I’ve been thinking more and more about what makes an individual, or even a country, wealthy. I am starting to understand that the typical association of wealth with one’s bank account size or the number of assets one owns is rather simplistic.
I believe wealth is about having a surplus of resources – financial, physical, emotional, or intellectual. It’s about having more than you need to live comfortably and being able to share your resources with others.
Interestingly, I think this definition of wealth applies equally to individuals and countries. A wealthy individual has a surplus of resources and can share with others, while a wealthy country has a surplus of resources and can help other countries in need.
The traditional view places a rather narrow focus on the potential stored energy available for use by an individual in the form of money, or things that an individual can trade, such as gold or real estate. This perspective often misses the mark when trying to understand complex systems, like economies, or societies as a whole.
But, if we want to equate wealth with being able to live a good life, then obviously, this definition is just not good enough.
When I speak with many people about money and why they want to be wealthy, an answer I often get back is around the question of freedom. They would like the money, and thus the time, to travel, do what they want every day, and not have to have the burden of going to work and having responsibilities.
To me, this perspective seems to be quite a bit different than what most people would traditionally think of when it comes to wealth. They are equating wealth with the ability to do whatever they want, whenever they want – and that is a far cry from simply having a lot of money.
So, if we take this definition of wealth – the ability to live a good life without having to worry about money – and apply it to countries, I think we can start to see where some countries are wealthy, and others are not, and it may not quite track to traditional measures such as GDP!
So there is this kernel of an idea growing: wealth somehow equates, or at least is relative to, the amount of freedom you have.
And this does appear to make some sense.
After all, you wouldn’t want to be the richest person in the world, but be stuck with a life sentence in Colorado State Penitentiary without the possibility of parole. All your wealth would be for nothing because you cannot make good use of it.
On the other hand, we can easily imagine the opposite scenario, someone who is not very wealthy in the traditional sense, and perhaps even poor, but has a lot of freedom. This individual wakes up every morning, and they are where they want to be, they are doing the work they want to do, and they have surrounded by people they love and like.
So, it seems that part of being wealthy is about having the freedom to do what you want with your life and resources.
Now, if we take this one step further, it would appear that countries that are the wealthiest are those that provide their citizens with the most freedoms.
This may seem like a rather obvious statement, but it’s often overlooked.
So, what are some key freedoms we enjoy as citizens of wealthy countries?
Some more obvious ones that come to mind are freedom of speech, freedom of assembly, and freedom of (and from!) religion. These are all important freedoms that allow us to live as we see fit without worrying about government interference.
We also enjoy freedom from want and freedom from fear.
In wealthy countries, we tend not to worry about where our next meal comes from or whether we will have a roof over our heads. We also feel safe walking down the street or leaving our homes unlocked.
So if wealth equates to being able to do what we want, when we want, this may be a clue as to why craftsmen — (and women!) how does one say that, craftsperson? — report such a high quality of life. They wake up each morning with a clear focus and set of goals, and they can measure their progress throughout the day. They may not make much money or have many assets, but many would not change their life regardless.
As the sums I have dealt with in my life have become bigger, I’ve noticed my mindset change about money. One interesting thing I have noticed is that I treat personal money and organizational money in a completely different way.
When it comes to personal money, I am fairly tight on spending and generally do not spend large amounts of it. I am risk-averse. I end each month saving over 50% of my salary.
Organizational money, that is, money that is spent during the routine course of business in an organization, feels cheaper somehow. I routinely sign off on thousands or tens of thousands of spending, and my clients trust me to make decisions affecting millions of dollars of spending.
So perhaps part of being wealthy is about having the freedom to take risks, knowing that even if you fail, you will always have a safety net to catch you.
There is this slight cognitive dissonance between the two, as I will quite casually sign off on $5,000 of spending in my business, but would never dream of spending $5,000 at a moment’s notice in my personal life.
I notice an even stranger subdivision in my personal spending, where digital spending feels somehow more expensive than anything in the “real” world. For instance, if I am downloading a paid app on the App Store that is the equivalent of a couple of coffees, I will for sure think about it — but I am completely happy to buy one or more coffees each day without thinking about it.
I am not sure why that is the case, but I guess there is some psychological loophole that anyone selling digital goods and services can exploit here. If we can equate spending on software to something trivial in real life, we can make purchasing decisions of consumers much easier.
So, to recap, it seems that part of being wealthy is about having the freedom to do what you want with your life and your resources. Countries that are the wealthiest are those that provide their citizens with the most freedoms. And finally, part of being wealthy may also be about having the freedom to take risks, knowing that even if you fail, you will always have a safety net to catch you.
So let’s talk about money.
There is a good analogy about the money that one keeps in a bank account; it is like a battery.
You take some actions, and you create some value in the world. This is given to you in the form of money, the ultimate fungible “thing”. This means that you can easily swap money for anything else. This is incredibly convenient and underpins the entirety of modern society.
Some of this money you spend right away, but if you earn enough or keep an eye on your spending, you can save some for later. And this is charging up a battery, whose power you can use later.
You can release this power anytime you wish, and people will sell you things and provide you with services. But, like power in a battery, the money you keep in a bank account will lose power over time. The number of credits or stored units of the money will stay the same, but things get slightly more expensive each year, eroding the relative value of the money you store in your bank account.
As I am writing this, many countries in the world are experiencing inflation that is hitting 9-10%, and Turkey just hit 80% inflation, which means 80% of the value of the stored potential you have in your bank account will erode in a year from now — which is crazy.
But it happens, and it is a real concern for people who have saved money.
But, money is not the only store of value; almost anything can be a store of value. You can buy land or real estate and rent it out at a most obvious level, earning a regular income. This is not without its own set of problems, but it is generally a safe bet over the long term.
The interesting thing, and this is where the battery analogy stops working, is that the stored potential you put away can actually grow over time, something that does not happen in the power of a battery.
The higher the risk and the more inconvenience you have to access the ultimate fungible token, money, the higher the expected growth rate. But, you have to be careful that, and I am paraphrasing Nassim Taleb here, you are not picking up pennies in front of a train.
This means you need to be aware that you are not making small and apparently steady returns, all the while unaware of large potential risks that can wipe out your entire stored potential.
Of course, this is a general overview of how wealth works, and there are many more nuances and considerations to consider. But, I hope this has given you a better understanding of wealth and how it can be created.
And so, let’s move back our discussion toward what wealth is and how we can come to a definition that enables us to live the best life possible. I think it will for sure include the traditional measure of wealth.
So, all things being equal, you would rather have more money and the largest assets than less money and smaller assets. But, and this is a big but, things don’t stay equal as you gain more.
One has to consider the mental overhead of managing your money and assets and how it changes your relationships with your family, friends, and even acquaintances if your wealth becomes public knowledge.
There is a reason why most lottery winners go broke within 7 years, and it is not just because they didn’t have sound financial advice. It is also because their relationships changed, sometimes for the better but mostly for the worse.
People will start asking for money, treat you differently, or be envious of you, and all of these things can lead to problems. So, as the old saying goes, “money doesn’t buy happiness.”
But, it can buy security, which is a close second, and it can remove a lot of stress from your life if used wisely.
So I’ll end this set of initial thoughts with what I think could be the building blocks of a definition:
- Wealth (in the traditional sense)
- Location Independence
That last one may surprise you, but I think that a wealthy individual has a life full of meaning — otherwise, what’s the point of it all?