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Save or Invest? Where to Focus Your Financial Attention


Adopting too many financial goals at once, or even a goal that is too generic, prevents us from meeting financial goals.  This means we cannot address every financial goal simultaneously.  That reality requires us to determine where we should focus the energy we can dedicate to our finances to have the greatest impact on our financial wellbeing.


We should all be saving and investing.  Saving money is when we choose not to spend part of our income immediately and instead allocate it for a future purpose.  That future purpose may be investing, so saving is a first step to accumulating wealth.  Investing involves taking that saved money and making a decision on how best to grow it into greater wealth.  Saving and investing are both key to building wealth, but saving focuses on the initial accumulation while investing focuses on the growth of wealth.


Crucially, investing cannot successfully occur without some initial savings.  We need to invest something before we can grow our wealth, and saving provides that initial something.  If you do not have enough wealth to start investing, it is pretty clear that your first step is to accumulate some money so that you have enough to invest.  However, whether to focus more energy on saving or investing becomes more difficult after initial wealth accumulation.


Deciding Whether to Focus on Saving or Investing


Say you invested $100 a month during your first year receiving an income, for a total of $1,200.  Like many young investors, you spend hours of time analyzing where to invest that $1,200 to maximize returns.


If the market grows at its expected rate of between 7% and 8% annually, you will make $84 to $96.  That is great because it is $84 to $96 you did not previously have, and your wealth is growing.  But it is still not a ton of money when considering all the wealth you will build over a lifetime.


Say you spend hours trying to maximize your returns and end up remarkably growing your wealth by 20% despite market averages around 7.5%.  (This is not likely to happen.)  You will end up with $240 in annual growth—about $150 more than you would have at 7.5%!  You feel like an investment pro, and the hours of time spent studying potential investments feel worth the effort.


But you would be wrong.  You spent hours studying investments to grow your net worth by $150.  How else could you earn $150?  Spend $12.50 less on takeout each month.  Cut out one or two streaming services from your budget.  Work 10 more hours throughout the entire year at a position where you net $15 an hour.  That means working less than one hour more a month.


In other words, when you have not yet accumulated a lot of wealth through saving, allocating tons of time towards analyzing your investments is not worth it.  You could accumulate more wealth simply by saving more money so you have a greater amount of money to invest going forward.  In the beginning, figuring out how to save more is the main priority.  The more money you can save and throw into investments—any standard investments—the more potential you have to grow your wealth.  Where you invest is not too important at the beginning.  Select any index fund with a low expense ratio, and do not worry about where you are investing until you accumulate more wealth.


But at some point, your investments will grow enough money that it is worth paying attention to where your money is invested.  In Just Keep Buying: Proven Ways to Save Money and Build Your Wealth, Nick Magguilli recommends calculating two variables and comparing them to determine whether you should focus more energy on saving or investing:


  1. Expected savings

  2. Expected investment growth


Your expected savings are what you can comfortably save in a year without experiencing any lifestyle deflation that causes you unhappiness.  This should be a level of savings that you feel confident in maintaining.


Your expected investment growth is the realistic return on your investments that you can expect in one year.  This should not be an overly optimistic number, like betting the S&P 500 will grow by 20%, but it should also not be overly conservative.  If you are heavily invested in index funds, using a 7% to 8% figure for your growth is likely a safe bet.  Your calculations may vary if you have a portfolio tilted towards other assets that you reasonably expect to accumulate wealth more quickly, like real estate.


Once you calculate these two numbers, compare them.  If your expected savings exceeds your expected investment growth, you are on the part of your wealth accumulation journey where you should focus on increasing your savings to obtain more money to then invest.  If your expected investment growth exceeds your expected savings, it is time to pay attention to where you are investing your money.  Hitting this point may mean it is a good time to rebalance your portfolio or talk to a professional about your finances.


For example, if you make $100,000 a year and have a savings rate of 25%, your expected savings for the year is $25,000.  If you have $150,000 invested in index funds and expect a 7% return on your investments, your expected investment growth is $10,500.  Since $25,000 > $10,500, it is still best to focus on saving more rather than worrying about your investment allocation.  While having $150,000 invested is a terrific wealth accumulation, it is still relatively early in your lifelong investing and wealth accumulation journey.


If you had that same salary of $100,000 and maintained the same 25% savings rate for an annual expected savings of $25,000 but instead had $500,000 already invested, the calculation is different.  If you expect a 7% return on investments of $500,000, that gives you an expected investment growth of $35,000.  Since $35,000 > $25,000, this individual should just continue their routine savings efforts and focus more energy on analyzing investments.  At the point that your investments are accumulating more wealth for your future than you are, you need to dedicate energy to making sure that wealth accumulation continues!



