The Correct Concept of Financial Management#
The key to winning the wealth race lies not in the starting point, but in choosing the right track.
Investment Leads to Wealth#
The Chinatrust Financial Holding Co., one of the top five conglomerates in Taiwan, was led by Koo Chen-fu, chairman of the Koo’s Group, and Jeffrey Koo, chairman of Chinatrust Commercial Bank. The Koo’s Group encompassed seven major business segments: finance, manufacturing, construction, hotels, media, services, and overseas operations, with over 50 affiliated companies and total assets exceeding NT$460 billion. Many wondered how this uncle-nephew duo achieved both political and business success, and who was wealthier.
The Wealth Race Between Koo Chen-fu and Jeffrey Koo
Wealth often correlates with personality. Koo Chen-fu was a slow and steady type, while Jeffrey Koo was more of a go-getter. Due to their vastly different personalities, their investment approaches also differed significantly. Koo Chen-fu’s eldest son, Eugene Koo, the general manager of China Life Insurance in Taiwan, understood them well. He once said, “Money put in Koo Chen-fu’s pocket would never come out, but money put in Jeffrey Koo’s pocket would disappear.” This was because Jeffrey Koo continuously reinvested his money, leading to greater wealth accumulation than his uncle. Jeffrey Koo’s personal assets were spread across the US and Japan, invested in real estate, funds, hotels, golf courses, and banks. Koo Chen-fu, in his 80s, was quite conservative. Regarding his financial management philosophy, he said, “I neglect financial management and don’t want to worry about money.” His personal income was deposited in the bank by his secretary, and aside from necessary expenses, the rest was converted into fixed-term deposits.
Over the years, Koo Chen-fu naturally had more cash on hand, as his money remained in the bank. However, in terms of wealth creation, Jeffrey Koo far surpassed him. Despite a 17-year age difference, with proper investment, one could still come out ahead.
Investing $1,200 Monthly Can Make You a Billionaire in 40 Years
It’s not what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
The first concept to understand about investment is: Investment not only improves financial situations but also allows anyone to achieve wealth.
Let’s illustrate with a simple example:
Suppose a young person with no savings starts saving NT$14,000 annually for 40 years. If this money is invested in stocks or real estate with an average annual return of 20%, how much wealth will they accumulate after 40 years?
The author often asks this question in lectures. Most guesses range from NT$2 million to NT$8 million, with a maximum of NT$10 million. The correct answer, however, is a surprising NT$102.81 million! For a 25-year-old, saving NT$14,000 annually (equivalent to $1,200 monthly) for 40 years, with a total investment of NT$560,000, could result in becoming a billionaire by age 65, assuming a 20% annual return in stocks or real estate.
This figure is calculated using the future value of an annuity formula in finance and investment. The calculation is as follows:
(Units are in NT$10,000)
This formula illustrates how small amounts of money can grow significantly through investment. Understanding the formula isn’t crucial; most people who become billionaires through investment don’t know it, and knowing it doesn’t guarantee success.
Therefore, with youth, ambition, investment knowledge, and three key factors—saving NT$14,000 annually, investing in stocks or real estate, and patiently waiting for 40 years—anyone can achieve wealth through investment, regardless of their current economic situation. These three factors are attainable for everyone:
Saving NT$14,000 annually (NT$1,200 monthly) should be manageable for most. (If you can’t save this much, focus on saving before investing. This book may not be as helpful yet, as you need some capital to start investing.)
Historically, the long-term average return on stocks and real estate has been above 20%. Consistently investing in these assets and holding them long-term can yield a 20% average return. These investment tools are accessible to everyone. (Data shows that the Taiwan stock market has averaged around 20% annual returns over the past 20 years; studies show similar returns for Taiwan real estate over the past 40 years.)
40 years seems long, but it’s a timeframe most people have. Starting work between 20 and 25 and retiring at 65 provides a 40-year investment window. While some are born rich and others poor, most have a fair chance at accumulating wealth over 40 years.
This example shows that investment not only improves finances but also provides a path to wealth. With the right concepts and practices, anyone can achieve wealth through investment.
