Money, Income, and Wealth

Money is a payment that nearly everyone accepts, and a common yardstick for pricing, so a pair of shoes and an hour of plumbing can be compared at all.

It also holds nominal value for a while. Get paid on Friday and buy the furniture in March, that is money standing in for your effort until you decide to spend it. What that placeholder can buy later depends on the price level: the same number of coins buys less if prices have risen.

Income reaches a person through concrete arrangements. An employer pays a wage. A customer buys a product. A software company collects license fees. Shareholders receive dividends. To explain why anyone earns what they do, ask three things: who pays, on what terms, and how is the amount worked out?

Income is measured across a period. Net wealth is a snapshot taken at one moment: asset values added up, debts subtracted. Available cash is what is actually spendable today.

Follow one household through a month. On day one it holds 20,000 yuan in savings and nothing else, no property, no debts. During the month it receives 10,000 yuan of after-tax wages and spends 7,000 yuan on everything else. At month's end the balance is 23,000 yuan, which is also its net wealth because there are no other assets or debts. Income during the month was 10,000 yuan. The household saved 3,000 yuan.

Now suppose it borrows 10,000 yuan. The account reads 33,000 yuan, which feels like a windfall. But a new 10,000 yuan debt sits on the other side, so net wealth stays exactly where it started: 23,000 yuan. Borrowing moved cash forward and pushed a repayment obligation into the future. It reshaped the balance sheet; it did not change the bottom line.

Asset prices can also change net wealth. A rise in the value of an owned house or shares increases the balance-sheet total without adding cash to the account. Selling an asset turns its value into cash; rent and dividends provide separate cash receipts. Inheritances, gifts, and ordinary wear and tear on possessions shift net wealth as well. When accounting for a change, keep three causes separate: what was saved, what was revalued, and what changed hands for free or wore out.

A company's revenue has to cover delivery, payroll, winning new customers, and running the office. Revenue minus expenses is profit. Cash flow is a different record: money actually received and money actually paid. A sale recognized as revenue may remain unpaid, so the related cash has not yet arrived. Buying equipment creates an immediate cash outflow while its cost may be recognized over time through depreciation. Repaying loan principal reduces cash and debt rather than being recorded as an operating expense. That gap between booked profit and cash on hand trips companies up constantly.

A company can retain profits for operations and distribute a portion to shareholders as dividends. That dividend is what finally becomes a person's income, the same channel as wages and fees. How revenue gets divided among all the participants is covered in Who Creates Value, and Who Gets Paid, and how a business works out its results unit by unit in Unit contribution and the cost of getting a customer.

Big numbers need close reading too. In its 2015 annual report, Microsoft disclosed that the cash price of Mojang, the developer of Minecraft, was $2.5 billion, net of the cash the deal brought in. That figure measures one transaction, completed in 2014. Microsoft's annual revenue measures something else: how much was sold during a year. Before taking a large number at face value, ask what it bought and over which period.

Keep in mind that much worthwhile work never appears as income. Caring for family and maintaining shared resources can benefit others through unpaid household work or public provision, without a personal charge to the beneficiary. And the income that does get paid depends on the payer's willingness and ability to pay, on the alternatives available, and on how the arrangement was designed in the first place.

So explaining income means studying transactions and the institutions behind them. Explaining wealth means studying what got saved versus how assets moved and how things were transferred. Once you can see which of the three ledgers tells your real situation, you also know where to aim, whether pricing, contracts, costs, or the weekly budget needs fixing.

• Business payments and collections: Cash Cycles and Funding Growth.
• Living costs during an income adjustment: Income Concentration and Cash Reserves.
• Long-term returns on retained funds: Turning investment returns into actual gains.
• Assets funded by borrowing and payments falling due: Borrowing Costs and Leveraged Returns.

For the full route through income and wealth accumulation, see How money splits up, and how it becomes wealth.