High Savings Rate Disclaimer


This calculation works quite well for “normal” savings rates but is not a perfect indicator for folks with high savings rates.  Take the example of the individual making $100,000 with $500,000 of investments.  At a 25% savings rate, this individual should clearly be focusing more energy on their investments, and that feels intuitive given their wealth accumulation so far.


But what if that same individual had a 50% savings rate?  This would bring their expected savings to $50,000 a year.  Since $50,000 > $35,000, their expected investment growth, that would indicate that the individual should spend more energy focusing on their savings than their investments.


That is probably not the correct takeaway for an individual making $100,000 a year with a $500,000 net worth.  If this individual is age 50 or below, they are an average accumulator of wealth or prodigious accumulator of wealth.  In other words, they have built some serious wealth and now have a lot of money invested, so they should probably pay attention to it.  They are also probably already maximizing their savings because they are already saving half of their income.


My own calculations fall in this strange area since my savings rate is currently at 54%, but I am also past the halfway point on my journey to reaching my FI Number.  I am much closer to the point of using my accumulated wealth to fund my lifestyle than I am to the beginning of my wealth accumulation journey; I just also happen to have a high savings rate and a higher income than I previously had.  Since my savings rate exceeds 50%, this formula would indicate that I should not pay attention to my investments until after I reach my FI Number.  That is a bit illogical, and I have started shifting my focus to my investments since I am in the final years before achieving financial independence.  But when should an aggressive saver switch over to focusing energy on investments rather than savings?


As someone who has a savings rate above 25%, I recommend still sticking with the 25% savings rate for your calculation.  In other words, calculate your expected savings for the year as if you had a 25% savings rate and compare that to your expected investment growth.  For aggressive savers, once your expected investment growth exceeds 25% of your annual income, you are probably far enough on your wealth accumulation journey to pay more attention to your wealth.



Saving Doesn’t Just Mean Cutting Expenses


If you are earlier in your journey and focusing on increasing your savings to generate that initial wealth to go towards investments, you may feel like the entire focus is on cutting expenses and living more frugally.  Cutting frivolous expenses is certainly important.  If you are spending money on any non-essential item or activity that does not give you joy, you should probably cut the expense.  However, cutting expenses is not the only way to increase your savings.


In fact, cutting expenses is not the most realistic or important way to increase savings.  Generating more income is much more impactful.  There is only so much you can cut before you are obsessively comparing which type of apples can save you $0.02 at the grocery store.


Another method to increase your savings is to increase your income without inflating your lifestyle.  Bring in more money without spending more money.  The difference is savings and can be used to invest and expedite your wealth accumulation.


Everyone knows that bringing in more money creates more possibilities for savings, but most folks will argue that increasing your income is difficult.  Actually, you can be pretty intentional about it by job hopping strategically, making yourself an indispensable employee, and providing the evidence to ask for a promotionWriting a good resume, acing the job interview, and negotiating a higher salary will get you to a higher income so you can meet your higher savings goals.  Having a base resume ready to go and a preexisting resume format will also make you ready to seize opportunities to raise your income as they arise.  Need even further guidance to build your career?  Our Design Your Base Resume workbook can help you get there.


To increase your income faster than traditional trajectories, you will likely need to switch employers or get into a field where your income is based on merit rather than time in position.  Scott Trench dives into tactics to get into a merit-based field in his book Set for Life.  This is especially important for those wishing to expedite the period they spend focused on savings.  The quickest way to increase savings is to increase your income rather than cut your expenses.



Shifting Your Focus to Investing


Reaching the point where you should focus your energy towards investing rather than saving is fun and exciting!  However, it can be easy to miss when you should switch your focus.  Particularly if you became an expert at cutting expenses to save, becoming fixated on saving can derail your attention from where it should be: investing.


Most of us need to spend more years focused on saving than investing because once our investments reach that point that our expected investment growth exceeds our expected savings, we are more than halfway to financial independence.  Just because we spend more time on saving does not mean that the investing portion of our financial journey is less important.


When you reach the stage where you should focus on investing, be excited.  It is your time to analyze what investment allocation best meets your future goals and needs.  This is a fun time to consider how to fund your dreams because you already did the hard part.  You accumulated enough money that your money is growing significant amounts of additional money.  That is the goal.  Have fun planning because the hard part is done.

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