In this article I discuss the definition of wealth, what wealth is & what it isn’t, why we need wealth and specific tools to create wealth.
Definition of wealth
Naval Ravikant, founder of AngelList, has given us a very simple definition for wealth
Wealth is having assets that generate income even when you sleep.
It’s so simple and yet so profound. Let’s see its implications by analyzing a few scenarios.
- Let’s take the case of a factory — is factory creating wealth? Can a running factory make money while I’m sleeping ? Answer is YES.
- What about stocks — stock is a share of ownership in a company that has its own management, its own assets, its own market. Can holding a stock make money while I’m sleeping ? Answer is YES.
- What about salary — will my company pay me salary if I am at home sleeping for a few days. Probably NOT.
- What about code — can computer code running on a cloud server create money while I’m sleeping. YES.
- What about a Private practice — can a doctor, dentist, lawyer or accountant make money while she is sleeping? Answer is NO. (That’s why rich lawyers, accountants have created this concept of ‘partnership firms’ where a partner is earning even while (s)he sleeps)
- What about a music track or a Youtube video ? Can your digital content create wealth while you are sleeping — 100% YES.
- How about a consultant — a consultant is selling specific hours to a company. Surely she will not be able to charge for hours spent sleeping. So a consultant income cannot be termed wealth.
- How about a real estate property — can real estate be leased out. Answer is YES.
Wealth is not money
Many people confuse Wealth with Money. Wealth is NOT the same as money. So what is money: Money is a medium to transfer ‘wealth’ and ‘time’ between people. I will discuss more about Money when I talk about Bitcoin.
Let’s take an example:
I run a factory that makes shoes — I exchange shoes for money. So I transferred wealth in exchange for money.
You are a dentist — you offer your time to help someone reduce his tooth pain and in exchange, you receive money from that beneficiary.
Money is a flow that connects wealth, time and people. So key learning here is, aim to create wealth, not money — this thought takes us to the next question.
Money created by ‘wealth’ is ‘sound’ money whereas money created by ‘money’ is ‘unsound’ money( Governments want us to believe that ‘money’ can be printed out of thin air — this is unsound money that destroys value. More on this later…)
Wealth can create money, money cannot create money.
Wealth is not a source of happiness
Most people think that wealth brings happiness. But is that really the case? Lets explore by taking a simple example:
Let’s say we have someone kicking a ball towards a goal that is down the road. Imagine that ball is ‘You’, the goal down the road is ‘Your Happiness’. Most people seem to think that ‘Wealth’ is the Force that kicks the ball (that’s you) towards the goal (that’s your happiness).
Let’s say we add one more complication to this scenario. Imagine there is a deep fissure along the road that is infested with crocodiles. A ball moving towards your goal is likely to fall into the fissure & cannot be retrieved easily. A fissure here is equivalent to the ‘Obstacles’ we face while moving towards our goal (happiness).
Now let’s say, a good Samaritan builds a bridge over this fissure. Our ball can now roll along and reach its goal without any hassle. In this example, Wealth is the ‘Bridge’ that helps the ball navigate past the obstacles and NOT the ‘Force’ that pushes the ball towards its goal.
Wealth is a tool that removes obstacles in the path to happiness. It is neither the source of happiness nor happiness itself.
When you look at wealth as a tool to remove obstacles & not as source of happiness — you tend to shed ego and stop playing stupid status games in life.
Why is wealth important then?
Let’s again imagine a hypothetical factory — lets call it a ‘factory of life’. This factory has machines that churn out all the best things in life — success, wealth, health and great relationships. The most important raw material that goes in as an input to this factory is something we call ‘TIME’. ‘TIME’ needs to be effectively processed by the machines inside the factory to produce all these good things in life.
Our factory needs maintenance to ensure that these machines are efficiently processing TIME . ‘WEALTH’ is that maintenance. By giving us a freedom to focus only on things that matter, WEALTH preserves and protects our TIME. And that’s why building WEALTH is absolutely necessary in life.
Wealth helps you to effectively control your Time.
How to get wealthy?
Naval again gives us a powerful formula for wealth creation:
1. Specific Knowledge
As a society, we have wants and needs. Often times, there might not be a clear path of getting to them. Society needs someone to understand these needs, think about them, conduct iterative experiments and come up with a better path to reach the destination. This whole exercise to build a body of knowledge is what we call as ‘specific knowledge’
Specific knowledge is something society wants and values but does not know how to get.
We’ve all come across leverage in our high school physics text books.
Lets say you sit on one end of a see-saw. On the other end is a dead weight that is way heavier than you. What happens? You end up in the air and the weight ends up on the ground. Now you shift to another setup where see-saw length is increased manifold. What happens? Suddenly you are able to lift the weight off the ground. What changed? You just used leverage.
Leverage is an ability to use external resources to amplify your effort
So with no leverage, your reach will be limited and hence opportunity captured will also be small. With higher leverage, you will be able to capture a much bigger opportunity. Basically, leverage allows you to punch way above your weight class.
Accountability, for an entrepreneur, is the ability to accept failure in public under one’s own name. Risking failure under your own name creates incentives & ownership that are essential for wealth creation.
This is perfectly explained by Ray Dalio in his book ‘Principles’ where he defines a concept called ‘Circle of Success’ that looks something like this:
We start with goals — and then there are setbacks that pull us back. So we have failures along the way. We iterate our way around these setbacks and improve our solution that helps us to achieve our goals eventually. And then we we set next set of bigger goals and the cycle repeats. To create wealth, we will have to loop several such circles. The engine that drives this journey is accountability — without accountability, we will never be able to complete these circle.
Accountability is engine that drives the ‘circle of success’
While the word patience has a very broad definition in English language, patience for an entrepreneur is simply a belief in magic called ‘compound interest’.
If you take all the good things in life - relationships, reputation , health, wealth and plot them on y-axis and you plot Time on X-axis, you will see that Patience compounds all these good things over time to create a fantastic upward sloping curve.
Patience is a belief in magic called ‘compound interest’
To summarize, we discussed the following in this article: