Chapter II

Chapter II: Understanding Wealth

14 min · 12 ideas

There's a long-standing maxim (its author is unknown, though it's often attributed to the psychologist William James): "Thoughts determine actions, actions determine habits, habits determine character, and character determines destiny."

Being rich is a way of thinking put into practice. The most fundamental difference between the poor and the rich isn't where they start but how they think. Different thinking leads to different actions, and over time the results end up worlds apart.

1. The Difference between the Poor and the Rich

First, find out where you stand when it comes to wealth. According to the National Wealth Statistics compiled by Taiwan's Directorate-General of Budget, Accounting and Statistics (DGBAS), the average net worth per household in Taiwan at the end of 2023 was about NT$18.89 million (including real estate). UBS, in its Global Wealth Report 2026, estimates that the average wealth per adult in Taiwan is about US$330,000, and the median about US$110,000. The average is far higher than the median — a sign that wealth is concentrated in a small number of families.

Rich Dad Poor Dad is a world-famous bestseller on personal finance, translated into dozens of languages. In it, Robert Kiyosaki talks about assets, liabilities and cash flow, and about how differently the poor and the rich think. The book influenced me deeply. In my own words, I've summarized these ideas in the table below:

Different thinking leads to different actions; repeated day after day, those actions add up to two different lives twenty years later.

1. Assets and Liabilities: The Chicken Story

A-Ming and A-Fang each earned NT$100, and both of them wanted to eat chicken.

A-Ming's choice: eat it the moment he wants it. That same day, he spent NT$100 on a chicken, cooked it and ate it. A few days later he was craving chicken again, but his money was gone, so he borrowed NT$100 from a friend to buy another one. The chicken seemed too small, so he borrowed NT$50 more for feed — and once it had grown, he ate it anyway. His stomach was full, his pockets were empty, and he was NT$150 in debt.

A-Fang's choice: hold off for now, and let the chicken make money for her. She saved NT$20 a month, and in the fifth month she used NT$100 to buy a chicken, after which she spent NT$20 a month on feed. After three months, she sold the chicken for NT$260. Subtracting NT$100 for the chicken and NT$60 for feed, she made a net profit of NT$100.

Two months later, she had NT$300, and she borrowed another NT$100: NT$300 for a rooster and two hens, and NT$100 for feed. Five months later, she sold the rooster for NT$260 and paid off the loan first. She kept the two hens, which laid eggs and hatched chicks day after day. She repeated the same steps over and over, until in the end she was eating chicken every day — and still had more and more chickens.

This story makes assets and liabilities as clear as they can be: the same chicken is consumption if you eat it, and an asset if you raise it. The difference isn't the chicken; it's how the person who gets the chicken thinks.

Think about it:

• In the story, which things are assets? Who owns the assets?
• Whose debt is bad debt? Whose debt is good debt? Why?
• What's the difference between A-Ming and A-Fang? How did their results differ?

Mini Glossary
- Assets: things that put money in your pocket (for example, a hen that lays eggs, or a stock that pays dividends).
- Liabilities: things that take money out of your pocket (for example, that chicken — gone once you eat it, and you still have to pay interest on it).
- Good debt: borrowed money used to buy assets, where the income from the assets is enough to repay the principal and interest.
- Bad debt: borrowed money used for consumption, which can only be repaid out of your own work income.

2. Using Cash Flow to Check Your Finances

Cash flow is the direction in which money moves. Income makes money flow into your pocket — that's positive cash flow. Spending makes money flow out of your pocket — that's negative cash flow.

The moment money lands in your pocket, what do you do with it first? That choice decides which way your cash flows. Trade it for a moment's pleasure, and what you bring home is mostly liabilities; once the money is spent, all you can do is go back to work and wait for the next paycheck. Others see clearly that a job alone will never get them to freedom. So they first put their income into things that make money and grow in value, sending their money out to work on its own.

3. The Income Structure of the Rich and the Poor

The biggest difference between the poor and the rich lies in where their income comes from: the poor get almost all their income from work; the rich get most of theirs from assets. Income from work has a ceiling, because everyone has only 24 hours in a day. Income from assets has no ceiling, because assets can keep piling up.

