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Saving vs Investing – Where Should You Focus?

June 16, 2018

For those just joining us, they’d be forgiven for thinking this blog is simply about investing.

We’ve been talking regularly about my love of dividend-focused investing for a while now.  Because my investment approach is a little different to most in the financial independence space, there’s naturally plenty of questions.

And I feel the need to share my thinking fully, so folks can decide for themselves whether it feels right for them…or not.

But at the end of the day, we only have so much free time.  So we need to prioritise our focus.  Constantly learning and optimising on the way to financial freedom is key.  But we also need to know where our efforts are most rewarded.

Today, we’ll compare saving and investing.  And consider where we should be allocating most of our time and energy.  Some say smart investing is much more important than saving.  And others say saving is the holy grail to building wealth.  Is the answer somewhere in between?

Here’s how I look at it…


Saving vs Investing

A common question…

Can’t I just make a few clever investments and that will make me rich?  I don’t want to give up my spending.

The answer is, it’s possible, but extremely unlikely.

Think about it.  The higher your spending is, the more investments you will need to fund your higher level of spending.

This is like wanting all the reward without any effort.  Like someone wanting to build a great physique without giving up their junk food habit.

Sometimes, this results in trying to ‘out-train’ their poor diet.  Working their body extra hard in the hopes that it makes up for their crap food choices.

It’s the same as an investor chasing higher returns, trying to ‘out-earn’ their poor spending choices.  So they push their money to work harder, hoping it makes up for their lack of effort in saving.

See the parallel?

Unfortunately, the results usually aren’t great.  It’s only when we start making more grown-up decisions, and decide these ‘harder’ choices are better for us in the long run, that we start to get better results in our lives.

And it brings us greater joy as well.  Because our efforts are well rewarded.

The funny thing is, most people avoid the ‘effort’ part.  Many see it as a source of pain.  But when you put effort into something and reap the rewards, it’s incredibly satisfying.

The difference being, some focus on short-term pain, others focus on the reward at the end.  It’s pretty obvious which line of thinking is more helpful for making changes and reaching goals.


Focus on what you can control

Instead of trying to make your investing compensate for your high spending, you’ll get much better results by getting your spending under control.  Since ultimately, there is no amount of money that you can’t spend.

Sticking with high spending and hoping for high returns to make up for it, will lead to higher stress.  And keeping spending low, means you only need moderate investment returns to achieve your goals, resulting in lower stress levels.

We can’t precisely control our investment returns.  But we can, if we’re honest, control our spending.

So why not focus on the area that is more likely to reward our efforts?  Spending 10 hours a week trying to find better investments or outsmart the market may prove fruitful.  But it’s more likely that it won’t.

In contrast, even 1 hour a week spent thinking about and optimising your bills and living expenses, is likely to be very well rewarded.


The power of saving

Saving tends to be more powerful since it gives you more control over your early retirement goals.  Rather than using leverage or banking on investment markets being nice to you and delivering you large gains.

Compound interest is powerful stuff.  But here’s the downside – it takes a while to kick in.  So for those looking to retire in 10 years or so, compound interest doesn’t get much of a chance to work its magic (as I wrote about here).

When we crank up our savings rate by living more efficiently and building strong money habits, our progress skyrockets, even if the markets only experience modest returns.

As fascinating as I find investing, I don’t want to give the wrong impression on this blog.  Whether you reach early retirement or not, is almost entirely dependant on your ability to save, rather than be a clever investor.


Seeing what works

After looking around, I noticed the people who become financially independent at a young age share a few things in common…

They are hardcore savers with strong money management skills and efficient lifestyles.

Most of them give consumerism the flick by realising how good we already have it.  And understanding there’s little to be gained by competing with the rest of the population in looking rich (but being endlessly broke).

And they know that happiness lies in the simple life.  Having enjoyable things/projects to work on, family time, healthy living, helping others and appreciating the world they live in.

Again, if we want something that’s already been achieved, there’s no shame in ‘copycatting’.  In fact, that’s often a great place to start.

Unfortunately, most FI examples are from the US.  But hopefully we can build up a nice little cult of early retirees here in Australia.  The largest name that comes to mind from our shores is Pete Wargent, who retired at 33.

Along with his wife, they saved hard and invested simply – capital city property and diversified shares like LICs and index funds.  He has now started a couple of small businesses of his own, because, well, why not?

After starting this blog and sharing my story, I’ve already heard from a few of you who are well on your way.  And I recently met a bloke who lives only 10 minutes away from me, who has recently retired in his early 30s to spend more time with his family.

Then, there’s the other Aussie bloggers who are flying along and documenting their own journey to FI – like Aussie Firebug and Pat the Shuffler.

Again, in each example, dedicated saving, sensible living and simple investing are evident.


But what about when it comes to returns?

Let’s think about how hard it is to increase our savings rate.  Now consider how hard it is to increase our investment returns.

Of course, it depends on our starting point.  But let’s look into it.

Generally, we have a pretty good shot at doubling our savings rate – from 25% to 50%.  But we’ll have an almighty challenge to double our investment returns – from 8% per year to 16% per year.

Here’s a scenario:

Let’s say you currently save 15% of your pay, and invest that in an index fund (or LIC), which earns a long-term return of 8% per annum.

Then you decide to put some effort into living more efficiently and learning how to save more.  Perhaps you start by getting smarter about your smartphone use.  Maybe you fix your money-pit of a car habit.  Or you may choose to trim some excess insurances or optimise your housing choice.

It’s not a stretch to imagine a few tweaks here and there allowing you to increase your savings rate to 45% of your pay.  Despite what you’ve heard, life is not as expensive as we’re told!