Smart Investing Can Shorten the Journey by 10 Years
While the initial example uses 40 years to demonstrate the power of investing, most readers are likely in a better position. They may already have savings and can save more than NT$14,000 annually, shortening their path to wealth.
The table below illustrates the wealth accumulation over 10-year intervals using the previous example (investing NT$14,000 annually with a 20% return):
If you have NT$360,000, congratulations! You’ve saved 10 years of effort. By continuing to invest in stocks or real estate, you could become a billionaire in 30 years. With NT$2.61 million, you’ve saved 20 years. With NT$16.55 million, you’re even closer, needing only 10 more years.
| Investment Years | Accumulated Amount (NT$10,000) | Amount Accumulated in the Last Decade (NT$10,000) |
|---|---|---|
| 10 | 36 | 36 |
| 20 | 261 | 225 |
| 30 | 1655 | 1394 |
| 40 | 10281 | 8626 |
Most readers likely have some savings, allowing them to achieve significant wealth in 20-30 years.
Investing Doesn’t Require Advanced Knowledge
The trouble with the world is not that people know too little, but that they know so many things that just aren’t so.
Many believe investing requires perfect timing and extensive financial knowledge. This isn’t entirely true. After years of studying investment, and witnessing ordinary people achieve wealth through it, I can confidently say that investment success doesn’t depend on academic qualifications, intelligence, technical skills, or predictive abilities. It depends on doing the right things. Successful investors aren’t necessarily highly educated or technically skilled; they can be ordinary people who understand fundamental principles.
By doing the right things, anyone can achieve wealth through investment, regardless of their background or effort. Investing doesn’t require genius or specialized knowledge; common sense and consistent action are key. Investors don’t need to rely on experts; with the right mindset, you can outperform them.
Investing isn’t about complex techniques; it’s about having the right mindset. Successful investors simply cultivate habits that most people find uncomfortable or difficult to maintain. Do you understand that investing can create wealth? If so, are you actively pursuing it?
From another perspective, investing can be challenging. The difficulty lies not in needing advanced knowledge, but in going against ingrained habits. This is difficult for most people.
This book presents seemingly simple investment concepts, but wealth is built through consistent, correct habits. Start your investment journey by building the right habits!
The amount of money you accumulate in your lifetime depends not on how much you earn, but on how you manage it.
Saving Alone Is Not Enough#
A Taiwanese proverb says, “People have two legs, money has four.” Money chases money faster than people chase money.
Traditional wisdom dictates that “the path to wealth lies in diligence and frugality.” This held true in times of economic stagnation, but in today’s rapidly changing economy, this mindset requires adjustment.
A century ago, before modern economics became widespread, during periods of economic stagnation and frequent wars, saving was indeed crucial for wealth accumulation. Today, however, with global economic growth and soaring stock and real estate prices, the focus should shift from saving to leveraging the power of compound interest for exponential growth.
How Did Lien Chan Become Wealthy?
With so many assets, it’s impossible to monitor everything closely. During the period of entrusted management, the principle was to hold existing investments and not trade stocks or dispose of real estate.
Lien Chan, with an estimated net worth of nearly NT$6 billion, was one of Taiwan’s wealthiest officials. His wealth wasn’t accumulated through decades of frugal living on a government salary or through earning a doctoral degree. It stemmed from his mother’s shift in investment strategy over 40 years prior.
Around 1951, Chang Pin-san, former chairman of Chang Hwa Bank, advised Lien Chan’s father, Lien Chen-tung, to invest in shares of the “Big Three” commercial banks. Following this advice, Lien Chan’s mother, Chao Lan-kun, invested her savings in hundreds of shares of Chang Hwa Bank, holding them long-term and letting their value appreciate naturally. This laid the foundation for the Lien family’s fortune. Chao Lan-kun had a keen financial mind. Unlike other women who participated in rotating savings and credit associations or simply deposited money in banks, she actively invested. She sold ancestral farmland in Miaoli and co-developed a property on Nanjing West Road with Huang Lie-huo, founder of Wei Chuan Foods Corporation, splitting the profits. This prime real estate became a significant source of wealth for the Lien family.
