Wealth Appreciation vs. Wealth Generation: A Breakdown

Having wealth is a liberating feeling. It allows you to use your time the way you want without having to worry about how that bread will arrive on your table. Or the butter for that matter.

But wealth appreciation and wealth generation are two different schools of thought and understanding them will help bring more clarity to those who already have wealth, are trying to build wealth or are on their way.

Wealth Appreciation

This term largely refers to what you already have. Your property, agriculture land, farmhouse, stocks, gold, fixed deposits and the growth in these assets over time will constitute wealth appreciation. For example, if you had bought a property for Rs 5 lakh, 25 years back and it is now worth Rs 1.5 crore this is significant wealth appreciation but you did not have to do much to achieve this. The prices rose based on the location of this house, demand, economic activity in the country, real estate cycle and jump in circle rates. Similarly, for the other assets- the gold in your home or your locker would have gone to remarkable levels. Around 25 years back one kg of gold came for about Rs 4400, now it is worth Rs 4.2 lakh. The stocks, if chosen wisely, would have gone up in value, split and benefitted from bonus shares and dividends. Some may have fallen off the wayside and possibly cost you some loss of wealth too but nevertheless, hopefully, they would have meant your overall shares portfolio did well. The fixed deposits would have matured and given you good returns. The agricultural land would have produced fruits, wheat and vegetables and given you the chance to sell and make money on them in your local wholesale market. But in a sense, all of this would have been rather passive and based on market forces and also associated fluctuations. So the stock market, currently at record highs, may have made you witness multiple crashes in those 25 years including erosion in wealth during 2008 and the COVID crash of 2020 before recovering soon after. Still, this mode of wealth appreciation is largely focused on the preservation of capital and ensuring that there is not too much volatility.

Accidents

Wealth appreciation in a sense also reflects the wealth that is handed over to you by your parents but many argue that there is no guarantee the next generation will be able to maintain this wealth to the same levels. There could also be accidents on the way that could make things worse.

For example, you may have inherited a big bungalow from your grandparents but your income generation from, say your salary, may slip suddenly leading to complete financial chaos at home. This may force you to sell your property and move to a flat. This could be heartbreaking not just because it is the place you were born in perhaps and spent your childhood but also because the comfort is suddenly gone. You need to gear up and start working doubly hard to remain relevant thereafter. Some argue therefore that the only way to ensure generational wealth is to make sure that even though you have a lot you need to study well and be skilled enough for the era that you are living in.

Tweaks

Similarly, a business that has dealt only with a sector say, oil, for example, may need to rethink its relevance and the prospect of wealth depreciation if nothing is done quickly to restructure its business. Car engines are giving way to electric vehicles and the adoption of the latter could make the business of oil not as lucrative. This would therefore mean the businessman has to go into new areas – say artificial intelligence or mobile technology.

Financial Education

Experts say families should also train children in wealth and personal finance early on as schools typically do not impart such education and an engineering college may not offer any finance lessons after all.

Wealth Generation

Think of this as asking yourself: What next? The assumption here is that you already have wealth.

How to multiply this wealth and generate more wealth by starting a new venture, investing in higher income generation assets etc.

This by its very nature involves more active involvement because here your land parcels are not meant to just grow in value on their own but perhaps you need to build a warehouse on these parcels and lease it to a major online retailer and earn much more from it than it would if it was only growing by the circle rate. You can also create a mall on this land and get rentals from the shops created on it.

Risk

Wealth generation therefore focuses on creating new sources of income. But this also carries a higher risk. Assume you lease a parcel of land to a builder who plans to develop it but suddenly goes bankrupt and the matter goes to court. You have lost big time.

Or you have invested part of your wealth to start a new food kitchen that falters costing your invested capital to go down the drain. The risk is all the more higher in wealth generation.

Journey

Building wealth is therefore a journey, not a sprint. It requires dedication, discipline, and continuous learning. The idea of 'get rich quick' is often a mirage, leading to unrealistic expectations and potentially unethical schemes." The recent example of a person who became a millionaire in a TV quiz show and didn’t know what to do with it is a case in point. He lost most of his wealth by investing in bad assets and now is back to almost where he was before he won the quiz show prize money.

Conclusion:

It is never easy to create wealth but is equally difficult to maintain it. If you are an employee your income is directly linked to the value you contribute to your company and the only way you can create substantial wealth is if you get stocks that rise with the jump in the value of the company. If you are a businessman you have to keep thinking of creating wealth through new income sources and ensuring that the money works for your next generation too.