How would you like to be rich? In the previous tutorial, we learned about wages,
but the richest people in the world don’t simply save their wages to become wealthy,
they buy up assets. An asset is anything of value that can be converted into money.
Both individuals and businesses own assets with the expectation that they will provide
a future benefit. Let’s look at an example. Rosalina makes $100,000 a year in wages,
but decides she wants to invest some of it. She decides to purchase some stocks, corporate bonds,
and real estate. She does this because she knows that if she were to simply keep her
money sitting in a bank, it wouldn’t grow much. So what do we mean by “grow” in this context?
Money certainly doesn’t grow on trees, but it can grow through investment in assets.
An investment is the act of redirecting resources from being consumed today so that they may create
benefits in the future. In other words, it involves using assets to make money,
and one of the best ways to earn wealth is to accumulate as many valuable assets as you can.
In this tutorial, we are going to look at three types of assets:
financial assets, tangible assets, and intangible assets. A financial asset is a claim on the
property or income of a borrower. Common examples of financial assets include just plain old cash,
or cash equivalents, like a savings account, stocks, bonds, mutual funds, or retirement
accounts. A tangible asset, also known as a real asset, is one that can be physically touched.
So actually, cash also qualifies as a tangible asset, but additionally we are typically referring
to things like land, houses, cars, artwork, or collectibles. For a business, tangible assets
might include things like machinery or office supplies. Financial assets get their value from
contractual claims on underlying assets, and can therefore sometimes be considered tangible assets.
Finally, an intangible asset is any asset that is not physical in nature.
Examples of intangible assets include patents, trademarks, and copyrights, which all protect
ownership of ideas and inventions. For a business, an intangible asset might even be something as
abstract as brand recognition, which is not a physical object yet still has measurable value.
Now, some assets can be converted into cash more easily than others.
Economists call this liquidity. The more liquid an asset, the easier it is to turn into cash. Both
individuals and businesses have to deal with liquid and non-liquid markets. A
liquid market is established with lots of potential buyers. For example, stocks are
generally more liquid than real estate. This is because it’s easier to sell them. These days
you can sell shares of a stock in a matter of seconds on your phone, while it may take months
or even years before you’re able to sell land since there may be less demand in that market.
In a future tutorial, we will look more specifically at how people invest
in order to build wealth, but all we need to understand for the moment is that accumulating
assets is generally the only way to truly build up wealth, since it is wealth that grows without the
need for additional labor. This type of income, by the way, is called passive income. The money comes
in regardless of whether or not you go to work every day. In fact, with enough liquid assets,
it is possible that one no longer has to worry about working for wages in order
to survive. But enough daydreaming, let’s move forward and continue learning about economics.