There are two categories of money. Assets are a stock that (hopefully) grows over time. Income is a flow, it comes in – from various sources – and goes out in order to meet our various needs and wants. It is important to understand the difference between assets and income.

It is possible, but not wise, to survive entirely without assets. Money comes in, from wages or profit, and it is spent. Should the source of income disappear we are left at the mercy of our particular state welfare scheme, or charity.

The third source of income is from assets. That is money invested in order to generate more money. We shall shortly review the different kinds of investment, but for now let’s just note that in these days after the job-for-life era income from assets is the most assured form of income.

Consider two gentlemen. Let’s call them Mr A and Mr B. Both earn $50,000pa and need $45,000 to live with enough left over for a few luxuries. Mr A, however, enjoys more than a few luxuries. He spends his surplus $5,000 on eating out, attending concerts, upgrading his car every year etc etc. Mr B uses his surplus to build income-producing assets. Mr A’s assets remain at zero, while every year Mr B’s increase in both capital value and income produced. Initially, Mr B re-invests the income from his assets in further assets, thus making them grow exponentially.

After a few years Mr A still has no assets, whereas Mr B has acquired a substantial holding. Mr A still has to get up early to spend his days doing something he’d rather not be doing to make ends meet. Mr B has built his assets to the point where they produce more income than Mr A’s wages, and both income and capital continue to grow every year. You get the point.

In the long run investment in stocks produces a very healthy return – better than just about any other investment class – especially aided by the compounding effect of re-investment. And you don’t even have to pick stocks or monitor markets, just buy sensibly and hold. Consider the inspirational example of Anne Scheiber. In 1944 this 44-year IRS employee invested $5000 in blue chip stocks such as PepsiCo, Schering-Plough, and Chrysler, re-investing dividend income. When she passed away in 1995 her $5000 had grown to a massive $20 million.

The importance of building assets is described brilliantly in Robert Kiyosaki’s masterpiece Rich Dad, Poor Dad.