In “Why Money Is Time,” we talk about defining what exactly money is and how one should think about it. I pointed out that the key to wealth isn’t a big bank account, but rather a function of owning the right assets. However, just like money, defining an asset is not easy. Go ahead and try it – What is an asset?
Even Webster struggles, offering this – an asset is “something that is owned by a person or company”. Well what does that tell us? Not much. From an accounting standpoint, an asset is a use of cash. From a finance standpoint, in order to have value, an asset must have a purpose, like your car has a purpose. In other words, an asset is something purchased to perform a specific job, like getting to and from work.
If you own a pizza shop, a pizza oven, is an asset. Its job is to cook pizza. So, an asset is a use of cash (i.e. stored time), that is bought to do something specific. There are many different types of assets. Factories, stocks, bonds, and cars are all assets, but they all have these two things in common, use of cash and a function.
So just to recap:
- Cash = store of time
- Assets = use of cash that does something for you
This logic is obvious for anything you have in your everyday life, but it gets lost when people start thinking about wealth. The key to wealth is asset ownership. Assets with a specific purpose of producing income, or cash flow.
What keeps Bill Gates out of the poorhouse? It is his ownership of Microsoft stock. An asset that serves the purpose of growing in value, keeping Mr. Gates near the top of Forbes 100. The reason why most lottery winners go bankrupt is because they were not able to convert their winnings into an asset, dynamic enough to keep their checking account full.
It is important to realize that based on our definition, assets can come in many shapes and sizes, an education (getting you a great job), a pizza oven, or stock in a company. Think about your life, chances are you spent several years getting good at something (i.e. educated) for which you will/do get paid. You, then, are an asset. The asset that produces the income you live from.
So, with this in mind, let’s start thinking about what “retirement” is. Retirement is a transition between productive assets. You replace your work effort, with another asset, or group of assets, which will take up the job of providing you an income.
What should be clear from this is that time is working against you. As you get older, changing jobs gets harder, and mistakes get harder to recover from. In economics, this is called opportunity cost, as time goes by your opportunity cost increases. In other words, there is a cost to everything you do, even doing “nothing”, the time is permanently lost.
Meanwhile, how much thought do you put into this inevitable handoff between assets? If you are like most people, probably not enough. This disconnect is probably because it’s confusing, and seemingly difficult to decide what to do given the myriad of choices. But this difficulty doesn’t mitigate, that things are getting more expensive for you every second, so getting the right assets is critical.
Going back to “Why Money Is Time“, that’s what makes the stock market so interesting to people. It’s mysterious, all that potential stored time being traded every day. Each trade seemingly having the potential to allow you to reclaim your time. It gets people thinking and dreaming. But, how does one decide what the RIGHT assets are?
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