Being WEALTHY Is All In Your Mind!

Just read a great article – where all that money went from the financial meltdown that came from the NY times. It speaks of how in the past couple years, American households have lost 11 trillion dollars of WEALTH.

But then it says, WHAT IS WEALTH , what is being rich? The quote a Michael Reiter, Universitat Pompeu Fabra, Barcelona paper calling it:

“Wealth” is the present value of the expected stream of future utility [human happiness] that an “infinitely lived individual or a dynasty” [or a nation] could hope to extract from the real resources available now and in the indefinite future, assuming these real resources are allocated and managed now, and over time, so as to maximize that present value of future utilities (at the “proper” discount rate).

Two practical points can be extracted from this abstract definition.

First, economists think of wealth not just in monetary terms — as cash, stocks, bonds and real estate — but in terms of human well-being.

Second, and most importantly, the wealth a nation believes itself to possess is based strictly on the citizenry’s expectations about the future. It is in good part a figment of the citizens’ imagination.

Yea, I know, that is a bit deep for me too, but basically what we are saying is ITS ALL IN YOUR HEAD. Cash in the bank, the value of your house, the value of that PATENT on a super cool new invention. Wealth is the idea that over time, you will be able to pay for the things that you and your family need. But what if the US dollar crashes? What is the value of home continues to decrease. So the TRADITIONAL idea of RICH and WEALTH can dissipate very quickly.

Then the article talks about CASH FLOW, and how everyone thinks real estate is an easy bet, surefire way to make money in the longterm. But its all about RISK PREMIUMS – or risk vs. reward. When everyone is thinking the economy is great, people will have jobs to pay their rents, and rent prices will increase – real estate investors push prices of houses / buildings higher – EXPECTING that they will get a higher, and stable income / cashflow of rental income.

Well, as we have seen with the real estate market, its not that easy, and there has to be

1) someone ahead of you that will buy your house for more then you paid for it (minus the cost of borrowing the money, and the cost of the inflation of money)
2) someone will rent it from you, and pay the rent on time, and pay the rent that is higher then your costs of maintaining it.

Actually, I think the same thing is happening right now in the Chinese real estate market – THE PRICES HERE IN CHINA HAVE SKY-ROCKETED. And I keep hearing from more and more chinese businessman that they CANNOT LOSE, and that the prices will keep going up. And they do not want to waste money on paying rent to someone else….they want to earn the rent for themselves. These are all signs to me that a crash in the market is near.

Anyway, I don’t want this to be too technical, but my point is, WEALTH IS ALL IN YOUR MIND. Based on what YOU PREDICT the future to be. And if you say its not your prediction, then yes, maybe you’re right, its the HERD, the market’s prediction of the future. And you cannot for sure control a herd of mindless sheep, that get scared and run as soon as they hear something bad coming up ahead.

And of course i’m not saying SPEND ALL YOUR MONEY NOW, and don’t save. But I am thinking, and also tryin to get into that mindset, that richness is not really cash in the bank – but how you live your life, and living the life you want to live. Being able to secure that lifestyle, for the longterm, with some cushion in case you hit a speedbump along the way.

That, my friend, is what we should call wealth!