4. The Power of Returns on Capital

In Capital in the Twenty-First Century, the economist Thomas Piketty points out that over the long run, the rate of return on capital is higher than the rate of economic growth (he writes this as r > g). The long-run return on capital is roughly 4% to 5%, while economic growth, once the population stops growing, is only about 1% to 1.5%.

That's how capitalism is designed: people who own capital see their wealth grow faster than the economy as a whole. Wealth isn't the work of one generation; it's capital accumulated generation after generation — which is exactly why I wrote this book, to pass these ideas about money on to my family.

2. The Path to Wealth

The path to wealth is the process of working hard to turn income into wealth:

Work hard and earn money → save first → control spending → turn savings into assets (investing or starting a business) → let assets keep producing more assets

Investing starts with having your first nest egg, and your first nest egg comes from work and saving. And before you save, you need a firm grasp of your own finances — your personal "balance sheet," "income statement" and "income and expense ledger" — so you can work out exactly how much you should save each month.

I often think of every dollar as a seed. Plant it, and it bears more money; plant that money back in the soil, and next season's harvest is bigger still. Someone in a hurry to eat the seed will only ever have that one seed. (I first came across the "money is a seed" metaphor in John Lee's This Is How Wealth Is Built; the title is translated, as there's no English edition.)

Two Ways to Get Rich: Investing and Starting a Business

• Starting a business: find something you can do for hours without noticing the time, and turn it into a business. In 1975, the psychologist Mihaly Csikszentmihalyi called this state of total absorption "flow." The way I understand it is simple: while you're doing it, you don't feel tired; you look up and realize it's already dark; and when you're done, you feel a deep, quiet satisfaction. Work like that is worth committing to for the long haul.
• Investing: become a capitalist, and let capital work for you. The order goes like this: first you have a sum of money; you use it to buy a small share of a good company, so you share in that company's ability to make money. The shares bring in income, which you use to buy more shares. That's how money starts making money, one round after another.

For most families, the simplest road to becoming a capitalist is to keep buying the whole market over the long term — in other words, broad-market index ETFs.

3. The Savings Formula

Income − Savings = Spending (save first, spend later)

Pay yourself first, then pay others:

• Savings: the money you pay yourself — the money you'll later use to invest and buy assets.
• Spending: the money you pay others, which divides into "necessary spending" (which you must pay no matter what) and "unnecessary spending" (which you could skip without any problem).

Most people's formula is "income − spending = savings": spend first, save later — and the usual result is that nothing gets saved. Reverse the order: the moment your paycheck arrives, save first, and spend only what's left. This one change alone is the dividing line between the poor and the rich.

Don't look down on small sums. In The Secrets of Money (title translated; no English edition), the Korean-American entrepreneur Kim Seung-ho calls small amounts of money "seed money," and I couldn't agree more: someone who brushes off NT$100 today won't take good care of NT$1 million tomorrow. The first nest egg for investing or for starting a business is always built up from small sums, one at a time.

4. The Golden Formula for Wealth

Income − Spending + Asset Growth = Wealth

Every financial question can be understood and explained with this formula:

• Income comes in two kinds: active income, which you get only by continually putting in time and effort, usually from a job; and passive income, which keeps coming in whether or not you work, usually from assets.
• The less you spend, the more you can save and invest.
• Asset growth is the force that truly makes wealth snowball.

The Prerequisite: Enough Work Income in the Early Years

You can't scrimp your way to being rich. In Just Keep Buying, the data scientist Nick Maggiulli calls "you can be rich if you just cut your spending" the biggest lie in personal finance. I agree. A family whose income only just covers its costs can tighten its belt as much as it likes; life just gets harder, while the bank account barely grows.

His prescription comes down to two things: grow your income, then put your money into assets that make money. When you're young, the best investment is in yourself. Don't dismiss the nine-to-five as ordinary — deepen your expertise at work, learn to work well with others and build your network. That paycheck is where most people's wealth begins.

As for what to buy, he and I reached the same conclusion: don't buy individual stocks; buy index funds that cover the whole market. Most of the stock market's long-term gains come from a handful of the very best companies, and it's very hard to guess in advance which ones they'll be. Buy the whole market, and you won't miss them. (Chapter V explains this in detail in "What to Buy.")

5. Wealth Grows by Multiplication

Why do I keep urging you to save your first nest egg? Because it's the hardest part — and the most important.

