Software and Computer Engineering

The Two Kinds of Wealth

As an individual in the workforce, we exchange our time and effort for money. Money, then, can be exchanged for goods and services, and are product from other people's time and efforts.

Besides being an exchange medium for goods and service, money also serves as a store of wealth. We expect to be able to exchange the money we saved up for goods and services in the future. This applies especially to ourselves in our later years, when our ability to generate money with our own work is diminished.

The word that frightens anyone who is saving up money is inflation. Inflation is the phenomenon of the price of goods and services going up over time. This means that the purchasing power of money which is simply saved up tends to go down over time, which is particularly dreadful to pensioners who live on fixed-income (meaning that, while nominal value of their income is maintained, the goods and services they are able to buy diminishes each year.)

So, given this dual function of money, being both: 1) a medium of exchange to goods and services, and 2) a store of wealth, we can likewise distinguish two kinds of wealth.

The first kind of wealth is one's ability to generate income now. This is the wealth which flows into the household, and may be immediately converted into goods and services the individual is needing at this moment.

The second kind of wealth -- more commonly associated with being wealthy -- is the amount of money (or property which can be exchanged for money) that an individual has accumulated in his lifetime. This is the wealth which is in store, and may go up or down over time according to market appreciation or depreciation.

Note that while the first (flowing) the second (stored) kinds of wealth may be correlated -- meaning that someone with a larger income tends to be able to save up more --, the first does not necessarily implies in the second, and each one of those require dedicated consideration.

At the end of the day, the goal of building wealth is having the means to live comfortably and safely. A greater income is only worth it when the “take home pay” -- meaning the money after taxes and costs of living, such as groceries, rent and health expenses -- is greater than your current one.

Building (the second kind of) wealth means leveraging your ability to make and income (the first kind of wealth) to build the second, while maintaining a comfortable lifestyle in the now and for the future.