Saving/Investing Growth Rate > Investment Returns

High returns are interesting it is what people like talking about over a cocktail on the weekend. “My rental property returned 22% this year”. “Netflix stock is on a tear this year I am up 57% YTD”. Returns are what sell investments to groups of investors. It is what gets people to pay high fees to investment pros to beat the market. Yet for most Americans returns should not be what they are focusing on.

Focus on Your Saving/Investing Growth Rate

If you didn’t care about your investment returns you would be crazy, I am not saying put your money into anything and everything. My argument is that you will not get rich overnight off the 10K you put into your investments this year. It is a great start but the power you really have is time to let your investments build and the ability to invest as much as possible while young. Don’t worry about your 10k getting a 100% annual return, that would be fantastic but that only gets you to 20K nothing life changing there (not to mention the return is unsustainable and unrealistic). Instead focus on how to invest an extra 10K next year then you did in the previous. It is way more realistic that you make an additional 10K this year and invest it then trying to swing for the fences and take the risks required to get a 100% return.

It is rewarding to steadily increase your investments and it will move the needle in down and up years. If you focus on this you will be well prepared when the next downturn comes as you will have positioned yourself to deploy more capital purchasing lower priced assets while building up your stash.

How to Increase Your Saving/Investing Rate

Simple, two sides to this equation income and expenses. That’s it either increase your income or decrease your expenses. In my opinion there is a lot of low hanging fruit regarding expenses available when you are young and don’t yet have expensive tastes. Cut down on the big things as your starting point, we all know them. It’s not the cup of coffee it’s the expensive bar tabs, car/student loan/credit card payments, and expensive housing that is holding most back. Find your biggest leak and plug the hole, do something now to set yourself up to invest more in the future.

After you have focused in on cutting down the big expenses switch your focus to increasing your income. This is so much more powerful than worrying about spending an extra $20 on groceries this week. You are most likely just getting started in your career, so light a fire in your belly and focus on how to earn. Figure out how to increase your W-2 income this is most likely the greatest source of income you have. Then brainstorm ways to make some additional money and make sure that after you make it the money is put to work paying down your debt or purchasing more assets.

When Does the Focus Change?

There is a tipping point to this equation however and that is the good news. Eventually your investments will most likely outpace your saving/investing rate with their returns. I would recommend that most people invest in a well-diversified low-cost index portfolio up until they reach a 250K portfolio. Don’t look at your statements the market will move up and down instead focus your efforts on how you can invest more each month, this is where the true growth will come from in the early years.

What Are Your Thoughts?

  1. How much focus and time do you put into your investments?
  2. How much time and energy do you put into saving and investing more capital?
  3. Which would you argue is more important with assets under 250K?
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10 Comments on “Saving/Investing Growth Rate > Investment Returns”

  1. I agree with a premise of focusing on systems and habits – the actual ACT of saving and investing – as opposed to specifically honing in on market returns. The market does weird things and it’s 100% out of your control. Saying something went up – yeah, great. But saying that you were able to increase your savings rate by 15% last year because you banked an entire raise and found some ways to cut some costs without impacting your life significantly…that’s where it’s at.

    Eventually yeah your investments will earn more than you can pump into them. But until that point, it’s critical to focus on the systems and habits and not go chasing a shiny ball of investment returns. Just get yourself set up with VTSAX or something similar and call it a day.

    1. Hi Dave, thanks for the comment. I am glad you are on the same page, to often I hear people discussing get rich quick schemes. Although I think there can be a portion of your overall strategy to shoot for the moon I to often see people sink their money into something and lose money and get frustrated. I think as you start to stay consistent with a plane you start to see how powerful it is. Then you can keep getting more motivated as you see your money grow. I enjoy your blog!

  2. Good points to consider.

    And I agree: going through the process (steps, habits, work, routine – whatever) is key to getting the actual event completed (results, goals, etc.).

    On the income vs. expenses, I also think focusing on a few key areas can make a difference. But only so much can be done on that side of the equation – the income side is unlimited (and a whole lot more fun).

    Thanks for the post.
    BD Mike

    1. Hi BD Mike,

      Thanks for stopping by! I completely agree focus should be on the income side of the equation.

      I think when you are first getting started expenses can be magnified if you can cut way down. Then once you get established your income will increase and you will have health habits which will lead to a lot of success.

      DM

  3. You and only you control your savings rate, so I think that should be the focus when under $250K. Managing one’s assets is important also especially as assets grow larger. The financial markets have a big say on success or lack of it in that area. Tom

  4. Good point, people get really excited about high returns, but when you think about it, a 37% return on $1000 isn’t that much. The high savings rate 40-60% or even more is what helped most of the FIRE people retire early, not simply the high returns.

    1. The act of stashing it away in the beginning is by far the most important. Then when the numbers are much larger the returns come into play. Appreciate you stopping by.

  5. Great tip! Cutting down on your expenses is definitely much easier compared to trying to grow your income. Personally for me right now, I don’t spend a lot of time checking my investments as most of my capital is already invested and the investments are for the long term. I am quite happy with how things are, although I still have a small sum of cash so I’m still looking out for more opportunities to invest.

    1. Having the long time horizon is huge when it comes to investing. Expenses are a great place to start…but as you grow the income it becomes much easier to feed your investments. What types of investments do you hold?

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