The Nature of Wealth - Wealth Building 101

$300,000 per year: annual income of the top 1% households in US;
$150,000 per year: income of the top 5%;
$41,000 per year : Median household income.

$5,000,000: net worth of the top 1% households in US; $2,000,000: net worth of the top 5%; $80,000: Median household wealth.

Average salary for a college graduate at entry into workforce: $42,000. After 5 years, average is $53,000-60,000, subsequently growing just ahead of inflation.

Sections

Welcome
Nature of Wealth
What is Net Worth?
Book Recommendation
From the Financial Glossary
Quote from the Wise

Welcome

What would it take to make you a high-income earner, someone in the $150,000+ range? How would you like becoming a true wealth builder and easily exceed $2 million in net worth in a reasonable time frame (10-15 years)? Even more importantly, what would you give to fully realize your potential and consequently lead a happy and contented life, knowing that you are fully leveraging your talent?

Welcome to the first issue of "C&W Journal", your personal guidebook dedicated to helping you build a high income career and a high net-worth life while fully realizing your potential, and achieving this with integrity, honesty and truth. It is our firm belief that using the timeless principles laid out in this guidebook, combined with your determination and efforts, you can go out and achieve all your dreams. It is our mission to arm you with two priceless qualities: an entrepreneurial spirit, which is the motive force behind the greatest success stories, and a sound character, that is the foundation for a happy and contended life.

What do we mean by a sound character? The Merriam-Webster dictionary (which you can find online at http://www.m-w.com) says:

Character: main or essential nature especially as strongly marked and serving to distinguish. Sound Character: moral excellence and firmness.

It is this moral excellence and firmness that we are after. For our purposes, moral excellence would imply: a) Honesty with oneself b) Trustworthiness in all relationships

Success has a unique way of finding people who are morally excellent, and who strive hard in their particular vocation.

All right, let us now define an entrepreneur. We like to use a broad definition, and say that any person who seeks out opportunities to create and implement new ideas, and manages an enterprise directed towards that goal, is a businessperson or entrepreneur. By this definition, the local storeowner who sells furniture, an executive at a multi-national company, an artist who is struggling independently to succeed, and a movie producer, are all entrepreneurs. Let us take this a step further by asserting that the spirit of an entrepreneur is not defined by his particular vocation, but by what moves him. He could be an employee of a large enterprise, with primary duties being quite narrow in scope, and yet could seek out opportunities for greater efficiencies, generate ideas for producing superior, relevant products, and use skills that help in the smooth running of the operations. And though the risk involved in running one's own business is much larger than when working in a large enterprise, the two people could share the same spirit. Good enterprises tend to seek out people who are moved by the entrepreneurial spirit and look for them to be the future leaders of the company (and we would recommend not working for firms that do not follow this practice!).

The good news is that this entrepreneurial spirit can be developed, and it will be our endeavor, through this guidebook and our website to light the fire of entrepreneurship in you, and help set you on the pathway to riches, regardless of your chosen profession.

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Nature of Wealth

Before you can learn about wealth building and develop skills to have a high-income career, you must understand the nature and source of this entity called wealth, which we often measure in dollars and cents.

The source of all wealth on earth is human effort.

Read that sentence again, and then again. Make it a part of you. Write it out on paper and stick it where you will read it everyday until it is a part of you. Let not any other definition of financial wealth ever enter your mind. You may go through classes of economics, read articles on globalization, study stocks and bonds, trade in commodities and do much else to understand and build wealth, but this truth will remain immutable.

This old fable illustrates this simply:

Romanov was worried. He had been walking for two days now, and his horse was showing signs of fatigue, loaded as she was with goods that Romanov had traded for at the marketplace in Damascus. It had been a good trip so far, and he hoped to sell the goods for a tidy profit once he got home. But that was at least another two days away. He worried for his horse, but he could ill afford any delays, for his provisions were limited. He looked at his horse again, and the horse looked back at Romanov, as if signaling to his master that she was too tired now and needed to rest. Romanov stopped, released the burden from the horse, and let her roam free. He sat down by the roadside, lost in thoughts about the remainder of his journey and how to complete it.
At some length of time, Romanov spotted a young boy, carrying what looked like a toolbox, walking briskly along the same path, rapidly approaching him. Romanov called out, "Please, Sir, I am a weary traveler, and need some help. My name is Romanov".
The young man, upon coming closer, replied, "Hello Mr. Romanov, my name is Fyodor. I am a student at the University here, but currently I am on my way to assist my uncle in his workshop. What is your problem? If I can, I will be happy to help you".
Romanov then related his story and told the boy about his tired horse, his goods and his eagerness to return home. Fyodor thought for a moment, looked at the horse, and told Romanov "Sir, I can help you, but it will cost you 10 gold coins! Can you afford to pay that sum?" "10 gold coins!" blurted Romanov, gasping at the steep price Fyodor was asking. "10 gold coins it will be, Sir, and I promise that you will be home in two days, with horse and goods intact. You will earn many times that sum with the goods that you will trade there", replied a confident Fyodor. Romanov had only 10 gold coins with him, but the desire to go home quickly and sell the goods was greater still, and he agreed to Fyodor's price.

Fyodor was happy at this deal since he had no money at all, an all too common situation for him! He immediately proceeded to a nearby forest, cut down some small trees, and using his tools, carefully crafted a cart with four wheels, and yoked the horse to it. He then loaded all the goods on the cart, and had the traveler sit on the cart as well. The horse, well rested by now and not having to carry the load directly, was able to pull the cart easily and Romanov could now complete his journey comfortably. Romanov was very pleased and gave 10 gold coins to young Fyodor and journeyed homeward.

