What is Paper Wealth?
Paper wealth refers to an individual’s or company’s wealth, measured by assets that are listed on paper. In other words, paper wealth is a speculated amount of wealth, determined as the money that could potentially be generated when the assets of an individual or company are sold.
Paper Wealth vs. “Real” or Actual Wealth
Paper wealth differs from “real” or actual wealth, which is the value of the physical assets that are at the disposal of an individual or company. The term is often used in discussions about finances – especially an individual or company’s finances – in line with broader discussions about finance and capitalism.
The term “paper wealth” is often considered a derogatory term, meaning wealth that exists only on paper, but isn’t physically present. It alludes to the more generalized definition or meaning of the term, specifically as it relates to accounting.
Paper wealth is commonly known as a financial asset, not a real asset. In other words, it typically relates to intangible assets, whereas real or actual wealth is based on tangible – or physical – assets.
The Smart Approach to Paper Wealth
Many individuals and corporations fall victim to the paper wealth trap. On paper, it looks as though the assets logged are worth a certain amount, but the real assets in hand don’t add up to the same amount.
Wealthy entities – individuals and companies alike – understand such traps and avoid them by buying assets that grow and create value over time and translates into real wealth. Individuals and businesses that get drawn into the paper wealth trap typically see their money tied up in liabilities – mortgages, deferred revenues, etc. – that aren’t generating real wealth.
The smart way to avoid the trap is to invest in income-producing assets, such as commercial real estate, apartment buildings with monthly rents being generated, and other assets that produce income. It can be particularly important for individuals who are in the later years of their life and approaching, or already in, retirement.
It can also be a good idea to consider investing in tangible assets – commodities such as gold and silver. Such investments often make it possible to build wealth and increase its power over time. Leaving investments in non-productive stocks and other liabilities only sets an individual up for their wealth to deteriorate.
Example of Paper Wealth
The bottom line is that paper wealth is unrealized, with no guarantee that it will ever be realized. For a simple example, consider that an individual’s been holding on to their prized baseball card collection for years, knowing that its value increases with time. If the baseball card collector gets the cards appraised and the value assigned is $10,000, it is paper wealth.
The appraisal value is backed by an asset – the baseball cards – but it is unrealized because no one’s actually given the individual $10,000 for the baseball cards. The true or realized value of the cards, as opposed to a mere appraisal value, is the actual amount that an individual can realize by selling the baseball cards.
Paper wealth is a simple idea with a somewhat complicated history in the financial world. In the simplest terms, paper wealth is value – which is generally backed by some type of asset – that’s been given but not realized, meaning it may differ substantially from the actual value, which is whatever amount is actually paid for the asset upon sale.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: