Investment Iron Law I: Don’t Keep Your Money in the Bank#
The vast majority of people who fail at financial management don’t do so because they don’t earn enough, but because they put their assets in the wrong place. Have you ever heard of anyone getting rich from bank savings?
Saving Equals Wasting Resources#
There’s a parable in the Bible about financial stewardship. A landowner entrusted his property to three servants. He gave the first servant five units of money, the second two, and the third one. He told them to cherish and manage their wealth wisely, and he would return in a year to see how they had fared.
Wasting Time and Money
The first servant invested his money; the second bought raw materials and produced goods to sell; the third, for safety, buried his money under a tree. A year later, the landowner returned. The first two servants had doubled their wealth, pleasing the landowner. Only the third servant’s money remained unchanged. He explained, “Fearing loss through mismanagement, I kept the money safe. Today, I return it untouched.”
The landowner was furious. “You lazy servant!” he scolded. “You didn’t even try to utilize your wealth!” Wealth not utilized is wasted money and wasted potential. The third servant was rebuked not for misusing the money, nor for losing it through failed investments, but for keeping it “safe” and unproductive.
Keeping money in the bank is the most common approach to personal finance today, and also the biggest mistake people make. Therefore, the first and most important financial rule this book offers is: Don’t keep your money in the bank. “Bank” here refers to post offices, commercial banks, and any other financial institution where money can be deposited.
Many believe that earning interest in a bank, benefiting from compound interest, constitutes sound financial planning. In reality, with inflation, the real rate of return is close to zero, meaning no real financial gain. Therefore, leaving money in the bank is equivalent to no financial management at all.
It’s impossible to predict how much wealth each person will accumulate through financial management. The only certainty is that getting rich solely through bank savings is incredibly difficult. Ask yourself, “Have you ever heard of anyone getting rich purely from bank deposits?” Those who keep all their savings in the bank often find themselves not only failing to become wealthy in their old age but also struggling to maintain financial independence. Such stories are common. Those who choose bank deposits as their primary financial management method do so primarily for safety. However, readers must understand: “Money in the bank is safest in the short term, but the most dangerous form of financial management in the long term.”
Blind Spots in Personal Finance
Most people manage their finances by keeping their money in the bank, so most people are not wealthy.
If accumulating immense wealth were as easy as the examples suggest, then most people over 65 today would be millionaires. However, this is far from reality. Millionaires over 65 are few and far between, with many senior citizens facing financial hardship, relying on continued work or support from their children to make ends meet.
Surveys on the elderly in Taiwan reveal increasingly serious financial challenges for senior citizens. Among approximately 1.48 million people aged 65 and above, about 13% rely on financial assistance from family and friends or social welfare. This demonstrates a serious problem with most people’s financial concepts and investment methods. How else could they reach old age not only without wealth but without even basic financial independence?
Taiwan’s savings rate has historically been above 30%, currently hovering between 20% and 30%, consistently ranking among the highest globally. This indicates excellent performance in saving and budgeting. Consequently, we can deduce that flawed financial management is the primary reason for the lack of financial independence among ordinary people. To understand where they go wrong, we must first observe how they handle their assets. In various lectures, I often ask the audience, “How are your assets stored?” The majority answer: “In the bank.”
Prioritizing Security over Investment
Surveys on Taiwanese household investment preferences reveal that the top three investment choices are demand deposits (72%), rotating savings and credit associations (53%), and time deposits (36%). Clearly, most people lean towards traditional financial methods. Furthermore, when asked, “If you had 10 million Taiwan dollars in savings, how would you use it?”, about 41% of surveyed households said they would deposit it in a financial institution to earn interest. This illustrates the widespread preference for bank savings.
Indeed, people have high savings rates and a strong preference for depositing money in financial institutions to earn interest. In early 1996, total deposits in Taiwanese financial institutions reached 12.6 trillion Taiwan dollars. With a population of 21 million, this translates to an average deposit of 600,000 Taiwan dollars per person, regardless of age. For an average family of four, this amounts to 2.4 million Taiwan dollars. This demonstrates a strong inclination towards bank savings. However, this traditional and conservative approach is the primary reason why most people fail to achieve wealth through investment.
