Private Wealth & Family Office Association - Weekly
By Ayoob Rawat & Kabir Rawat
‘Wealth’ originates from old English ‘weal’, which means ‘wealth, welfare, and well-being. To a certain extent, the accumulation of net resources (net asset value) did not mean abundance which is better defined by the term ‘rich'.
In the book ‘An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith (1776) explains that wealth was mostly related to a community or a nation that had accumulated and was able to produce more resources than say a poor one.
Over time, individuals, the first entrepreneurs, started accumulating wealth for their own private accounts. The nature and mindset of these individuals were focused on the creation or acquisition of wealth, be it for the good of all or simply for their own. However, this also led to the accumulation of wealth well beyond their immediate and future needs.
At the dawn of human civilisation, the plantation of crops for food was much less life-threatening than competing with dangerous animals to hunt. This must have been planned as they would have had to continue hunting as crops do not grow overnight.
Therefore, wealth was mostly related to the food security of the human race. While it takes time to grow crops, once grown, the person, his family and the community could be fed on an ongoing basis if only he could protect them. This led to the basic common-sense principle of Financial Advice, ‘One reaps what one sows.’
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Even though farming requires care and patience, the returns could feed the farmer, his family and the community on an ongoing basis. This is significantly better than hunting an animal and being able to feed himself and maybe his family for only a few days at most.
Over the years, different designations have been used to describe individuals giving Financial Advice leading to Investment Advice followed by Wealth Management. The term ‘Wealth Management’ itself was institutionalised by major American banks in the ’30s during a process of client segmentation to provide selected services to high net worth clients.
➡️ WEALTH DEVELOPMENT OVER THE LAST 20 YEARS - CLICK HERE
The Wealth Game: Cashflow
Extracts from The Wealth Game – An Ordinary Person’s Companion - By Peter Alcaraz
How Does Cash Fit In?
🔴 The Problem
Many people mistake cash flow for wealth and confuse the two. They think that having cash makes them wealthy, and they behave accordingly.
The problem is that when they spend their cash, it is swapped for something else. If they buy an appreciator, wealth is preserved and should grow, but if they opt for a depreciator, the value will waste away over time, and for a consumable, value is lost immediately.
You might think it self-evident that spending choices affect wealth, but this simple truism is widely overlooked or forgotten, as you can see from consumer debt, which continues to balloon.
Plenty of ordinary people have a high net cash flow for a phase of their lives. They can live well, consuming and pleasing themselves without a financial care in the world. This cash may be a new experience, novel and exciting, and perhaps follows years of doing without.
They may treat being asset-light as a virtue and enjoy freedom from responsibility. This is no way to prosper in the wealth game. Pleasure, such as it may be, is sustained only by the cash fuelling it, and at some point, for the ordinary person, this cash flow will stop; the job or career will end.
Without the porridge pot of wealth, the only course is to downscale and live simply on whatever money can be eked out from earnings or state benefits. This may be exactly what the player always wanted and foresaw, but on the other hand, it may not. The point is they won’t have any choice in the matter.
At the same time, some people have wealth but struggle to manage, because they are short of cash. This situation is often mistakenly used to justify the superiority of cash relative to wealth.
🟢 The Way Forward
You should be clear as to the nature of cash flow. It is like the element of water, fluid and moving. It is the fuel for wealth creation since, without it, you cannot buy or develop assets. At the first sight of it, you should put as much of it to work as you can.
Second, it is a by-product of wealth, because assets, whether productive appreciators or productive depreciators, generate income, and all assets deliver cash on sale.
Cash flow is not wealth itself but a measure of solvency, and it is not the same as cash, the asset that can be exchanged for something else. It is measured over a period of time, rather than at a moment in time, like net worth.
A person’s net cash flow is £x over a week, £y over a month, and £z over a year. Measured weekly or monthly, it may dip into negative territory, as the timing of income receipts and payments vary, but over a period of time, it should be positive. A negative cash flow is unsustainable and, if uncorrected, leads to insolvency.
It follows that to succeed in the game, you need to keep a close grip on cash flow and take care not to trade wealth for a short-term lifestyle.
How do you plan to achieve financial freedom? Share your thoughts with us 😀
➡️ Where’s the Finish Line? - CLICK HERE
➡️ I can live the life I want without needing to work for money again. - CLICK HERE
🟢 Needs make up the liability side of the equation. They erode your net worth, so every pound reduction in your needs adds to your net worth. Think about this for a minute.
🟢 This article will disclose the 9 steps (or decisions) that we took to create a fiduciary multi-family office safeguarding assets of over $20 billion.
🟢 This is a measurement of your wealth at a point in time. You have a net worth right now, and the sooner you know it, the better. Whether positive or negative, large or small, solid or uncertain, it is your starting point.
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Thank you and stay safe.
Kind Regards,
PWFO Team
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