.

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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