This phenomenon reveals an over-reliance on traditional bank deposits for financial management. People prioritize safety and convenience over the rate of return. However, focusing solely on earning and saving money, then depositing it in a bank, is often the first step towards financial mismanagement.
Keeping money in the bank is like having no financial plan at all.
Deposit Interest Rates Lack True Compound Interest Benefits#
What’s wrong with bank deposits? The problem lies in the low interest rates (return on investment), making them unsuitable for long-term investment tools.
How much interest can bank deposits earn? The salaries of average office workers are usually directly deposited into demand deposit accounts (current interest rates around 2%-4%). A portion serves as temporary funds or covers daily expenses, while the remainder is transferred to time deposits (current interest rates around 5%-8%) for investment purposes. Thus, the average interest rate earned on bank deposits is about 5%.
5% Interest is Hardly a Path to Wealth
Most people have a basic understanding of compound interest, believing that interest earned on bank deposits, accumulating over time, can create substantial wealth. This misconception arises from a superficial understanding of compounding. The vast differences in final returns resulting from different rates of return on the same principal over the same period often come as a surprise.
Let’s illustrate with an example. Suppose someone saves 14,000 Taiwan dollars annually at the end of each year for 40 years, depositing everything into a bank account with an average interest rate of 5%. How much will they accumulate after 40 years? Before answering, recall the similar example from the previous section, but with the money in a bank instead of invested in stocks or real estate with an average annual return of 20%.
You might guess 25 million, 10 million, or even a conservative 5 million Taiwan dollars. The correct answer, however, is only 1.69 million. This can be calculated using the future value of an annuity formula:
Let’s compare this with the 20% return scenario. The only difference between the two formulas is the rate of return (5% vs. 20%). A 20% return over 40 years yields 102.81 million Taiwan dollars, while a 5% return over the same period yields only 1.69 million, less than a fraction of the former. The difference is over 60 times! This illustrates the power of compound interest. Many assume they benefit from compound interest in a bank, but at a 5% return, even with compounding over a long period, the wealth creation effect is very limited.
This example demonstrates that one of the keys to successful financial management is the rate of return. The key is not just whether your assets are invested, but where they are invested and what the rate of return is.
- The key to financial management lies in how your assets are allocated. The rate of return has a decisive impact on your future wealth.
- While bank savings provide interest income and the benefit of compounding, you’ll find that as you age, bank deposits contribute little to overall wealth growth.
- The first step towards building wealth through investment is to allocate assets to investments with high long-term rates of return.
- “Financial Management” is a significant factor contributing to wealth disparity in society.
Inflation makes money worth less and less.
The Invisible Killer of Currency Value: Inflation#
Forty years ago, a millionaire was truly wealthy. Today, a millionaire might struggle to afford a house. Why? Inflation. Every investor must consider the impact of inflation.
Inflation reduces the purchasing power of money and lowers the real rate of return, diminishing the effect of wealth accumulation.
Over the past 30 years, the average annual inflation rate in Taiwan has been around 5%. What about the future? Inflation and economic growth are closely linked. As Taiwan’s economy continues to grow, inflation is expected to remain around 5% annually.
Inflation means continuously rising prices, which translates to decreasing purchasing power. If you keep your money in a demand deposit account earning 4% interest with a 5% inflation rate, what happens? Your purchasing power decreases. The longer your money sits in a savings account, the less it’s worth. What used to cost 10 Taiwan dollars for a newspaper now costs 15. Your 10 dollars can now only buy two-thirds of a newspaper. With inflation, money in the bank shrinks like wool submerged in water.
Saving Alone Won’t Make You Rich, Not Even in Two Lifetimes
With 5% inflation and a nominal interest rate of around 5% on bank deposits, your real rate of return is zero. In this scenario, the effect of compound interest is nullified. Wealth accumulation relies solely on painstaking saving. Imagine someone saves 500,000 Taiwan dollars a year. How long would it take to become a billionaire? 200 years!
