Why saving is key to investing

Saving is key to investing

I heard that there was a quote from Buffet saying that saving is more important than investing before you reach the first 100,000. As I am a late saver and, to be frank, I suck at saving, I thought that writing this article can not only motive me, but also raise some awareness for those of you that can start early.

This article will be a boring one, focus on math with some justification within the line. The weird fact is that once you do the math, you can realize how much saving is worth especially if you manage to start saving early in life.

I do not want to say that I have 90% of my income, that would be a lie and it will not apply to most of us. We are not millionaires so that we can like on 100,000 a year and then save 900,000. At least not yet. I would focus on a 50,000 household income per year with a 15% saving target and a 7.5% return on investment as 7% is usually conservative, but in the recent years the S&P 500 has a slightly better return than that. On top of this, I will calculate with a dollar cost average type of investment, on a monthly basis and use this throughout the comparison.

Let’s start with a shocker: If you generate a 7.5% return on 100,000 you have the same amount gained as saving 15% on a family income of 50,000. It is pure math and it is simple, but now it is time to be emotional. Putting aside 15% of what you make in a savings account, month after month, will bring you further to financial independence, and later on, freedom, faster that investing under 100,000. This is why, it is imperative to reach that first 100,000 and then to keep you saving habits.

Saving, the only investing sure thing

Some math for those of you who like it:

  • With 0% investing, you need 14 years and a half to reach 100,000 if you save 15% of 50,000
  • With 7.5% investing, you only need 10 years and a half

I know, I know, 10 years sounds insane. And it is. All you can do is either increase the amount of saving or get a better return on investing. You should focus on both, but I would always start with the sure thing. Yes, saving is the only sure thing out of the two. Let’s look at the different with the 7.5% return on investment for the following savings rate:

  • With a saving rate of 20% you will only need 8 years
  • With a saving rate of 25% you will do it in 6 and a half.

If you look at the overall, you only need to put more aside in order to get to those 100,000 faster so that things start compounding in your interest. And once you reach that amount, things will sky rocket. If you manage to keep your savings where they are, or even if you push for a difficult 25% in the first 6 years and then go down to 15% savings as you family starts to grow, you will have the start that you need in order to reach financial independence, and later on, freedom.

How much does saving help after the first 100,000

We cover the fact that the first 100,000 is the one most influences by the saving rate. It is now time to discuss a little bit more about how things grow once you have passed that point. If we look at the math now, you will reach the 2nd in 6 years and a half with the original rule of 15% saved or in 6 with 20% saved.

As you can notice, the difference between 15% and 20% saved before getting the first 100,000 was of 2 years and a half. Now… it is only 6 months. Even when you compare with the 25% saving rate, you still have the 2nd 100,000 1 year faster than with a 15% saving rate.

With all this said, the main goal is to get that 100,000 as soon as you can and then you decide if you relax the belt or not on the saving rate. It should be you who chooses and as you get older, there will be new expenses that come into your life. This is why you should start early and adjust over time. You income might grow or fluctuate, but we are not here to do math on a varied income, or are we?

Saving the best for the conclusion?

There is only one goal of this post, and that is to convince you that saving is the way to go. Even if you start with 15%, less or more, this is the way to go, at least up until you reach a certain amount in the bank. And the best way to say it would be in a table.

Year 15% 20% 25%
6 100k
8 100k
11 100k 200k
13 200k
14 300k
16 300k
17 200k 400k
19 400k 500k
21 300k 600k
22 500k
23 700k
24 400k
25 600k 800k

I hope you get it now and that things will go forward in your best interest.