Your Savings Amount Or Your Return: Which Is More Important?
Your Savings Amount Or Your Return: Which Is More Important?
I did an informal poll of close friends and family members (30 people in total) and the majority of them, 83%, said investment returns. I feel that this number would hold true in real life as well since most investors talk about their return more so than how much they actually save.
While earning a return on your investments is important, it is nowhere near as important as saving more money. I am here to tell you that if you want to be successful with investing ? regardless if it is for your retirement, your child?s education or anything else, you need to focus more on your savings than your return. Let?s look at both investment return and saving more in detail.
I did an informal poll of close friends and family members (30 people in total) and the majority of them, 83%, said investment returns. I feel that this number would hold true in real life as well since most investors talk about their return more so than how much they actually save.
While earning a return on your investments is important, it is nowhere near as important as saving more money. I am here to tell you that if you want to be successful with investing ? regardless if it is for your retirement, your child?s education or anything else, you need to focus more on your savings than your return. Let?s look at both investment return and saving more in detail.
Investment Return
Historically, the stock market has returned on average, roughly 10% per year. More recently, the number is lower and going forward I think it will be lower as well. I think that a reasonable expected annual return for the stock market will be closer to 8%. (Note that this 8% is the average annual return. I am not suggesting that the stock market will return 8% each and every year. There will be years when it returns more and other years where it returns less? and is even negative. But on average, it should return 8% per year.) In recent years Bitcoin proved to be a very profitable investment, also Bitcoin mining even if many people were scammed by Bitmain.
Let's have 2 different examples of the impact of various investing returns. In both cases we have $10,000 invested for 25 years. In one case we earn 8% interest and in the other case we earn 12% interest.
It should come as no surprise that the account that earned the higher interest rate ended up having more money. We started with the same amount so of course the account that earned the higher interest rate had a larger ending balance.
Saving Amount
But let?s look at this from the viewpoint of a different savings amount. If I am able to save $5,000 and earn 10% and you save $10,000 and earn 10%, who ends up with more money?
Again, it should come as no surprise that you will end up with more money than I will. In this case, you started with more money, and as a result, your money was able to compound faster at 10% than my smaller amount of money was able to.
Saving More vs Investment Return
But now let?s combine the two and see what happens. We will invest our money for 25 years again. But this time, I start out with $15,000 and you have $4,000. I earn the average return of 8% while you earn an amazing 13% per year.
Surprisingly, I end up with more money after 25 years, even after earning a lower interest rate. How can this be? It?s simple math really. My money was able to compound faster than yours, even with a lower rate of return. In other words, because I saved more, my money grew faster, even with a lower interest rate.
Focus Your Attention On Savings
I know that when you are out with others, they like to boast about how they earned 15% this year on their money. In some cases, they earn even more. But they can?t do this consistently over time. No one can. When you focus your attention on how much you save, the return that you do earn becomes that much less important.
This is why I stress investing passively. I don?t worry about what my return is every year. I know that I am going to earn what the market returns and for me, that is plenty. I focus my attention on saving as much as I can and continuously adding it to my investments each month without fail.
How To Just Focus On Savings
The interesting part to all of this is that Wall Street and the media want you to focus on return. The more you focus on return and don?t earn a high return, the greater the chances of you jumping around from investment to investment. This is good for Wall Street and bad for you. When you jump around you pay fees ? trading fees, management fees, commissions, etc. All of this adds up to more money in everyone?s pocket but yours. Here is how to focus on saving more.
Ignore the news: the news wants to get you to be emotional. When you are emotional, you will tune into their broadcasts more frequently and for longer periods of time. The more eyeballs that watch their programming, the more they can charge advertisers ? more money for the television stations and less money for you because you never make a smart decision when you are emotional.
Invest passively: I touched on this above: when you are OK with what the market earns, your life is so much easier. Do you know how much time I spent last year analyzing stocks and trying to pick the next Apple or Google? Absolutely zero. I used all of that time to hang out with my wife, my friends and family, doing the things we love to do and enjoying life.
The work involved in trying to beat the market year in, year out is a waste. No one has consistently beaten the market every year ? not even the professionals. So why do you think you can? Take the return the market gives and enjoy life.
Hold for the long term: Investing is for the long term. This means you buy and hold for long periods of time. You sell because you need the money for your goal, not because the stock market tanked 4% today or you are worried that Armageddon is near.
The more you trade, the more you pay in fees and commissions and the less you earn overall. In fact, the average investor only earns close to 2% while the market earns close to 8%! Why is this? Because the average investor is always trading, chasing the next big thing or trying to get rich quick. It doesn?t work.
Final Thoughts
When it comes to investing and being a successful investor, you need to save as much as you can and stay invested for the long term. Over time, you will earn what the market is giving you. That return will be more than enough to grow your money.
Don?t fall victim to trying to earn the highest return possible. Focus instead on saving as much as possible and in the long run, you will be a very happy investor.