Economic Lesson of This Story
Let us examine this simple story for its economic lesson. Note that before the transaction occurred between Fyodor and Romanov, the total wealth between the two was:

A horse (Romanov)
Goods (Romanov)
10 gold coins (Romanov)
Toolbox (Fyodor)

At the end of the transaction, the total wealth between the two became

A horse (Romanov)
Goods (Romanov)
10 gold coins (Fyodor)
Toolbox (Fyodor)
Cart! (Romanov)

The ownership of the 10 gold coins has changed hands, but the total wealth has increased by the addition of a cart!

The total wealth in the economy (in this case Romanov and Fyodor) has grown, and has grown in proportion to the human effort involved.

Read this story twice. We hope, after reading this, you will never say "It is just money!". If some volunteer was working hard to create a shelter for the poor, you surely would not say, "It is just a volunteer's effort"! But these two phrases are identical in their meaning, but we, as a society, have gone to great lengths to shroud the meaning of wealth and money. We will be talking more about the physical meaning of those dollar bills you carry (or would like to carry), in upcoming issues. However, it is important to understand this basic nature of wealth, and its source.

Recommendation

We touched upon transportation in the fable just narrated. Transportation is a huge industry in US covering cars, trucks, trains and planes, moving people and goods across the country and world. There is a stock index, called the Dow Jones Transportation Index. Look this index up (using Google or Yahoo!) and figure out all the companies that make up this index, and the type of businesses they are in. This will also be relevant in later issues when we talk about the Dow Theory for financial stock markets.

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What is Net Worth?

We talked about the net worth of the top 1% of US households in the opening section of this issue. But what is net worth?

Simply stated, it is the sum of all your liabilities subtracted from the sum of all your assets. The simplest way to look at this is to add up money in your bank accounts, cash in wallet, money in stocks and bonds and mutual funds, value of personal possessions such as a house, car and so on. Then add up any debts you have including credit card debt, student loans, home mortgage and so forth. The difference between the sum of your assets and sum of your liabilities is your net worth.

So if you have $100 in bank and $20 in your wallet, and a car worth $800: your assets are $920. And then if you have $200 in credit card debts and no other loans, your net asset would be $920 - $200 = $720. Frequently, you may have student loans of about $20,000, and your net worth would then be -$19,280. That is, you are under water. It is not uncommon for this to be the situation when you graduate from college and start a job. However, knowing that you are underwater should guard you against taking on more loans (like taking on debt for a new car right out of college, plunging you further under water!).

Even though in the calculations above a car has been included to calculate the assets, we believe it is better to exclude items such as cars and any other personal effects. Cars and similar items tend to be consumables, and lose their value rapidly over time, and it is better to not include them in your calculations of net worth to give you a better sense of where you stand. It is best to talk in terms of financial assets (checking account, saving account, cash, stocks/bonds etc.) and financial debt. The only other asset that should be included is any real estate (like house) that you may have. Applying this principle to the above example would make the total assets: $120 (money in bank + money in wallet), and the net worth - $20,080.

Recommendation

Calculate your net worth as given by the new definition, today. Record this at some place, and put a date and time on it. Repeat this exercise every 3 months. We will remind you to do that. Your goal is to improve your net worth every year, and if possible, every 3 months. Use a simple net worth calculator available here from this website.

Know Thyself
The most important thing you can do for your wealth building career is to know yourself intimately. Know your strengths and weaknesses, areas that need improvement and areas that you are an expert in. And there is a powerful method for doing this, and that is by creating your personal portfolio.

A personal portfolio is a listing of all the projects you have done in your lifetime, including hobbies, starting from as far back as you can faithfully remember.

Devote a separate page for each project and record the nature of the project, your role in it, and what you learnt from it.
Highlight any leadership roles.
List the toughest problems you faced and how you solved them.
Finally, list all the names of people involved in those projects. Record their contact information.

This type of portfolio begins to give you an idea of the road you have traveled, and makes your strengths and interests more obvious over time. Having the details of your projects available makes it a snap to create your resume, even tailored resumes directed at particular jobs. And the list of names starts building up your network of connections. The portfolio creation takes time to do the first time around, but is easier to update afterward if you spend one day per quarter on it. Allocate time for this process, and it does not have to be done in one sitting, especially the first time around. Guard your personal portfolio as a company guards its secrets.

Recommendation

Create your personal portfolio today! It will be your lifelong friend and its value is incalculable.

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Book Recommendation

"The Richest Man in Babylon" by George S. Clason. This book is a classic. Some of the principles emphasized in this book will also be emphasized in this guidebook, for they are timeless. We recommend reading this book annually, and will surely mention it again.

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From the Financial Glossary

Ad Valorem: According to Value, and refers to a way of assessing taxes based on value of the goods, as opposed to weight or volume.

Simplified Meaning: If you have a car, it will generally be taxed based on its value, that is, what will it sell for? And not on its weight or any other feature.

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Quote from the Wise

What we are today comes from our thoughts of yesterday, and our present thoughts build our life of tomorrow: Our life is the creation of our mind.

-- Buddha

At all times, we appreciate your feedback on improving this journal, any experiences you wish to share, or any disagreements you may have! Mail us at: shri_ajay@characterandwealth.com or post on the forums!