The Wealth Environment – Part II (The Knowledge for Wealth Creation)

This is the second article in a series entitled "The Wealth Environment". In the first article, we dealt with the fundamentals of wealth - what it is and what it is not. In the second article, we shall deal with the three types of wealth, their order of importance and how to create them. In our third and final article, we shall see examples of several ways to acquire enormous wealth both offline and online. Companies large and small are beginning to appreciate the value of intellectual capital in their employees and companies are investing huge amounts of cash in knowledge management. The reasons are quite clear. If you study the balance sheet of many companies today you will notice that only about 15% – 20% of the total assets held by the companies are actually tangible or fixed assets. The remaining 80% - 85% are either, intangible, liquid or near-liquid assets. This is especially more so with service-oriented companies such as software houses whose actual tangible assets comprise only about 10% of the balance sheet. In fact, since all tangible assets are usually rented e.g. computers, desks, carpets etc., the only assets held by some software companies are the software and the human capital who help to create the software, (e.g. software designers, software developers, computer programmers, system analysts, software engineers and administration staff).

The same appears to be the case with banks and other financial institutions such as insurance companies whose balance sheet comprises between 80% – 90% of intangible assets either in liquid or near-liquid form.

Perhaps you are wondering – What's the big deal about all this? The big deal is that accountants believe that you cannot generate an asset from nothing. You need resources to create assets. For example, if you want to create an asset worth $1 million dollars (e.g. a machine, a building etc.), you must employ (spend) a resource worth $1 million dollars (e.g. cash). If we follow this principle, it becomes easier to explain where the 15% – 20% tangible or fixed assets are coming from. So where are the 80% – 90% of the assets coming from? They are coming from the human beings who are using their brains to control the existing tangible assets and processes to create the assets. Therefore although human capital is the most valuable asset of any company, it's not usually reflected in the balance sheet when companies produce their annual financial statements.

Knowledge Management is a relatively new study that is quickly gaining momentum mainly due to extensive work done by pioneers of the subject such as Thomas A. Stewart, Ikujiro Nonaka, Hiroyuki Itami, Carl-Erik Sveiby, Yogesh Malhotra ( www.brint.com ), Karl M. Wiig ( www.krii.com) and others. As intense interest grows, extensive research is going towards the subject and several models have been proposed for measuring human capital but none of them have been agreed upon. In fact, some large insurance companies such as Skandia, are already recognizing human capital in their annual financial statements.

“Therefore physical or material wealth is derived from an image of wealth created by the human mind that has already been transformed through knowledge to create images of wealth”.

It is widely believed that knowledge is power. Really, this is incorrect. Knowledge is potential power. It only becomes powerful when it is applied. Knowledge is more important than wealth because most wealth is really perishable but knowledge is not – as long as you continue acquiring it or replacing it. Therefore knowledge to create wealth is itself wealth, which is at a higher level than common material wealth since this form of wealth is perishable and is derived from the knowledge to create it.

You need to realize that this is a fundamental universal principle. You cannot get a dog from a fish and you cannot get maize from sand but you can grow maize on soil to get maize. Therefore physical or material wealth is derived from an image of wealth created by the human mind that has already been transformed through knowledge to create images of wealth. The transformation is a process and is very important since the transformed mind is the one that creates the wealth environment and it's on this environment that physical or material wealth is created.

Where do you begin to transform your mind? I mentioned in my earlier articles that you need to change your attitude – the willingness to transform. Once this is done you need to start learning new ways – attending seminars, conferences, watching DVDs, listening to tapes and reading books about the subject you want to transform to (e.g. wealth creation etc.). Secondly you must be willing to replace old or obsolete knowledge with new knowledge and ideas. This you also do by the same process of learning – attending seminars, conferences, watching DVDs, listening to tapes and reading books. It's also important to associate yourself with like minded people and get away from others. This may not be easy as it means dropping some of your old friends and associates. You don't need to get away from your close relatives and friends but you can design a formula on how to live with them. Some will support you and some will be against you. But then you need to realize that life's a journey and the road you want to travel is mostly lonely and may not be popular with most people. You must understand that nothing comes without sacrifice. Therefore you must be willing to change the way you talk, what you read, what you hear, what you watch on TV, how you spend your spare time etc. and instead use the time to do something that would contribute to your long term goal.