Stocks, real estate, and land were the Lien family’s wealth-generating tools. Over the years, Lien Chan accumulated holdings in 19 different stocks, including Chang Hwa Bank, Taipei Business Bank, Hua Nan Bank, and Cathay Life Insurance. His real estate holdings were located in prime areas like the Da’an, Shilin, and Zhongshan districts, including 11 plots of land and 26 properties.
Lien Chan once described his family’s investment approach as “Wu Wei Er Zhi” (doing nothing and achieving everything), meaning buying and holding long-term. By investing in stocks and real estate 40 years ago and patiently holding them, with minimal trading and benefiting from annual returns exceeding 20%, they amassed a fortune nearing NT$10 billion.
You might argue that the Lien family was already wealthy 40 years ago. This might be true, but the point is that while they were prominent, many families in Taiwan were wealthier back then. Today, very few families surpass the Liens in wealth. This is attributed to their early adoption of the correct investment strategy – focusing on stocks and real estate.
The Key to Wealth Lies in Financial Management, Not Just Saving
The ability to earn money is less important than having a mind for financial management, understanding how to make money work for you.
Chinese culture values diligence and frugality. Older generations often teach younger ones that the path to wealth lies in these principles and careful budgeting. The saying “Great wealth comes from heaven, small wealth from frugality” encourages thriftiness, as it’s seen as the key to wealth. This emphasis on saving is reflected in Taiwan’s high savings rate. However, I want to convey a crucial message: while saving is important, financial management is even more so.
In the previous example, how much of the NT$100+ million fortune came from diligence and frugality? The answer is NT$560,000, accumulated by saving NT$14,000 annually for 40 years. This represents only 0.5% of the total. The remaining 99.5% came from investment, specifically the power of compound interest at a 20% annual return over 40 years. Which is more important, saving or investing? Therefore, lifetime wealth accumulation depends not on how much you earn, but on how you manage your money.
If a worker realizes in old age that their wealth primarily comes from a lifetime of hard work and saving, it’s almost certain they won’t be very wealthy. The key to wealth through investment isn’t the ability to “earn and save,” but the ability to leverage the “compounding power of money.” For most, improving their financial situation requires focusing on investment, not just saving.
Consider this: saving NT$1 million annually without investing would take 100 years to reach NT$100 million. In contrast, investing NT$14,000 annually could make you a billionaire in 40 years. If Chao Lan-kun had only focused on saving and not investing, would the Lien family be as wealthy as they are today?
I’m not dismissing the importance of saving, but I want to emphasize that it shouldn’t overshadow investment. Investment plays a crucial role in wealth accumulation. For successful investors, wealth comes primarily from “making money work for you,” not from earning or saving. Therefore, in addition to being diligent and frugal, learn how to invest.
To improve your financial situation, remember: earning is important, but managing your money is more so. A correct investment mindset and wise investment choices have a greater impact on your future financial status than your current wealth or future income. For most, the first step towards improving their finances is not to increase saving, but to understand the correct investment concepts and take action.
1. For those who achieve wealth through investment, their fortune comes primarily from making money work for them, not from earning or saving.
2. Less than 1% of a NT$100 million fortune comes directly from earned income.
3. Investment is not a technique, but a mindset.
4. The key to financial management is having money to manage, not the amount of money.
Those who learn to invest are like having a money-printing machine.
How Investment Strategies Create the Wealth Gap#
A study indicates that in recent years, the public has perceived a serious wealth gap in Taiwan, with a trend towards wealth polarization. Over 47% of respondents believe that “speculation in stocks or real estate” is the main cause of this widening gap, followed by “personal work ability and effort” (14%) and “family background” (11%). This suggests a common belief that the wealth gap isn’t solely due to individual effort, but also to systemic issues, luck, and unequal opportunities.
Indeed, “stocks and real estate” are major contributors to the wealth gap, while “personal work ability and effort” and “family background” have less impact. People often attribute their poverty to external factors like systemic issues, luck, or lack of opportunity, or use negative terms like “speculation” to explain their lack of action. Wealthy individuals often accumulate their wealth through real estate or stock investments, not primarily through “speculation,” but through “holding appropriate investment assets.”
Looking ahead, the wealth gap will likely continue to widen. Some will benefit, while others will suffer, depending on their ability to navigate the changing landscape. External factors alone don’t determine our financial situation; our investment abilities play a crucial role.
