36
Chapter 3
Money Does Not
Equal Wealth
T
he English language can play tricks on those who don’t spend the time to learn its nuances. Many people think that retirement ac-
counts and mutual funds are the same; cash and credit are the same; and money and wealth are the same.
Retirement accounts (a.k.a RRSPs
in Canada or 401(k)s in the US) and
mutual funds are not the same.
When I used to work in the investment industry, I would be absolutely stunned by the amount of people who could not differentiate between their RRSP retirement account and their mutual funds. For most people, their retirement accounts have only ever held mutual funds, only hold mutual funds today, and only will hold mutual funds in the future. For these people, the terms mutual fund and RRSP account might as well be the same. However, RRSPs and mutual funds are not the same at all.
Money Does Not Equal Wealth
37
If a shoebox were an RRSP
account, mutual funds would be
a pair of shoes inside the box.
An investor can put any pair of shoes they wish inside the box, and it’s still an RRSP account. If mutual funds are brown shoes, the brown shoes can be taken out of the box and replaced with a pair of black shoes, which could represent a privately held mortgage. Many savvy investors with RRSP accounts use their RRSPs to buy investment real estate instead of mutual funds.
Cash and credit are not the same.
Many Canadians have seen windfall equity gains on their homes in the last ten years. The rush of doubling or tripling the value of the family home has made many Canadians feel rich. Of course, when we feel rich, we start to act rich, and suddenly we are using our newly gained home equity to purchase vacations to Mexico, a new car, or renovate the kitchen. What many Canadians don’t realize is that equity spent on consumer goods like vacations, cars, or home improvements creates bad debt. Like all debt, home equity needs to be paid back with interest at some point. The equity in the home is not cash; it’s debt, but many people spend like they have won the lottery.
Shoes and Shoeboxes
money people deal
38
Although home equity is not cash, it can be treated like cash and be used to purchase cash-flowing investment property or to flip real estate for profit. The lines today between cash and credit are blurrier than ever. With credit being offered at record lows, cheap interest rates, cash, and credit in many ways have become the same. When interest rates go back up to their historic levels, cash and credit will look very different again.
Money and wealth are
not the same.
Money and wealth are two words that are easy to confuse. Most people use money and wealth interchangeably and say, My uncle has money or My uncle is wealthy. The meanings on the surface appear to be the same, but money and wealth are vastly different.
Wealth is measured in time;
money is measured in dollars.
The biggest distinction between wealth and money lies in the units of measurement. Wealth is measured in time, and money is measured in dollars. For example, if you are living paycheck to paycheck, you only have two weeks’ worth of wealth. If you stopped working, you could only survive for two weeks. If you owned a large real estate portfolio that provided you with more passive income than you need to live, then you can say that you are infinitely wealthy because you can survive forever without working again.
Why will a nest egg mentality
will leave you broke?
Money is much easier to understand than the intangible concept of wealth. Many people in the world have money but have zero wealth. One example I can think of is the traditional Canadian retiree. Traditional investment advisors preach that you need a “nest egg” for retirement. These advisors will say that the average Canadian needs one million, two
Money Does Not Equal Wealth
39
million, or three million dollars to live off of during retirement. The sad thing is that the investment advisor is planning for their client to sit on two million dollars of cash and slowly eat away at the nest egg. If the nest egg runs out, so does the ability to survive. Many investment advisors today are setting their clients up to have money in retirement, but absolutely no wealth. To me this is scary, because we cannot estimate what the cost of living will be in the future. What will the cost of living be five, ten, or fifteen years from now? I don’t have a crystal ball, but I know that it will be higher than today.
Will two million dollars
be enough?
I was recently reading a column in the Globe and Mail in which a traditional investment advisor offers weekly advice for a particular Canadian’s investment portfolio. The advisor was evaluating the portfolio of a fifty-five-year-old Toronto woman with a positive net worth of two million dollars. The advisor’s message to the woman was, “You cannot afford to retire.” Although this woman had two million dollars in assets, including her home, he advised that she continue to work, because two million dollars was no longer enough to retire in Toronto. The woman in the newspaper column is someone with money, but no wealth. In the 1970s, two million dollars was a lot of money; in today’s dollars two million dollars may not be enough to retire on.
We need wealth more than ever
before—and here’s why.
Most people wake up in the morning, have a shower, get dressed, and go to work to earn money. The problem is that most of us are not working to build wealth. Wealth is passive income that comes in every month whether we work or not. We need wealth more than ever before because the world is changing at a record pace. We no longer know what industries, businesses, and jobs will be relevant five years from now. In 2005 Myspace.com ruled the Internet and was sold for billions of dollars. By 2013, Myspace.com became a dinosaur with virtually no relevance on
money people deal
40
the Internet. We need to have a strong base of real estate wealth because, unlike high-tech companies like Myspace.com, real estate is a primitive, slow, and stable way to build real wealth.
Action Step: Evaluate your current financial situation. Do you have money, wealth, or neither? What resources do you have at your disposal to build wealth? Do you have an underutilized RRSP or 401(k) retirement account or home equity line of credit? How much monthly passive income do you need to achieve wealth and stop working?
41
Chapter 4
The Skills Required
to Play the Game.
Although Money, People, Deal is one of the most rewarding games in the world, it is certainly