“The shocking fact is that the difference between the rich and the poor is in the remaining 8 – 10 hours in a day and how we spend them!”

Did you realize that for all of us rich or poor there are 24 hours in day? Out of this, most of us spend about 8 hours a day going to work or conducting our business. According to physicians, the human body needs to rest for between 6 – 8 hours a day in order to maintain good health. This leaves a balance of between 8 to 10 hours unaccounted for. How do you spend these remaining hours – watching TV? Gossiping? Or perhaps whiling it away with your friends at the pub? The shocking fact is that the difference between the rich and the poor is in the remaining 8 – 10 hours in a day and how we spend them!

It's a known fact that our social lives are as important to us as anything else. But perhaps what you need to realize is that in order to be rich there are some sacrifices to be made. Did you realize, for example that when you were preparing for your college exams you had to cut yourself off of your friends, your relatives and your social life for a while otherwise you would not have passed your exams?

Many people think that in order to become rich there's a magic formula, a secret of some kind, or some luck that enables rich people to become rich. In fact nothing is further from the truth. The fact is that there's no rich person on earth who was born rich. They either acquired wealth or inherited it. And you need to realize that acquisition is much easier than inheritance because inheritance is governed by very strict rules, traditions and restrictions that you must maintain, sometimes for the rest of your life even after your predecessor has died. For example, your predecessor may have left a will that restricts you from marrying again, or visiting or seeing certain people, or traveling to certain countries, or from spending your wealth in inappropriate ways, otherwise you may lose your inheritance rights.

You see, the problem with inheritance wealth is that it is always left under the hands of a trustee or an executor, so you don't really have direct control of your wealth. In most cases, wills are written such that the trustee controls important aspects of inheritance even after the heir is past the age of 18 years. Therefore you are not always in direct control or free to spend or to invest your wealth the way you would like. In addition you are required to maintain a very strict code of conduct.

Finally, the taxman is not very kind to inherited wealth due to a preconceived idea by tax authorities that perhaps you don't deserve the wealth in the first place, so unless you are wearing the face of a public, educational, religious or charity institution, tax authorities are notorious for taking quite a generous chunk out of your inherited wealth.

Then there are accountants and lawyers who are not any kinder either. You see, there are many predators stalking on your inherited wealth. The moment somebody dies and leaves (or doesn't leave) a will, you will be shocked by the number of people, previously unknown, who will come out of nowhere to file suits in court claiming a part or all of your wealth. By the time you settle down, relax and can finally lay your hands on what's left of your inherited wealth, accountants and lawyers have deducted quite a huge chunk of the wealth for their professional fees, charges and commissions.

But perhaps the most important drawback is that inheritance is not for everybody even within the same household. So what happens to the rest of us?

The knowledge that people used to create wealth in the 1930s may not work today but the principles remain the same. It is these principles that I would want you to know.

Fig. 1 - The Wealth Pyramid

On the above diagram (Figure 1), material wealth is the lowest form of wealth followed by the knowledge to create wealth found in our human brain. Spiritual wealth is the highest form of wealth. Notice that the diagram takes the form of a pyramid. It is wider at the bottom and narrows as you go up. This indicates that material wealth although found in large quantities on earth, is of the least quality and is the least durable. Knowledge to create wealth is higher in quality and durability but is more rare to find than material wealth. Spiritual wealth is the highest form of wealth but is also the least in quantity.

The knowledge to create wealth is more important than the wealth itself because it is reusable and can be duplicated. This knowledge gives you the ability to create wealth but itself doesn't become wealth automatically, until you apply it. This is very important because it is this application that the rich have always used and kept secret for centuries.

The application of knowledge is actually a formula and can even be borrowed or copied from someone else, applied and converted into physical wealth. This is really the secret.

Many of you have been wondering whether the formula to create wealth or to become rich is some kind of mathematical formula. This is not the case – rather, it's a set of rules and principles that work for you regardless of your race, the color of your skin or your geographical location. In fact it's not even a secret since these are simply a set of rules and principles that anybody can follow to become very rich but they require some kind of discipline on your part.

Next Article: The Wealth Environment – Part III (10 Ways to Create Enormous Wealth)