Wealth Building in the 21 st Century
Everyone would like to be wealthy. Those who are already wealthy, without exception, want to be wealthier. Wealth conveys the ability to buy more consumer goods, but much more important, the power and freedom to do what one wants. Great wealth allows one to hire, dismiss, promote and demote other humans and to open, shut and move businesses from one location to another. Those with great wealth can control the physical and human environment around them. Those without wealth have to adjust to their environment.
On the back of the dollar bill there is an unfinished pyramid with a brilliant glowing eye at the top. It was placed on the dollar bill by President Roosevelt in 1935, in the middle of the Great Depression, when America 's wealth was in sharp decline. The pyramid was meant to represent economic strength and durability. It is unfinished to symbolize the possibilities of ever increasing wealth. Thus in their darkest economic day, Americans were both invoking man's oldest symbols of durable success and praying to the gods for help. Behind the glittering eye, a symbol of divine guidance, is the unfinished top of the pyramid, which has yet to be built. Americans could see what had to be done to achieve success. They just had to muster the resolve to be builders. Today Thai people see a world very much like that seen by Americans in the 1930s. A boom has gone bust. Individual, corporate and social wealth has disappeared. The stock market is down by almost 80% after the 1997 crisis. What was just a short time ago seen as an unstoppable economic juggernaut that would dominate the twenty first century now looks like a permanent derailment. Asia's financial meltdown, which started in Thailand , threatens the foundations of success in every third world country. With old routes blocked, what is the right route to accumulate wealth? The old foundations of success are gone. For all of human history, the source of success has been the control of natural resources- land, gold, oil. Suddenly the answer is “knowledge”. The world's wealthiest man, Bill Gates, owns nothing tangible- no land, no gold, no oil, no factories, no armies for that matter. For the first time in human history the world's wealthiest man owns only knowledge. Knowledge is the new basis for wealth. This has never before been so true. In the past when capitalists talked about their wealth they were talking about their ownership of factories and natural resources. But now when capitalists talk about their wealth they will be talking about their control of knowledge. However, owning knowledge is a slippery concept. The human beings who possess knowledge can not be made into slaves. How one controls knowledge is in fact a central issue in a knowledge based economy. The current transformation is often misleadingly described as the information revolution or the information society. Speedier or cheaper information by itself is not of much value. Information is only one of many new inputs used to build a different economy populated with very different products and services. Fundamentally, how does one use “knowledge” to build a new wealth pyramid for an individual, for a company and for a society? These are the questions to be answered if success is to be found in a knowledge based economy.
Wealth is not the same as income. People with high income but spend it all are not getting any wealthier. Wealth is what one accumulates, not what one spends. Many people who display a high-consumption lifestyle have little or no investments, appreciable or income producing assets. In fact, it is seldom luck or inheritance or pure knowledge that enables people to amass fortunes. Wealth is more often the result of a lifestyle of hard work, perseverance, planning and, most important of all, self-discipline.
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• They live well below their means.
• They allocate their time, energy and money sufficiently, in ways conducive to building wealth.
• They believe that financial independence is more important than displaying high social status.
• Their parents did not provide much inheritance.
• Their adult children are economically self-sufficient.
• They are proficient in targeting market opportunities.
• They choose the right occupation.
One way to determine whether someone is wealthy or not is based on net worth, which is defined as the current value of one assets less liabilities. Whatever, your goals and strategies for the future, this will serve as a starting point. Try this simple exercise by filling in the details in the Net Worth Finder Table.
Assets
First, list the current value of any securities (stocks, bonds, mutual funds etc.) that you own, including those in retirement accounts such as provident funds and retirement mutual funds (RMF). Then include other assets of significant value such as real estate, private business, collectibles, insurance policies etc. But leave out typical depreciating assets such as cars, furniture or any possessions that you do not intend to sell. Once you have added up the value of your assets, you can see how your total compares with the assets of other people in your age group. (Due to lack of data for the Thai market, US numbers are used instead). In general, assets increase with age up to retirement, but depends on how much you spend and how astute you are as an investor.
Debt
In contrast to your inventory of assets, your inventory of debt should include the followings: mortgage, credit card balances, car installments, student loans, personal or bank loans and other debts that you can think of. It is important to pay down any high interest debt such as credit cards before making new investments. But most important of all one must keep a cash cushion of at least six months' living expenses for financial flexibility in emergencies and for peace of mind.
Net Worth
Your net worth is simply your assets minus your debt. It is the best single measure of wealth – or lack of it. This is something one should keep track of. A stagnant or declining net worth, unless in retirement, is often a sign of financial danger. The pie chart on the left offers a quick look at average US net worth by age group and percentile.
Another way of defining whether a person or household is wealthy is based on one's expected level of net worth. A person's income and age are strong determinants of how much that person should be worth. In other words, the higher one's income, the higher one's net worth is expected to be (assuming one is still working and not retired). Similarly, the longer one is generating income, the more likely one will accumulate more wealth. Therefore, higher income people who are older should have accumulated more wealth than lower income producers who are younger. A simple rule of thumb, however, is more than adequate in computing one's expected net worth:
Your age x realized pretax annual household income divided by 10.
For example, someone who is 40 years old and makes Baht 2 million a year should have a net worth of Baht 8 million. (40 x 2 million / 10). (Compare pie chart)
Foundation for Building Wealth
No one has ever become very rich by just saving their money. The rich see opportunities to work and invest in situations where large disequilibriums exist. This was as true for John D. Rockefeller as it is for Bill Gates. Disequilibrium means great threats as well as great opportunities. Disequilibrium situations usually depend upon radical changes in technology. As in the second industrial revolution a hundred years ago, the third industrial revolution is creating opportunities for great wealth to emerge. New technologies means change. Change means disequilibrium. Disequilibrium conditions create high-return, high-growth opportunities. However, disequilibrium conditions eventually disappear. New industries with high returns and high growth rates become old industries with much lower equilibrium returns and normal growth rates. As technology matures, profits get squeezed as competitors drive down prices faster than technology can drive down costs. Penetration rates for the new products reach saturation levels. Growth markets become replacement markets. But this process often takes several decades and in the meantime there are great fortunes to be made.
Invest Early, Invest Often and Invest for the long term.
In order to take advantage of the disequilibrium situations, one has to invest early, invest often and invest for the long term. At the outset, investing is an act of faith, a willingness to postpone present consumption and save for the future. By investing early, your money will be working for you instead of the other way round. The effects of compounding will ensure that your money will multiply much faster. By investing often, on a regular basis, the theory of Dollar Cost Averaging will help you to take advantage of market volatility. Finally, investing for the long term is central to the achievement of optimal returns by investors. However, for most of us, long term goals often conflict with short term concerns. We typically hope for growth but seek to avoid risk. While that perfect pairing will forever be elusive, but the roles of asset allocation and investment planning will find the route that comes as close as possible to the desired objectives. It is often said that risk and reward go hand in hand. Miss one and the other will pass you by.