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A lot of people misunderstand what wealth is. We tend to think of wealth only in terms of monetary units. A billionaire is defined as someone who has more than 1 billion units of his national currency in his bank. However, during a major recession, these units of currency mysteriously vanish. That is why classical economists never confuse money and wealth. Money is a measurement of a claim that can be placed on capital goods and services. Pricing your capital assets is usually done with money, but you could do it with other things as well. Older societies used gold and silver. Native American societies used chocolate beans.

Properly Measuring Capital

Capital is something that you use to create something else. An example of a capital good is a car or a factory. An example of a capital service is a bank account or a certification from an Ivy League school. If you want to understand your wealth, you have to understand how much capital you are currently holding. Many people make the mistake of heavily denominating their wealth in capital services. They put all of their earned income in the bank. The problem begins when a financial recession starts. The bank folds, or at a minimum, no longer makes it easy for you to access your claim on services that the bank can provide.

Properly Distributing Assets

It is important that wealth be distributed across multiple financial baskets. It is important to have a bank account, house, car, food, gold, land, permits, and people. If you prioritize one type of capital, it will likely let you down. Many people do not like the bother of managing their wealth properly, so they outsource that job to their creditor, which is often a bank. However, during an economic crash, the bank cares more for itself, and less for its debtors. That is why it is very important that assets be priced and valued properly. Many people like to overly focus on one type of asset. This is because it is easy. If they want to buy a new pair of shoes, they just rely on their credit card basket or their checking account basket to handle it. The danger is if the check bounces, or the credit card withdrawal is too high. Having more baskets such as cash can protect your finances from danger.

Conclusion

Proper capital asset pricing requires knowing what capital is. Money is not wealth. It is a claim on goods and services existing in the economy. Modern money brings with it the risk that the value of the government in the eyes of the public will suddenly be destroyed. Making sure that we diversify our portfolios can protect us from financial tragedy. A billionaire with a stack of 1 billion dollar bills is much poorer practically than a billionaire who has the right to rule a giant corporation, owns a fancy car, and has a flock of adoring admirers, with $200 million in the bank. Diversification of your portfolio creates wealth and lowers risk.