Saving 500,000 Taiwan dollars a year is difficult; living for 200 years is even harder! Therefore, even with diligent saving and budgeting, if all the money is kept in the bank, this person won’t become wealthy in this lifetime, and worse, not even in the next! The average lifespan is around 75 years, meaning two lifetimes total only 150 years. It would take a third lifetime for someone relying solely on bank savings to potentially reach billionaire status. If a family maintains the financial strategy of “frugality and bank savings,” it would take at least 200 years, or about seven generations, for them to potentially become wealthy. Conversely, with proper financial management, wealth can be achieved in 40 years (half a lifetime).
Money in the Bank Should Be Spent Sooner Rather Than Later
I remember 30 years ago, when I was in second or third grade, a popsicle cost 20 cents, and a red bean ice cream cost 50 cents. My parents gave me 50 cents each day for allowance, which I invariably spent on red bean ice cream after school. My parents constantly encouraged me to save, so my father opened a bank account for me. If I had been obedient and developed good saving habits from a young age, saving those 50 cents daily and earning 8% interest, it would have grown tenfold over 30 years, to 5 Taiwan dollars. However, a red bean ice cream now costs 15 Taiwan dollars. Those 5 dollars can only buy one-third of a red bean ice cream. More importantly, for a小学生 30 years ago, a red bean ice cream was precious. Even a dozen red bean ice creams today couldn’t compare to the value of one back then. Had I followed my parents’ financial advice and kept my money in the bank, I would regret it now.
Therefore, if you’re going to keep money in the bank, my sincere advice is: “Spend it sooner rather than later!” This might sound shocking, but there’s logic to it. From an economic perspective, money has more value and higher utility when used sooner. We save money in the bank, delaying gratification for the sake of greater enjoyment in the future. However, with inflation, money left in the bank often leads to less enjoyment.
The Value of Money Decreases with Age
My wife and her friends developed a financial philosophy: “Money is most valuable when spent while young.” This makes economic sense. Their reasoning: “When you’re old, delicacies might harm your health, traveling becomes difficult, and most importantly, wearing beautiful clothes attracts unwanted attention and ridicule.”
Thus, everyone managing their finances must be mindful of the dual pressures of inflation and the diminishing value of money with age. Bank deposit interest rates cannot compensate for these losses. In other words, money in the bank, while nominally increasing, actually decreases in value.
Of course, I’m not encouraging you to spend all your savings immediately. Rather, I’m highlighting that if you keep money in the bank, you must consider the declining purchasing power due to inflation and the reduced economic benefit as you age. The fundamental solution is to withdraw your money from the bank and invest it in instruments with higher returns than bank deposit rates. Therefore, the best way to combat inflation is: Don’t keep your money in the bank. Invest in long-term, high-return assets like stocks and real estate.
Because inflation decreases real returns and hinders wealth accumulation, even saving 14,000 Taiwan dollars annually and investing in stocks or real estate for 40 years to become a billionaire won’t carry the same weight as being a billionaire today. Therefore, under inflation, consider using the real rate of return. If the return on investment is 20% and inflation is 5%, the real return is 15%. So how much should you save annually, investing in stocks or real estate with a nominal return of around 20% (real return of 15%), to become a billionaire in 40 years? The answer is 57,000 Taiwan dollars per year.
A small step today makes a world of difference tomorrow.
The Path to Wealth of Chang Pin-san, Former Chairman of Chang Hwa Bank#
Chang Po-hsin, the current standing director of Chang Hwa Bank, with assets exceeding tens of billions, inherited and expanded upon the fortune of his father, Chang Pin-san, the former chairman of Chang Hwa Bank, earning him a place among Taiwan’s wealthiest individuals.
