Thread by @dollarsanddata

\1 Tweetstorm on some uncomfortable truths in personal finance and investing.

To start, raising your income is far more important than cutting your spending when growing your wealth. Spending definitely matters, but without sufficient income it is far too difficult to succeed.

\2 Just look at the lowest 20% of income earners. They spend MORE than what they earn for BASIC NECESSITIES. While there are low-income individuals that become millionaires through very low spending, they are the exception, not the rule.

\3 Comparing them to the highest 20% of income earners, you can see how the highest 20% have a lot more room to save. This is why most millionaires are white collar professionals or business owners of some sort. They have high incomes and they don’t overspend.

\4 If we look at the data by income quintile it is clear that those that save the most have more income. In reality, many Americans just don’t have the incomes to live a reasonable life.

\5 I know this truth all too well because I grew up lower middle class and am now upper middle class only because I saved a lot while earning a high income. Most poorer families are better at money management than me because they HAVE TO BE. I don’t budget. They have to.

\6 Finally, cutting spending to extreme levels only leads to stress and regret. What if you miss a good friend’s wedding to save a few hundred bucks? It isn’t worth it. You only live once, so start learning, grinding, etc. and RAISE YOUR INCOME.

\7 Once you have a high income you can start to save and invest, but your investment results will be heavily influenced by luck.

Consider this: from 1980-2005 the S&P 500 compounded at ~9.2% a year (post inflation + div). Even if you underperformed by 2% a year, YOU KILLED IT.

\8 That’s right. Even those that are objectively bad at investing (underperforming by 2% annually) would have seen their money grow 5.5x over those 25 years.

But, start one decade earlier (1970) and the market only compounded at 5% annually for the next 25 years.

\9 This means that OUTPERFORMING the market by 2% a year from 1970-1995 made you LESS MONEY than UNDERPERFORMING the market by 2% a year from 1980-2005. The gods always have the last laugh.

\10 So don’t forget that sometimes the greats stumble and the fools make it to the top. This is true in both investing and in life. Remember, a rising tide lifts all boats, even those that shouldn’t be on the water.

\11 Lastly, we cannot forget the importance of starting conditions. Some people will catch a lucky break early on (or just start so far ahead of you) that you can NEVER catch up no matter how hard you try.

\12 For example, if you started with $100,000 and grew it at 5% a year, it would take 47 years to reach $1 million. However, if you started with $10 million, you would have to LOSE ~5% a year for 47 years to get to $1 million.

\13 Think about how profound this is. Five decades of good investing discipline can be equivalent to five decades of financial idiocy if one party has a large enough starting advantage. This is completely unfair, but something we have to accept.

\14 In America we like to think that most things come down to hard work, but a few lucky (or unlucky) breaks early on can have lasting effects over decades.

I’ve written on this before and illustrated it with a simple simulation here: ofdollarsanddata.com/why-winners-ke…

\15 These are just a few uncomfortable truths we have to live with as investors. While I wish there were easier ways to help everyone achieve their financial goals, investing can be simple, but is NEVER easy.

Thank you for reading and happy investing from Of Dollars and Data.