Saving vs Investing – Where Should You Focus?

If you’re new to the FIRE community and this little corner of the internet, you’d be forgiven for thinking this whole thing is just about investing.

That’s all everyone seems to talk about, in forums, facebook groups and even in real-life.  Whether it’s debating property vs shares, index funds vs active investing, or debt strategies.  Most conversations are only moments away from circling back to investing.

And I’ll admit, it’s certainly the most intellectually stimulating bit to talk about.  But at the end of the day, we’ve only got so much time and attention.
So we have to make sure that we are allocating our attention where it’s going to get maximum rewards.

In essence, we want to do stuff that moves the needle the most.  So, today I want to compare saving and investing.  Let’s zoom out a bit from all the chatter and figure out where most of your focus should go by default.

As with most things, there are cases to be made on both sides – and it’s not anepi either/or debate – both matter.  But let’s flesh it out because there are some important points to make.

The fantasy of “investing your way out” of high spending

A common newbie assumption goes something like this:

“I don’t really want to bother with saving. Can’t I just make a few really good investments that will make me rich? ”

Is it possible?  Yes, technically almost anything is possible.

Is it likely?  No.

Think about it.  The higher your spending, the more investments you need to fund that level of spending.  If you want a $150k lifestyle, you need way more invested than someone who’s content on $60k.

Not only are you making it harder to find money to invest, but you’ve also made the goal much harder to reach – effectively multiplying the difficulty level!

Trying to “invest your way out” of overspending is basically wanting all the reward with none of the effort.

It’s like wanting a great physique while still gorging on junk food every day.

When people do that, they usually decide to “out-train” their diet.  They go hard in the gym and hope it cancels out their crappy eating habits.

On the money side of things, it’s the same pattern: you’re trying to “out-earn” your crappy spending choices.  You try to push your portfolio harder, take more risk, and chase higher – often unreasonable – returns.

All to make up for the fact you don’t want to make any personal changes.
You can probably guess how that ends in most cases.

The reality is, better results come from grown-up decisions. From making tradeoffs that might not feel good at the time. 

At some point you decide the “harder” choice now (saving more, spending smarter) is actually the best long term choice.  And the funny thing is, once you put in the effort and begin to see progress, it’s incredibly satisfying.

Most people see this effort as pain. But when you see the results, effort starts to feel like a kind of freedom, because that’s where it’s leading you.

But you’re probably thinking, “surely if I get high returns that’s going to be more powerful than being a tightarse”  Well, let’s think about that.

Why saving beats chasing huge returns

There are basically two levers you can pull:

1. Increase your savings rate
2. Increase your investment returns

Say right now you’re saving 20% of your income.  You invest that in something sensible – like index funds – and long term you get around 8% returns per year.

Now say you decide to get more deliberate with your lifestyle and money habits.

You start looking carefully at what groceries you’re buying.  You stop seeing your vehicle choice as part of your identity. You optimise all the bills in your life, questioning everywhere your money is going.  You stop buying random shit you don’t really need or going out to eat simply when you’re bored.

Over time, that 20% savings rate becomes 50%.

That’s not some crazy extreme scenario. For a lot of households, that’s achievable with effort and time.  In this example, you’ve just increased your savings rate AKA your household profit by 2.5x – double and a half.

Now let’s think about doing the same thing on the investing side.
Can you boost your returns 2.5x?  From 8% per year to 20% per year, on a long term basis?

That’s a very different game.  For 99.9% of people, it’s not going to happen.  Now I know some people think 20% isn’t that high, because we’ve had an amazing period of investing returns for the last 10-15 years.  But please understand, that’s not the norm.  At some point, returns will be terrible for a while… then what?

But let’s put some numbers to it.  Say you’ve got $200k invested.  Instead of earning an 8% return, let’s say you can bump that up, sustainably, to 12% per annum.  That’s an extra 4%, or $8k in a year on your $200k.  That would be an incredible feat… you’d eventually be able to get a super-high paying job running your own fund with that kind of outperformance.

Or you could just earn/save an extra $8k per year.  Which one do you think would be easier and more repeatable?

And here’s the thing: even if you aim for higher returns instead of higher savings – AND you achieve it somehow – the lower spender will still beat you to FI.

Why?  Because their target is much lower.  So it’s still gonna take you longer to reach your goal.

Both saving more and getting higher returns are trying to achieve the same goal – building wealth faster.  But only one of those is in your control. The other one is largely out of your hands.

If you want the odds stacked in your favour, you lean into the thing you can change.  Here’s how I want you to think about it:

Every extra chunk you save doesn’t just represent more money in your account – repeating that action is literally going to mean months, or years, of freedom brought forward.

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.

We can’t control or even influence the markets and our returns.  But we can, if we’re honest, control our spending.  And that flows through to everything:

• How big your FI number needs to be
• How long your journey takes
• How much stress you feel about money
• How much pressure you put on your portfolio to “save” you

If you keep your spending high and then expect your investments to perform miracles, you’ve essentially just created a stressful game for yourself.

If you design a more efficient lifestyle and keep more of your income, suddenly you only need modest returns to get where you’re going.

You end up with a shorter journey, less stress, better odds and more predictability over your outcome.

From a practical standpoint, that’s hard to argue with.

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 1-2 hours a week spent thinking about and optimising your bills and living expenses, is likely to be very well rewarded.  When you focus all your efforts on investing, then subconsciously, deep down you know it’s a vulnerable position to be in.

You know that any month the market might shit itself, your luck might run out, or sentiment changes, and all your outperformance could disappear.

