Thread by @dollarsanddata

\1 Tweetstorm on the relative importance of saving vs. investing throughout your life cycle.

To start I will declare:

“Saving is for the Poor, Investing is for the Rich”

Why do I say this? A story…

\2 When I was 22 and fresh out of college I was OBSESSED with how to invest my money. How much should I put in stocks? How much in bonds?

Though I didn’t have much money to invest at the time, I thought that my allocation decision was incredibly important.

\3 Later in life I realized that most of my obsessing was a COMPLETE WASTE OF TIME. Why?

Let’s say I had $1000 to invest at that time and I could get a 10% return on my money. My investment gains over a year would be $100 ($1000 * 10%).

\4 That might seem great. $100 I didn’t have, right? However, while I was gloating in my $100 gain, I was ignoring another part of the equation: my spending.

I was ROUTINELY going out with friends and spending $100 in a single night. Dinner + drinks + Uber/Lyft and its gone.

\5 The problem was that I focused more on how to invest what little funds I had instead of realizing that by saving more I would have a far larger impact on my finances.

This is why SAVING IS FOR THE POOR. If you don’t have much $ to invest, focus on saving it first.

\6 As the corollary to this, imagine yourself as a 65-year-old retiree with $2M invested. If you get a 5% annual return on your money, that is a $100,000 gain in wealth.


To do that via saving would be very difficult without a high income.

\7 Look at this chart as an example of your savings (green) and investment gains/losses (red) by year.

As you can see, early in life the green bars overshadow the red bars (savings > investing), but, as you acquire wealth, the reverse happens (investing > savings).

\8 The fact is that in some years you will be able to save more than your investments can earn you and in other years your investments will gain/lose more than you could ever save.

\9 If done right, by the end of your life most of your wealth gains (assuming a decent rate of return) will have come from investments rather than savings. This chart illustrates one possible example of the % of your total wealth that comes from investments over time:

\10 Even better, there is a FORMULA you can use to determine whether you should focus more on saving investing. So, ask yourself, which is greater:

Your Total Assets * Your Expected Annual Return

or

Your Expected Annual Savings

\11 For example, if you have $100,000 in assets and expect a 7% rate of return, that is $7,000 annually. If you can comfortably save over $7,000 a year then you should focus on savings. If not, focus on investing.

Plug in your numbers and see what YOU should focus on.

\12 Note: I am NOT saying to ignore your investments or ignore your savings. Both are very important. However, their RELATIVE importance changes over time. This is the main idea that many people (my past self included) tend to not notice.

\13 Thank you for reading and happy investing from Of Dollars And Data!


My original post on this is here: ofdollarsanddata.com/saving-is-for-…