The concept of Wealth, Income and Assets
There are 4 factors of production namely
- Land
- Labor
- Capital
- Entrepreneur
Land gives you rental income. Labor is the human resource that you employ. Capital is the fund adequacy you maintain. Entrepreneur is the business acumen you have in coordinating the other 3 factors.
You need all four factors working together to create “True Wealth”, but most of us are just stuck with only 1 factor ~ Labor.
Most of us would be a big fan of Robert T. Koyosaki’s 4 quadrants — Employee, Self Employee, Business, and Investor. We are not getting into the details but the Income we earn could be active or passive depending on its nature.
When we earn money by doing work actively, it is called Labor. This income lasts as long as we are performing the work. Most people get it wrong when they say they are pretty rich when their CTC is very high. No matter how big your “Active Income” is, it is expendable. The moment you stop working — your income is gone.
Assets on the other hand give you passive income. For eg: if you have a Govt. of India Bond of 754GS2036, it means you are getting an annual interest payment of 7.54% till 2036. GOI will pay out the interest if you are alive or not, employed or unemployed.
There are other forms of assets as well. Real Estate (REITS), Stocks, Fixed Deposits etc. Some give Capital appreciation and some give Dividends.
Real Income = Labor + Assets.
You get the real income when you club your active income and passive income.
True Wealth is when the major portion of the “Real Income” comes via the passive route. It does not mean that you stop your work and retire, it just means the assets have grown & yielding benefits.
Most of them in their 20s and 30s may not get this concept as the “compounding” effect is still a theory for them. Talk to anyone in their 40s, 50s, and 60s on how their portfolio of stocks, mutual funds & bonds are performing. Their monthly “interest” income would be higher than their annual CTC.