Your Savings: The True Engine of Wealth Accumulation

When people get into investing, some get very excited about stock picking and business analysis, while others are searching for investments that promise higher returns: crypto and thematic concentrated ETFs.

This intense focus on "what to invest in" and "how to get higher returns” is steering people away from examining what matters most in their investing journey.

Importance of Saving rate

In the early years of your investment journey, your saving rate is by far more crucial than the return of your investments.

Consider this illustrative scenario:

• Initial Investment: You start by investing $1,000 each month.

• After 1 Year: You've invested a total of $12,000.

  
  

You plan to invest another $12,000 the following year, representing 100% of your portfolio. Achieving a 100% return on your investments is theoretically possible but practically extremely risky. I'm trying to say that looking for an investment that will give you 100% risk-free is unreasonable. Better to focus on saving.

The Power of Consistent Saving Over Time

Let's expand this scenario over five years, assuming an average market return of 10%:

• Annual Investment: $12,000

• Total Investment Over 5 Years: $60,000

• Compound Growth at 10% average market Annual Return: Approximately $73,000

Your portfolio will grow significantly by the end of five years, not solely because of the investment returns but primarily due to your consistent savings contributions.

If you decide to invest another $12,000 in the sixth year:

• Portfolio Value Before Year 6 Investment: ~$73,000

• New Investment as a Percentage of Portfolio: ~16%

As you can see, even after 5 years of investing your savings, your portfolio increases by 16% reliably and without any volatility. No investments can produce 16% annually without any risks or volatility.

This demonstrates that, especially in the early stages, your portfolio's growth is predominantly driven by your saving rate, not investment returns. Moreover, this scenario doesn't account for potential increases in your annual investment as your income grows, which would further amplify the impact of savings on your portfolio's growth.

Focus on the Key Thing

Instead of focusing on cherry-picking stocks, searching next promising big thing in the investing universe, focus on fundamentals:

Establish a Simple, Passive Investing Portfolio: Consider a 60/40 stock/bond portfolio or something similar. At this stage, a solid, straightforward investment strategy is better than chasing market-beating returns. “Good enough” is better than striving for perfection.

Pick reliable broker

Pick a reliable broker so you don’t have to worry about putting your savings into the hands of some sketchy companies. Ideally, your broker should be SIPC-protected, and the company should be traded publicly.

Track Your Expenses

Use budgeting tools or spreadsheets to monitor your monthly spending. Tracking key categories is critical to limit your expenses and increase your savings.

Track Your Savings

Set a monthly saving goal. Set an achievable target and tune it later. It’s critical to invest monthly rather than setting an annual goal.

Regularly review your savings to stay motivated and make adjustments as needed.

Focus on Career Advancement

Invest in education and skills, and enhance your qualifications to increase your earning potential.

Seek promotions or higher-paying opportunities of course as long as they will satisfy your long-term career goals.

Conclusion

In personal finance and investing, your saving rate is the actual engine of wealth accumulation, particularly during the early stages of your investment journey. While investment returns are necessary, they are often secondary to the foundational habit of saving consistently and diligently. By prioritizing your saving rate—through diligent expense tracking, reducing unnecessary expenditures, increasing income, and focusing on career growth—you set the stage for sustainable wealth creation. Remember, building wealth is a marathon, not a sprint, and maintaining a strong savings discipline will propel you steadily toward your financial goals.