Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley in Kailua-Kona, 329-7979.
Everyone uses the terms income, savings, wealth and money, and they appear on a daily basis in all forms of media. But what do they exactly mean when used by economists and financial professionals?
Income is money received from employment, rentals or interest and dividends. Because it represents a flow, it is properly expressed per a given unit of time. For example, assume that 20 vacationers each pay the owner of a small hotel $100 per night for their rooms. If they incur no additional charges for meals, room service, etc., the owner’s income from the hotel for the duration of their stay would be $2,000 per night.
Savings simply represents that portion of after-tax income that is left unspent. It too represents a flow, expressed per given unit of time. Returning to our example, if the hotel owner is fortunate enough to earn an income of $2 million per year, out of which he is able to save 10 percent, his savings rate would amount to $200,000 per year.
Wealth, often referred to as financial wealth or net worth, is the value of all an individual’s financial assets, less all of his or her financial liabilities. Unlike income and savings, wealth does not represent a flow. Instead, it measures a specific value at a fixed moment in time.
Money, regardless of what it may or may not be the root of, is any financial asset that can be directly used to buy goods and services. It includes currency and deposits against which checks can be drawn.
It’s worth pointing out that money and wealth need not maintain a direct relationship. For example, our prosperous hotelier may have paid all his bills and still been able to save millions of dollars over the course of his business career. But, for reasons known only to him, he keeps no more than $1,000 in his personal checking account. Thus, although certainly wealthy, it would not be technically correct to say “he has a lot of money.”
This article is published for general informational purposes only and is not an offer or solicitation to sell or buy any securities or commodities.
Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley in Kailua-Kona, 329-7979.