1. Financial habits create the difference between the rich and the poor.
2. The prerequisite for building wealth through investment is allocating assets to high-return investments like stocks or real estate.
3. One way for the government to address the widening wealth gap is to educate the public about proper financial management.
Greater Investment, Greater Returns
“Thoughts change actions, actions change habits, habits change character, and character changes destiny.”
Imagine two classmates who join the same company after graduation, holding similar positions with the same salary. Both are equally frugal, saving NT$14,000 annually for investment. The difference lies in their approach: one keeps their savings in the bank, while the other invests in stocks. Both largely leave their money untouched after depositing or investing it.
After 40 years, the stock investor becomes a billionaire, while the bank saver becomes a “millionaire.” While a billion represents significant wealth, “millionaire” now evokes laughter, being synonymous with “homeless” in Taiwan’s expensive housing market.
The “millionaire” classmate, seeing their former colleague with the same starting conditions become a billionaire, might assume foul play or lottery winnings. How could their wealth differ so drastically, with one rich and the other struggling?
Those with less wealth often attribute the success of the wealthy to luck or illicit activities. A more positive view might be that they worked harder or were more frugal. However, they often overlook the critical factor: financial habits. The rich and poor manage their money differently: the rich hold assets like real estate and stocks, while the poor keep their money in the bank.
To become wealthy through investment, one must break free from conventional thinking. An adult who couldn’t ride a bicycle saw a child doing so and complained, “Only agile children can ride bikes.” The child responded, “Agility isn’t necessary,” and taught the adult to ride. The adult quickly learned but, upon parting ways, instinctively pushed the bicycle home instead of riding it. This illustrates the difficulty of breaking free from ingrained habits.
If financial management is the primary cause of the wealth gap, the solution lies in improving financial literacy and encouraging people to learn more about investing.
Focusing Solely on Saving is Outdated
If one adheres to the principles of investment, it’s hard not to become wealthy. If one doesn’t, it’s hard to become wealthy.
I often wonder why, after over 200 years since their ancestors arrived in Taiwan with nothing, most Taiwanese families aren’t significantly wealthy. Perhaps the problem lies in outdated family precepts that hinder wealth accumulation.
Family precepts are the guiding principles passed down through generations. Most families emphasize diligence, frugality, and academic excellence, believing these are the keys to success and wealth.
Many families diligently follow these precepts, raising children who are both frugal and well-educated. However, few families achieve significant wealth through these alone. These precepts focus on earning money, not on managing it. To build generational wealth, families need to update their guiding principles. While “diligence and frugality” and “academic excellence” remain valuable, add another: “Don’t keep money in the bank.”
Why retain “diligence and frugality”? While saving alone won’t lead to great wealth, it’s a virtue and a necessary foundation for investment.
Educating the Next Generation Requires a Balanced Approach
Why keep “academic excellence”? Studies show a weak correlation between education and wealth. Academic success doesn’t guarantee financial success. Based on this, I once stopped emphasizing academics with my children, resulting in declining grades. Their teacher, puzzled, asked, “You and your wife are both highly educated, why don’t your children share this trait?” I was ashamed.
I immediately reinstated the emphasis on academics. I realized it was partly for our own pride, but also because education can enhance social standing and job security. So, for both parents and children, academic pursuits remain important.
However, for future generations to prosper, add another precept: “Don’t keep money in the bank!” Encourage children to invest in assets like stocks and real estate, rather than leaving money in low-interest bank accounts. Otherwise, building significant wealth might take generations.
Every Lunar New Year, I buy stocks for my children instead of giving cash. My second-grader is already learning the importance of investing over saving. This concept should be ingrained early as part of family values, fostering a healthy financial mindset from a young age.
In conclusion, most family precepts are outdated. Building wealth for future generations requires new concepts and practices. By updating family values and changing how we accumulate wealth, families can achieve lasting prosperity.
1. Diligence, frugality, and academic excellence alone are not enough for building lasting wealth.
2. Teach children not to keep money in the bank, cultivating a proper investment mindset from a young age.
3. Leaving money to children might sustain them for a few years; teaching them how to manage it can provide for a lifetime and for generations to come.