Trading Bank Deposits for Stock Dividends
Forty years ago, both Chang Pin-san and my father were from Nantun District, Taichung City. They were not only fellow townsmen but also colleagues. Back then, Chang Pin-san was just a junior manager at Chang Hwa Bank, without much wealth. However, he borrowed money to buy Chang Hwa Bank shares from colleagues who wanted to sell them. At the time, stock dividends were far lower than bank interest. Despite this, Chang Pin-san persisted in borrowing money to acquire shares, holding onto them for the long term. Other colleagues deposited the proceeds from their stock sales into banks. Years later, Chang Pin-san, owning the most shares, became the largest shareholder and eventually the chairman of Chang Hwa Bank, laying the foundation for his immense wealth.
Chang Pin-san was also friends with Lien Chen-tung, father of Lien Chan, and encouraged him to buy Chang Hwa Bank shares. The Lien family’s fortune also originated from those hundreds of Chang Hwa Bank shares.
It’s hard to believe that the path to wealth could be so simple: borrow money to buy a few Chang Hwa Bank shares, invest in some real estate, hold them long-term, and essentially forget about them. Decades later, great wealth is attained. Those who sold their shares and deposited the money in banks are still wondering how others became rich. Some might attribute this to luck, but financial management is not about luck. It’s about the method chosen and the investment tools selected. Therefore, if you don’t want to be poor, don’t keep your money in the bank.
Bank Savings Shouldn’t Exceed Living Expenses
Someone once jokingly asked me, “You’re telling us not to keep money in the bank. Are we supposed to pay with stocks or real estate certificates at the supermarket or restaurant?” Of course not! Advising against keeping money in the bank doesn’t mean you can’t have any money in the bank at all. Bank deposits offer advantages: security and convenience. They are ideal for storing funds needed for daily expenses. However, you can’t have your cake and eat it too. Convenience comes at the cost of high returns.
The wise approach is to clearly divide funds into two categories: daily expenses and investments. Keep enough for daily needs in the bank, enjoying the security and convenience it offers. Invest the rest in higher-return assets like stocks and real estate.
In my opinion, keeping the equivalent of two months’ living expenses in the bank is sufficient for an individual or family. Most individuals and families receive regular income, which is deposited into their bank accounts. Therefore, one month’s expenses for immediate use and another month’s worth as a safety net should be ample. The remaining funds should be invested in higher-return assets like stocks and real estate. In other words, if your monthly expenses average 50,000 Taiwan dollars, and your bank balance consistently exceeds 100,000, you are not managing your finances effectively. Actively seek suitable investment opportunities to make your surplus funds work for you.
The “Two Big, One Small” Approach to Flexible Fund Management
Some believe in maintaining substantial emergency funds. However, even if unforeseen circumstances drain your bank savings, there’s no need to panic. The high-return investments mentioned earlier—stocks and real estate—are not as illiquid as some might think. Listed stocks in Taiwan’s active stock market can be sold almost any day of the year (excluding holidays), providing quick access to cash within a few days. Reluctant to sell? Stocks can also be used as collateral for loans.
Real estate is less liquid than stocks, but many Taiwanese banks now offer “revolving mortgage loans,” allowing property owners to convert fixed assets into liquid assets. These loans involve mortgaging a property to secure a credit line of up to 70%-75% of the property’s value. Borrowers can draw and repay funds as needed, with interest accruing only on the outstanding balance. For example, a 10 million Taiwan dollar property could secure a 7.5 million credit line. Borrowing 5 million leaves 2.5 million available without interest charges, with interest accruing only on the 5 million borrowed. Any surplus funds can be used to repay the loan, reducing interest costs.
Many financial experts recommend a “three-part” approach, dividing assets equally among bank savings, real estate, and more speculative investments. I propose a “two big, one small” approach: allocate most of your assets to stocks and real estate, keeping a small portion in a bank for daily expenses. This isn’t my invention. In fact, this is the portfolio strategy employed by many who have achieved wealth through investments.
- Keeping money in the bank is the riskiest form of financial management. Inflation erodes returns, leaving real interest rates near zero.
- Banks offer convenience, not high returns.
- Keep only two months’ worth of living expenses in the bank.
- Trying to get rich with money in the bank is like trying to win a baseball game without swinging the bat.
If all this hasn’t convinced you to reconsider keeping most of your money in a financial institution, perhaps the story of the Nobel Prize Foundation’s success might change your mind.
