Savings Vs Investing
This month’s message is a simple one: saving is a much greater force than investing? Most people focus on the investing side of the equation, but forget the most crucial part, savings. Yes, I know this sounds boring, but the discipline involved in saving for a goal, really drives our future outcome. Let’s try a bit of a thought experiment to get to the essence of the idea. You are given $100 to invest and it earns 20% in one year, so now you have $120. Not too bad, right? Your brother, on the other hand, invests $10 per month for the year and earns 2% on his money. At the end of the year, he has just over $121.[1] Skip forward to the end of year five and here are the results: you have a whopping $248.83 and your brother has $630.48[2]. Here are my observations: 1) Your brother is wealthier than you. Yes, he invested $600 and you only invested $100, but the future doesn’t care about your pathway to wealth. 2) This example is extreme, on purpose, as a 20% linear return for five years is near impossible. A more realistic example would show a much greater divide between the two figures. 3) No realistic amount of investment return can outpace a targeted savings plan. It’s quite simple, the more dollars you add to savings, the more money is available for investing and eventual spending. Given the logic above, shouldn’t this make us pause and think about whether our future retirement goals are realistic based on our current level of savings? If our capital base (i.e., savings) is too low, we will be relying on impossible investment returns to fund our retirements. At the very least, we should be conducting annual reviews to make sure we are on track and to adjust our savings rate accordingly.
Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Patrick A. Choquette, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.
[1] Calculation: PV=0, PMT =10, %i=.1667, N=12, FV=$121.11
[2] Calculation: You: PV =10, %i=20, N=5, FV=$248.83 Brother: PV=0, %i=.1667, N=60, FV=$630.48