The power of saving (and why compounding isn’t enough on its own)

We all know compound interest is powerful.  But the bit people gloss over is this: it takes a long time to truly work its magic.

If your plan is to reach FI in 10–15 years, compounding doesn’t have decades and decades to do its thing.  In that timeframe, the main driver of your progress is your savings rate.

f you read my first book, you’ll know this intimately, as I talk about it at length.  But when you crank up your saving:

• The amount of cash you can invest goes up
• What you need for FI drops
• You’re not relying on massive returns to make your plan work

That’s why I’ve always banged on about frugality, optimisation, and lifestyle design.  Because saving well is the most powerful lever you have, especially in the earlier years.

But don’t get me wrong.  Once you’ve got a sizable amount of money invested, then increasing investment returns will have more impact.  But you need to build up that money first – and you do that by earning and saving.

Yes, you can borrow money too, but that’s a topic for another day.

Ultimately, there’s no point being the best investor in the world when you’re saving $100 a week.  And if you’re saving $1,000 a week, you’ll make great progress even if you’re not a great investor.

So as much as I enjoy talking about investing, whether you reach early retirement or not is mostly about your savings habits, not whether you find the perfect ETF or the best strategy.

Seeing what works in real life

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

They are (or were) hardcore savers with strong money management skills and efficient lifestyles.  Most shun consumerism to prioritise their goals, realising that modern life is still good without big spending.  And by understanding there’s no benefit in playing status games with everyone else trying to look rich (while being hopelessly broke).

Their happiness tends to come from:

• Interesting projects
• Family and friends
• Health and time outdoors
• Helping others
• Appreciating the life they’ve built

If that’s the outcome you want, there’s no shame in copy-pasting the approach.  Here in Australia, we’ve got our own examples:

You’ve heard my story.  There’s also Pete Wargent who reached FI at 33 with his wife through serious saving and simple investing – using capital city property and diversified shares.

You’ve got Aussie Firebug, who’s now basically FI in his 30s. And I’ve met several readers – like one bloke who lives 10 minutes from me – who’s retired in his 30s to spend more time with family.  I interviewed him here.

Not everyone’s public though.  Some people prefer their privacy, so you’ll never see all the stories of people who’ve done it – only a few.  If you’ve been to one of my meetups in Perth, or been in FB groups long enough, you’ll see there are plenty of people now in impressive positions.

And every normal story has the same basic structure: earning well, committed saving, moderate spending and consistent investing.

Let me put it another way.  Investing is important.  It’s basically like your rocketship to long-term riches.  But saving is the fuel.  No fuel, and your rocket isn’t going anywhere!

So where should you actually focus?

If you’re earlier on your FI journey:

• Put most of your effort into saving and designing an efficient lifestyle, learning to live well on less.
• Increasing your income to create more fuel for your investing rocketship.
• Build strong habits so that saving feels easy and normal, not painful and difficult.  This comes with practice.

On the investing side, keep it simple and consistent.  Pick a sensible approach – index funds, property – whatever your preferred approach is – and just keep feeding the portfolio.

If you’re further along:

• Your savings muscle is probably already strong and you’ve built wealth well into the six figures.
• At that point, tweaks to your investing approach can start to make an impact, but don’t try to get too clever or you might reduce returns!!
• Even then, saving is still the foundation your whole plan is fuelled by.

A focus on saving does the following:

• Reduces the size of the nest egg you need
• Speeds up your progress and timeframe to FI
• Lower your stress (since you control the outcome more)
• Simplifies the process down to its most impactful elements

Honestly, optimising your money and building a strong savings rate is the best return on effort you’ll ever get. It pays off immediately and for the rest of your life.

And remember, this isn’t just about one magic day where you quit work.  This is also what gives you options along the way – going part-time earlier, taking long breaks, switching to work you actually enjoy, or easing into semi-retirement instead of slogging it out for another 5-10 years.

If you try to chase huge returns without fixing your spending, it will keep your FI number high, stretch out the journey, and quite possibly backfire as you end up underperforming a simpler approach.

A few final thoughts

Even if you ignore what I’m telling you, as long as you’re saving something and investing, you’ll probably still retire earlier than the average person.

Just understand that taking a sub-optimal approach is probably going to come at a cost:  likely an extra decade or so of work.

You can always look at optimising your investing approach for higher returns later.  But do it AFTER you’ve mastered your personal finances.  Otherwise you’ll waste years trying to find some secret strategy while sitting on a piddly amount of savings before you realise the truth.

And I get it – saving doesn’t sound as sexy as getting big returns. But it’s a whole lot easier to do, it’s repeatable, and it’s guaranteed to work.

The goal is designing a lifestyle with ample surplus cashflow that’s also enjoyable.  You save aggressively and you invest simply, giving you the highest probability path to freedom – sooner than most people can even fathom.  And importantly, along the way, you become the kind of person who doesn’t even need an expensive lifestyle to feel rich – which is why the money part works in the first place.

Resources you might find helpful:

 Financial Advice
For those wanting personalised guidance with strategy, optimising super, or planning retirement, I can connect you with someone I trust. Find out more.

 Mortgage Broker
Deanna and her team have helped me and many readers with home loan strategies over the years (including debt recycling). Check them out.

 Strong Money Australia Book
Your complete guide financial independence in Australia.  Available on Amazon, Audible and Spotify.

If you use the above services, this blog may receive a benefit at no extra cost to you. I only recommend things I use myself and genuinely believe in.