Published on 08/24/2007

Few people really realize that it is not only the amount of assets that you own that determines whether you will be wealthy but also the type of assets that you own. In this article we look at the various definitions of assets, their characteristics and identify the type of assets that the poor, middle class and wealth own.

Does Wealth Come From Owning Assets? Page 1

The traditional definition of assets defines an asset as anything you own that has some monetary value. While this definition is correct and may seem logical, it is completely unhelpful when it comes to wealth creation. For example, the car sitting in your driveway or even the television sitting in your lounge room are assets under this definition. The wealthy are rich because they own lots of assets aren't they? But how are either of these "assets" helping you become wealthy. Well in short; they're not!

It is true that to be wealthy, you need to own lots of assets, but these assets must be of a certain type. In the world of wealth creation we need to define assets differently so that we can easily distinguish between assets that help you become wealthy like stocks or investment real estate and assets that don't help you at all, like the car and TV we just looked at. In terms of wealth creation we can define assets as either:

Good assets or bad assets

Good assets, when owned, put money in your bank account. They are things like stocks, bonds, mutual funds, commodities, investment real estate, futures, options, hedge funds, and so on. All these assets have the ability to put money in your pocket. These are commonly called investments.

Bad assets take money out of your bank account. They are things your car, house, clothes, TV, stereo, mobile phone, furniture, CDs, Xbox, boat, and so on. Bad assets take money out of your pocket in three main ways. They cost you money to buy, they usually cost you money to maintain and they have an opportunity cost, which represents the forgone opportunity and benefits that could've been earned or received from that opportunity.

The types of assets you own as well as the amount of you own largely determines which wealth class you're in. The problem is that people often don't distinguish between good and bad assets. The table below summaries the connection between asset type and wealth class:

	Bad Assets	Good Assets (Investments)
Poor	Little to none	None
Middle Class	Loads	Little to none
Wealthy	Minimal (compared to their wealth)	Loads

Does Wealth Come From Owning Assets? Page 2

We can break down good assets (investments) in three main categories. We know from the income article that you have three main potential income sources:

Active - your salary
Passive - real estate, royalties from patents, license agreements and owned businesses
Portfolio - paper investments such as stocks, bonds and mutual funds

These three income sources come from good assets and it's useful to categorize investments (good assets) by these same categories:

1.    Individual - employed and self-employed
2.    Passive investments
          a. real estate, royalties from patents, license agreements
          b. businesses
3.    Portfolio investments - paper investments such as stocks, bonds, mutual funds and insurance

The wealthy are wealthy because they own passive- and portfolio-type assets that produce passive and portfolio income. They don't have to rely on individual-type assets for income, which are limited because individuals can only work so many hours. Passive and portfolio assets aren't limited in this way. These assets will continually provide income whether their owner works or not and can be owned to a theoretically unlimited degree, which means that the income they produce is theoretically unlimited. The wealthy know this, which is why they concentrate their energies on acquiring as much passive- and portfolio-type assets as they can.

The poor don't realise this, which is why they earn an individual type income and concentrate on getting marginal increases in their salaries that are always limited. The table below summarizes your class by asset ownership. What does your income and asset profile look like?

	Individual (employed & self-employed)	Passive (real estate, royalties & licences)	Passive (Businesses)	Portfolio (stocks & bonds)
Poor	Minimal	No	No	No
Middle class	Yes	No	No	No
Wealthy	No	Yes	Yes	Yes