Suppose you grit your teeth and spend a year saving your first NT$1 million. The second million will come a little more easily: your first million has already started earning returns, so it's like having a helper saving alongside you. By the third and fourth million, you have more and more helpers, so it takes less and less effort — and less and less time.

So wealth doesn't climb one step at a time — 1, 2, 3, 4, 5. It doubles again and again — 1, 2, 4, 8, 16. Money makes money, and assets make more assets.

The earlier you start, the more times your wealth can double. That's why I want you to start saving your first nest egg right now.

(I first came across this idea of wealth growing by multiplication in Kim Seung-ho's The Secrets of Money. His example uses Korean won; here I have rewritten it in New Taiwan dollars.)

6. The Goal of Investing: Creating Passive Income — The Six Stages of Financial Freedom

The goal of investing and managing money is to create passive income. People often divide a family's financial situation into several stages. Drawing on the "six levels of wealth" introduced by Taiwan's Business Weekly, I've organized them into six, in my own words:

1. Dependence: you owe more than you own, and you get by on borrowed money or help from family.
2. Repayment: you can pay your bills, but a single illness or lost job would knock you right back to where you started.
3. Stability: you have enough cash on hand to cover six months of basic expenses, and you have all the insurance you need.
4. Security: besides a six-month emergency fund, you have money invested; if you had to stop working for a while, your passive income would cover the basics.
5. Independence: your passive income is greater than your salary, so you could retire tomorrow without lowering your standard of living — this is financial freedom.
6. Abundance: your passive income is more than you can spend, and life keeps getting better.

My own approach: in the first two stages, cut expenses first, aiming to save a quarter of income; once you reach "stability," start planning investments and let the money go to work.

Once you reach "abundance," money is no longer just for yourself. Being able to use it to help others brings a joy worth more than an extra zero in your bank account.

7. Four Reasons People Fail to Get Rich by Investing

If you know how to avoid failure, success comes more easily. A common saying goes that when most people fail to get rich by investing, it comes down to one of four reasons:

1. not knowing that investing and managing money can make you rich;
2. learning from the wrong people, or in the wrong way;
3. having no confidence in investing, and no patience;
4. gambling, or engaging in high-risk speculation.

8. Home Education That Lives Out Our Family Motto: Raising Business Geniuses

Give your child a gift that grows.

Children tire of toys within a few months, but stocks can grow up alongside them. Here's what I do: apart from everyday pocket money, I convert whatever my child receives — red-envelope money, prize money, savings from part-time jobs — into funds or stocks, and keep them in the child's own account.

I learned the idea of opening a brokerage account for a child from a book by the Korean-American entrepreneur Kim Seung-ho, and then adapted it to suit our family. Our family's practice is to open one for each child while they're young (until age 18, the parents open it as the child's legal representatives; around the time your child turns 18 and becomes an adult, remember to check with the brokerage whether you need to sign a new agreement or complete any paperwork, so the account or the dollar-cost averaging plan isn't suspended). (This applies to Taiwan.) Here's how:

• Put a small sum in the account and buy mostly broad-market index ETFs — your child instantly becomes a small shareholder in hundreds of companies;
• If your child is interested, set aside a small portion (say, 10%) and let them pick a company they know and like. Win or lose, count it as tuition, not as an investment method;
• Every so often, open the account together and take a look: what a stock is, where dividends come from, what a company is worth. When prices rise or fall, look for the reasons together.

Principles read in a book and real ups and downs in your own account feel completely different to a child. Holding the same phone, one child thinks only about the next new model, while another asks: How much did this company earn this year? How much does it pay in dividends? Children who see the world this way from an early age grow up more used to looking at things through a business owner's eyes.

Key Takeaways

1. The difference between the poor and the rich lies in how they think: the poor spend first and buy liabilities; the rich save first and buy assets.
2. Assets put money into your pocket, and liabilities take it out; borrowing to spend is bad debt.
3. The rich get most of their income from assets, and over the long run, the return on capital is higher than the rate of economic growth.
4. Pay yourself first: income − savings = spending.
5. The golden formula for wealth: income − spending + asset growth = wealth. In the early years, raise your work income first.
6. Wealth grows by multiplication, so the sooner you save your first nest egg, the better.
7. Open an account for your children while they're young, and give them broad-market index ETFs as gifts.