Entry 55

Why extreme savings is more powerful than investing?

The myth of investment returns

Investing early is important as your money gets compounded over time. However, investing too early without sufficient capital will yield little return. Let’s say you have a $5000 savings that you want to invest.

If you’re lucky enough to get a 10% return every year for the next 5 years, your capital will only grow to $8052.55. This is not going to make you rich in any way even if you had invested it for 20 years.

On the other hand if you focused on saving money say $1000 per month, your money grows at an astonishing $12,000 per year. Invest this savings at a 8% return and you would have accumulated $100,000 in just 6 years.

If you started saving this $1000 per month at the age of 24 and invest consistently, you would be worth a million dollars by the time you’re 50.

Savings before investment

Your savings play a vital role in your accumulation of wealth. Retiring a millionaire is not a dream if we plan it correctly. Save $1000 per month at 8% return will give you 1 million dollars in 27 years. Save only $200 and you would require a 18% return to achieve the same 1 million dollars. It is very hard to achieve 18% return on investment for a long period of time.

Savings is important. Investing is also important. Savings is the basic foundation in financial planning. Get the foundation right and your financial future is on the right track. Start saving first while you look at ways to increase your income. Focusing on only increasing your income is just one sided. Go for both increasing your income and start a savings plan at the same time.