Why Putting Money in the Bank is Bad for your Wealth

How do you build wealth?  According to Rich Dad Poor Dad, GetRichSlowly.org, Warren Buffett and financial life coaches everywhere, locking all your money away in the bank is NOT the way to do it. They may have different roads to get there, but there is one agreed path that makes little sense.

Now we are not advancing a ‘Occupy Wall Street’ concept here.  Having a business account at your commercial bank is useful for safely and efficiently managing your expense account.  But that’s the point – putting your money in the bank is bad if you put ALL your money there.  Robert G Allen said it best, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”


Maid-money vs Muscle-money

Consider the difference between your money for daily expenses and money for growth.  Your “maid-money” does all the housekeeping work – pays the utilities, buys office supplies, covers the rent, etc.  While your “muscle-money” helps with the heavy lifting like buying expensive equipment, providing collateral for expansion, paying a year-end bonus to employees, etc.

Banks are comfortable places for your maid-money.  Through automated banking platforms and short-term credit facilities, you get safe and quick access to cash.  But with average saving rates of 1.75% over the last 3 years and continual decline, it’s no place for the muscle!

“Money often costs too much.” (Ralph Waldo Emerson)

Bankers themselves also acknowledge that it takes more to run a business over the long-term. That’s why they get into building society, insurance and investment subsidiaries. The different institutions serve different purposes for your money.

Your muscle-money can do its body building best with other types of financiers. For example, Credit Unions were established to offer lower loan rates through shared funding by its members, and Building societies were built for mortgages, so their mortgage rates are better. With their research expertise, securities dealers give the best returns on investments and even cambios seem to have a lock on foreign exchange rates.  In all cases, however, caution should be exercised to identify ethical and legally operating entities.

As your business grows from small to medium or even from medium to large, explore, the merchant bank and trust company options for better day-to-day rates on higher volume transactions. A review of  Bank of Jamaica’s Bank Fees Survey can help you to decide which specific institution offers the best rates for your business.

Make use of every opportunity

But why isn’t saving your money enough to attain wealth?  Because money loses its value over time as explained in this video on the history of inflation. Putting your muscle-money in the bank is like encouraging your able-bodied 40-year old son to live with you while he contributes a lot less than he consumes – you’re stifling his potential.

Both unexpected and planned opportunities are always out there. Will your business have the money to take advantage of them when they come? Saving combined with wise investments will give you the ability you need to move your business forward at the right time. So, think in terms of J$50,000 to J$100,000 increments.  Once you have accumulated this money in excess of your expenses, move it to where it can grow faster.

‘Well done good and faithful servant’

In the Biblical parable of three servants, a master gives the first servant 5 bags of gold, the second servant 2 bags of gold and the third servant 1 bag of gold. While the master was away, the first and second servants invested the gold left to them. They both received double their investments. The third servant buried the gold he received.
When their master returned, the first two servants were congratulated on their entrepreneurial abilities and rewarded. The third servant was chastised and thrown out.

There are quite a few lessons in this parable. Not only that you need to reward productive employees and boot ineffective ones, but also be a good steward.  Money does not grow like a tree. So burying it in a bank account will yield only rot as inflation eats away at it. To grow your wealth puts your money to work.

Have you experienced your muscle-money thriving in a bank account? Or do other non-banking institutions work better with your maid-money?  Let us know in the comments below.

Footnote:
The comments made here do not constitute financial planning advice and each financial decision should be entered after consultation with a financial professional.