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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Why do rich have zero money in bank accounts?

You will find practically no money in the bank accounts of most millionaires and billionaires. Strange. Isn't it?

Bank is probably one of the lousiest places to keep your money. Unbelievable. Isn't it?

However, reasons for this are quite plain and obvious.

First, you get so little interest on your bank deposits that it almost sounds like a cruel joke.

Second, even on this trivial money that you make, tax authorities have the first right. I am sure you are fully aware of the dreaded TDS or Tax Deducted at Source. More importantly, there is no tax relief or deduction on this interest income. Every penny is taxable.

Do I hear someone say that it is safe and secure?

Are you sure? 

Do you really think it is a risk-free investment? Ok. let's see how risk free it is.

Suppose you have a lump sum amount of Rs.15 lakhs, which you wish to utilize for your son's MBA. Given that his graduation is 7 years away, you make a 7-year fixed deposit with your bank at say 9% p.a. interest. This, at maturity, would be worth about Rs.27.40 lakhs.

Assuming you fall in the 30% tax bracket, you will receive around Rs.23.70 lakhs in hand after paying taxes of around Rs.3.70 lakhs.

In the meantime, the 2-year fees at an IIM (which at present is around Rs.15 lakhs) would have conservatively ballooned to about Rs.29.20 lakhs @10% inflation. This would leave you with a shortfall of almost Rs.5.50 lakhs.

Hence, while you can afford the IIM fees today, you are short by almost 20% in 7 years time. If you think you can ignore this inflation-risk, you are clearly fooling yourself. To put it differently, you lost Rs.5.50 lakhs by investing your money in a bank FD.

Do you know why the rich people don't keep their money in banks?

So what's the solution? 

Don't give loans (keeping money in the bank is like giving loan on interest.)

Instead, buy assets that beat inflation. Two assets that have handsomely done so are Equity and Property.

Look at all the rich, prosperous and wealthy people around you. Who are these people? More often than not, they are owners of a business. Of course, you don't need to start your own business. You can own a share in other peoples' businesses i.e. equity.

Look at all the rich, prosperous and wealthy people around you. What do they own the most? Property, of course.

And icing on the cake... dividends, rental incomes and capital gains (both on equity and property), all enjoy many tax concessions, deductions and benefits. The rich have designed all the tax laws in their favour.

If you wish to become and remain rich, you can
a) Either learn how to invest in equity and property
b) Or mug up all the General Knowledge hoping that one day Mr. Amitabh Bachchan will make you a Maha-Crorepati.

Therefore, I think I should say the opposite... people become rich when they don't keep any money in the bank.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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Ignorance is like a SIGNED BLANK CHEQUE... anyone can MISUSE it.

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