(By Michael Rivers) As much as I love to blather on about investing in this blog, I must also make clear that all investing rests on a prior assumption: saving.
Put logically, saving precedes investing. Whether you can generate better or worse returns matters little if you don't save or don't save enough. A 100% return on $100 dollars will move your retirement meter an immaterial amount more than a 2% return on $100.
Even prior to saving, you must manage your money. You must earn more than you spend or spend less than you earn to have savings. After that, you need to set aside that money for investment. Only savings can be invested.
My point may seem so blatantly obvious that it goes without saying. But, the truth is, people focus too much on investing (including yours truly) and not enough on saving.
There are two additional points with respect to saving that should be highlighted: 1) the more you save, the better; and 2) the earlier you save, the better.
To elaborate on #1, even if you generate moderate or weak returns, you can reach your goals if you save enough. For example, someone who saves $2,260 a year and generates 10% annual returns from the time they are 25 to 65 will have just as much money as someone who saves $ $8,278 a year and gets 5% returns from 25 yo 65.
Yes, the second person must save much more than the first, but savings can make up for poor returns. It's smarter to adjust your savings to the returns you get rather than vice versa.
Also, the impact of compounding is greatly enhanced by saving more over time. Even if you don't get great returns, you can always work hard to save more money (earn more, spend less). The more you save, the better the outcome, all things equal.
The second point is probably even more important: the earlier you save, the better.
Early savings benefit more from compounding than later savings. For instance, if you assume two people get 10% returns, someone who saves $1,000 a year from age 25 to 35, but then doesn't save another dollar, will end up with $278,100 by age 65; whereas someone who saves $1,000 a year from 35 to 65 will end up with $164,500. Even though the first person saved only $10,000 and the second saved $30,000--three times as much--the fact that the first person started earlier means they end up with 70% more money and therefore a 70% higher standard of living.
Many people think such an argument is pointless if you aren't 25, but the math is the same with 40 to 50 and 50 to 80, or 55 to 65 and 65 to 95. The earlier you save, the better.
The prior assumption of saving before investment is frequently overlooked, but need not be.
- Saving precedes investment
- Raise your savings to meet future goals
- Start investing earlier rather than later
Getting great returns is only relevant once you've saved enough--so focus on saving first.Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.