If you’ve successfully learned to start thinking like a business, you’ve just tripled your household profit!

Now I might just be a know-nothing investor, but I struggle to see us being able to triple our expected investment return from 8% per annum, to 24% per annum.


Saving your way to success

I cringe when I hear people who deride the importance of saving.  It’s always the ones who are chasing higher incomes but not really getting anywhere.  Or it’s someone selling you the perfect investment solution.

Maybe they mean well.  But generally, the results of the savers and spenders speak for themselves.

So why don’t people save?  More income is what they need, if you ask them.

While eventually they get the higher income, the saving never comes.  The solution?  More income of course.  They don’t seem to see the virtuous circle they’re in.

Don’t get me wrong, a decent income is important.  But in Australia, the bulk of the full-time workers are earning more than enough money to live an enjoyable life and still save plenty.

I don’t buy the ‘times are tough’ argument.  For some people, absolutely.  But for most of us, it’s just not true.



By designing our lives to be less wasteful, a bit healthier and becoming a more thoughtful and efficient spender, this will all come together.

Hoping we can earn huge returns with our investing prowess is a bit misguided, in my opinion.  As much as I love investing, I think our time is better spent working on our saving.  Especially so, if we’re earlier on in our journey, because that’s where the most progress will be made.

Building strong financial habits and a good savings rate will be the best return on your effort you’ll ever make.  And that effort pays off over your entire lifetime!

Now, I know saving more doesn’t sound as sexy as boosting your investment returns.  But it’s a whole lot easier to do.  And pretty damn effective for those who try it!

In fact, many who chase higher returns get themselves into trouble.  Or, just do really poorly.

You can be a slow saver and wait for those investments to really start compounding, to compensate for high spending.  But this will often take a lot longer – often 20 years or so.

While you’ll still be able to retire earlier than most, understand that you are trading 10 extra years of your life and freedom away for these ‘treats’.

That doesn’t sound like a ‘treat’ or a ‘reward’ to me.  Sounds more like being a slave to one’s spending habits.

Or, you can design a perfectly happy life on much less money, and regain control and freedom in your life at a MUCH younger age than most think is possible.

At the end of the day, we all get to choose.  You can probably guess which option I chose!


16 Replies to “Saving vs Investing – Where Should You Focus?”

  1. As a fellow blogger, I enjoyed the amount of internal linking in this post. Pointed me to a few posts I’ve missed.

    Yes, investing will get you know here unless you have some dry powder in the keg.

    1. Thanks Pat. I wasn’t sure if it was too many links but it felt relevant to bring it together.

      1. Hi Dave! enjoyed reading your posts, can i ask your opinion on Vanguard Shares! Australian and International ? and the best way to buy into them. I have Argo and Afi Shares.
        any information and your logic would be much appreciated.
        Thanks.. Brad

        1. Thanks Brad!

          My opinion is favourable 🙂 Putting money away for the long term into Vanguard index funds – whether Oz or International – is an excellent choice.

          There isn’t a best way really, whatever suits you best. Buying the ETFs on market (VAS & VGS) is the cheapest way, but going direct to Vanguard has other advantages, such as the ability to regularly BPay in small amounts and no share prices in your face which can be a huge mental advantage. So direct is more expensive but it’s more hands off, you can automate it more and it may help you make better decisions and stay invested when things get scary. Hope that helps.

  2. Great post and I totally agree.

    I think the problem is most people are brainwashed into believing consumerism is the answer, that the next shiny bauble will bring them happiness. They are trying so desperately to have it all they never even stop to question if they actually want it all. So they keep spending and spending. Any suggestion they might be in control of their own fate, that the problem isn’t that life is so hard for the “battler” is met with indignation and resentment,

    1. Thanks Adam – great comment and very well put. I feel the need to say it whether it’s popular or not, because the ‘life is hard’ camp works tirelessly to ensure we all believe the game is rigged and we can’t do anything about it. It’s hard to turn those with a defeatist outlook, but we can try!

  3. Great article mate.

    As the old saying goes

    “It’s not about how much you can make, it’s about how much you can keep!”

    My old man has been telling me that since I was a kid.

    As you mention in the post, savings has the double whammy effect of enabling more to be invested while simultaneously requiring a smaller portfolio to fund your lifestyle.

    And a dollar saved is a dollar earned, whereas a dollar earned is really only around 70c depending on your tax bracket.

    1. Cheers Firebug. And yes spot on mate – for some folks a dollar earned is closer to 50 cents. But one dollar lower in spending means 20-25 dollars better off, as you now need 20-25 dollars less in investments to retire to cover that dollar of spending – incredibly powerful stuff that can’t be denied.

      Timeless saying too, your old man did well to drum that into you!

    2. “It’s not about how much you can make, it’s about how much you can keep!”
      I’ve never heard that quote before, but I love it. I’ll be teaching that one to my munchkins when they’re old enough. Thank you!

  4. Really enjoyed this article. So easy to forget how our savings and really a lot of people have no clue. i have a colleague who has shared a lot of the financial trouble she s in (and you wouldn t believe how a $600k person can do to be in trouble!). gave her my insights. the week after she suggested we climbed the harbour bridge as a fun work event – $250 each!!!
    well if only she knew the power of saving coupled with the power of delay gratification…

    1. Thanks for sharing that grogounet. It’s quite incredible the stories of people earning gigantic amounts and yet manage to get rid of it all, every year – sometimes for decades in a row. Before considering anything else, people have to decide to actually keep some of their income!

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