Change your asset management perspective, change your financial destiny.
Lessons from the Nobel Prize Foundation#
Every October, the Nobel Committee announces the Nobel laureates. The Nobel Prize attracts global attention not only for representing the highest academic honor but also because each laureate receives a substantial prize of 1 million US dollars.
The Folly of Depleting Capital
The Nobel Foundation awards several prizes annually, disbursing millions of dollars. This raises the question: How large is the Nobel fund to sustain such substantial payouts? The Nobel Foundation’s success, besides the substantial initial donation by Alfred Nobel over a century ago, is largely attributed to its shrewd financial management.
Established in 1896 with a 9.8 million US dollar donation from Nobel, the foundation’s purpose is to fund the prizes. Flawless fund management was paramount. Initially, its charter stipulated that investments be restricted to safe, fixed-income instruments like bank deposits and government bonds, explicitly excluding stocks and real estate to avoid market risks.
This capital preservation approach, prioritizing safety over returns, seemed prudent, preventing losses. However, sacrificing returns had consequences. After 50 years of prize payouts and operating expenses, low returns depleted two-thirds of the Nobel fund, leaving only a little over 3 million US dollars by 1953.
From 3 Million to 270 Million: The Secret
Facing depletion, the Nobel Foundation’s board recognized the importance of investment returns. In 1953, they made a groundbreaking change, amending the charter to shift from bank deposits and bonds to primarily stocks and real estate. This shift in investment philosophy transformed the foundation’s fate. Over the next 40 years, despite continued prize payouts and operating costs, the foundation not only recovered all previous losses but also grew its assets to 270 million US dollars by 1993.
Nobel Prize Foundation Asset Growth and Decline
| Year | Total Assets (Million USD) | Remarks |
|---|---|---|
| 1896 | 9.8 | Foundation Established |
| 1953 | 3.3 | Investment Charter Amended |
| 1993 | 270 |
Had the Nobel Foundation not changed its approach 40 years ago, clinging to bank savings, it would have vanished, unable to fund the prizes. Perhaps other wealthy individuals would have established new foundations with larger prizes, replacing the Nobel Prize.
The Nobel Foundation’s history underscores the importance of financial management. Even a substantial initial fund, if mismanaged, can be depleted. Conversely, even with significant spending, skillful management can generate rapid growth.
I once heard of a Taiwanese hometown association that established a foundation with 100,000 Taiwan dollars 40 years ago to provide scholarships for children from their hometown. Forty years later, the fund remains at 100,000 Taiwan dollars. While a significant sum back then, today it barely covers administrative costs, threatening the foundation’s existence. The problem? Neglecting financial management.
Learning from the Nobel Foundation, many US foundations, pension funds, university endowments, and even personal trusts have shifted from bank deposits and bonds to primarily stocks and real estate. In contrast, few Taiwanese foundations grasp this concept, and university endowments rarely address financial management seriously. The fate of these foundations, if they don’t adapt, is clear.
I often participate in corporate training programs, where I habitually ask companies about the size and investment strategy of their employee welfare funds. The answers are usually similar: small funds, mostly in bank deposits, rarely exceeding a few hundred thousand or a million Taiwan dollars. However, in 1990, during my time at China Development Corporation, the employee welfare fund exceeded 200 million Taiwan dollars. Why? Because it was primarily invested in China Development Corporation’s own stock.
- The Nobel Foundation’s course correction 40 years ago secured its status today.
- Prioritizing security above all else leads to asset depletion.
- The growth and decline of wealth for individuals, families, businesses, or other entities depends on their investment strategy.
Will your hard-earned wealth shrink like the early Nobel fund, or grow like the later one? The key lies in how you invest. If, like many, you keep most of your money in the bank, it’s not too late to change. The Nobel Foundation’s story shows how a change in investment philosophy can transform everything. Should you reconsider your financial habits and prioritize investments in stocks and real estate? Let the Nobel Foundation inspire your financial thinking. A single change in mindset can lead to immense wealth decades from now!