Wealth Creation

“When you make a choice

 

you change the future”

Deepak Chopra

 

“For most Australians, income is the most important resource they have to meet their living costs. However, reserves of wealth can be drawn upon to maintain living standards in periods of a reduced income or substantial unexpected expenses. Considering income and wealth together helps to better understand the economic well-being or vulnerability of households.”

ABS 6523.0 – Household Income and Wealth, Australia

Wealth is defined as assets minus liabilities.

Assets may be real or financial.

Real assets are tangible, such as real estate, cars, jewellery, furniture, while financial assets are cash, shares or managed funds.

Liabilities are debts owed; examples would be a mortgage on a property, a credit card debt or a margin loan.

Wealth provides security and freedom to enjoy the lifestyle you desire.

It provides you with enhanced options.

Income and wealth in Australia are unevenly distributed. The fact that income is uneven is not necessarily a problem* to be solved; the ability to increase your income or wealth in return for hard work, risk-taking and investment are strong incentives that drive growth and development in the economy. (the motivating force of self-interest)

Approximately 60% of the total private wealth in Australia is held by only 20% of the population.

 

Most wealth in Australia is not inherited but created by individuals who not only worked for their money but put their money to work for them, many of them penniless migrants who came to Australia and saw an opportunity!

https://www.forbes.com/australia-billionaires/list

 

 

 

 

If you are fortunate enough to be able to divert some of your income to savings and to invest and increase your net wealth for the future, the opportunities exist in this country.

Once you have the capacity and knowledge to create wealth, the rule of law and government policy provide the framework and security to do so.

Australians are in an advantageous position when it comes to many dimensions of freedom, security and opportunity.

Global comparisons demonstrate the privileges we enjoy:

 

The opportunities exist,

whether you take advantage of them or not

is up to you!

 

 

The Importance of Investment

“Someone is sitting under a tree today because

 

someone planted a seed a long time ago.”

Warren Buffett

 

To increase the productive capacity of the economy and allow us more choices, requires that we refrain from consuming all resources now and invest for the future.

Resources- land, labour, capital and enterprise – are dedicated to future production. Turning iron ore into machinery rather than cars, educating the innovators of tomorrow, and incentivising the use of new technology, are some examples of ways as a nation we invest in the future.

Some decisions or allocation of budget resources may pay dividends quickly; others take time, such as grants to research facilities or revising the school curriculum to include coding in the kindergarten school curriculum!

The funds available to increase the productive capacity of the economy (via investment) primarily come from the pool of national savings contributed by both by the private sector (households) and the public sector (government) via the financial sector.

Remember, to have more options and less scarcity; we need to make the economic ‘pie’ grow or, shift the production possibility curve out to the right.

Likewise for us households!

Another way of thinking about the size of the economy is via the simple circular flow of income model that looks at injections into the economy vs the leakages.

Think of it as a large above ground swimming pool. The more water that is pumped in (injections), the higher the level of water in the pool and more people can get in and get wet. Spring a leak and the water level falls meaning some swimmers need to get out. (= unemployment)

Injections are consumption expenditure (C), investment expenditure (I), government expenditure (G) and the sale of exports (X).

Leakages are saving (S), tax (T) and imports (M)

If injections are > leakages, the economy will grow.

If leakages are > injections, the economy will contract.

 

 

Consumption is the most significant contributor to demand in the economy. Maintaining consistent consumption is vital to keep people employed.

Regulating the level of consumption in the economy is one of the primary responsibilities and targets of economic management. Variations in consumption, both increases (in times of prosperity and strong business and consumer confidence) and decreases when the opposite conditions prevail, has significant impacts on the level of income, output, and employment in the economy.

Via the multiplier effect, any change in consumption has a ripple effect throughout the economy.

For example,  the government implemented a stimulus package to support consumption and businesses in the wake of the exogenous shock to our economy that has necessitated social distancing to combat COVID-19.

One of the cash injections was in the form of three payments to Pensioners. Why? Because most pensioners are living on minimum incomes and so they are extremely likely to need to spend, rather than save the bonus payment.

Their marginal propensity to consume (MPC) is high.

The MPC is a measure of how likely a recipient of funds is to spend an extra (or marginal) dollar they receive.

If the MPC = 0.8 recipients will  spend 80 cents and save 20 cents

A $10 million injection into the economy, in this case, will result in a much more substantial $50 million stimulus to the economy.

Of course, this simple example assumes the recipients of their spending will have the same MPC. It may be higher or lower; nonetheless, the concept is evident. A carefully targeted injection into the economy will have a reasonably predictable compounded effect on consumption, income, and employment.

An understanding of the power of

the multiplier

is fundamental to understand the significance

of the housing market

 and why governments

provide incentives

to invest in bricks and mortar and are

very unlikely to ever remove those incentives

 

 

 

 

“Home Building Packs a Punch in Job Creation Stakes”

A new report from the  National Housing Finance and Investment Corporation reinforces the view that  “the residential construction sector punches well above its weight as an economic multiplier” and “understanding how residential construction activity may affect jobs and flow through to the broader economy is increasingly important… The Urban Developer June 19, 2020

 

 

But what if in times of uncertainty households save instead of spending?

All is not lost, nor is the stimulus ineffective.

They provide funds via financial institutions for firms to invest and increase their productive capacity. Provided you don’t stash your savings under the bed, (a leakage from the system) you are making it possible for firms to borrow and invest and build the capacity of the economy.

That constitutes a passive investment in the economy and our future collective welfare,

BUT

you can also do the same,

individually and proactively!

 

We can invest in our own and our family’s future by devoting some of our resources (time, income, assets, efforts and skill) to education and training to improve our earning capacity or saving to directly and deliberately invest in creating future wealth.