Saving and investing go together like a horse and carriage because frugality always matters.
My posting days at the Retire Early boards can be divided neatly into two periods. In the time-period prior to my May 13, 2002, post on the realities of safe withdrawal rates, I was the most loved poster in the community. In the time thereafter, as my focus shifted from saving to investing, I became the most hated. Neat trick, huh?
In my mind, my two posting careers are two sides of a single coin. The common thread is a desire for an efficient use of resources. No one viewed it as “controversial” when I argued for frugality in the context of spending decisions. Apply that idea to investing, however, and watch out for the brickbats that will be sent sailing in your direction!
The reality is that wasting money in the investing area sets back your quest for financial freedom as much as does wasting money in the spending area. Buying stocks when they are overpriced is wasting money. Some don’t like to hear it, but it’s so, it’s so.
Stocks are not going to go out of style anytime soon. You don’t need to be in a rush to buy them. When a house that you want costs too much, it’s viewed as a smart idea to wait until the price comes down. When a car that you want costs too much, it’s viewed as a smart idea to wait until the price comes down. I advise doing the same when an investment class that you want costs too much. I love stocks as much as just about anyone else I know. But there are limits to what I will pay for them, just as there are limits to what I will pay for a vacation or a restaurant meal or a sweater.
I’ve known a lot of people who think of themselves as investing geniuses who don’t pay hardly any attention whatsoever to the price they are paying for the stocks they buy. Knowing this should give you a boost if you are someone who has shown skill in the saving area but feels intimidated by the idea of tackling the investing project. If you appreciate the value of thrift, you possess the single most important trait that a successful long-term investor needs to possess — an eye for the deal. Those dollars add up, both on the saving side and on the investing side.
Saving and investing go together like a horse and carriage because one leads naturally to the other.
Is it more important to save effectively or to invest effectively? It’s more important to save effectively. Why? Because that’s what gets the ball rolling. The aspiring early retiree who saves a good percentage of her income but who earns a small return on her investments is in far better shape than the aspiring early retiree who earns an enviable rate of return on a small pile of assets. If it’s a choice of getting your saving house in order or getting your investing house in order, choose to get your saving house in order. Effective saving will cover a multitude of investing sins.
It doesn’t work the other way around.
Or does it?
To a small extent, it does. One trick that pays a big reward is to think of your earnings on your investments as an income stream that comes to you as a result of work done by your money rather than work done by you. This is an obvious point but one that is too often missed by those who find it a struggle to save. It is usually only when you become an effective investor that the magic of compounding hits home.
So there is a sense in which this is a chicken-and-egg riddle. You can’t invest until you save; so saving comes first. But it is seeing how being able to invest permits you to overcome dependence on a paycheck that often serves to motivate a successful saving effort. Thoughts of the payoff of effective investing often must come before effective saving.
There’s a sense in which effective investors don’t need to worry about saving as much as do those who do not know how to invest well; they are adding to their accumulated wealth through a different process. But effective investors usually care more about effective saving. Effective investors often come to view investing as a game they want to win. Adding new dollars to the pool of investable money is one way to gain an edge in the game. Learn saving first, but, when you have risen to a high level of competence as a saver, it makes sense to direct your efforts to raising your skills as an investor rather than to reviewing saving ideas you have mastered. Becoming a good investor will make you an even better saver.
Saving and investing go together like a horse and carriage because how well you manage the one influences how you feel about the other.
The big problem with saving is motivation. Most of us earn enough to save significant amounts of money. But most of us find considerable appeal in the exciting life enhancements available to us by spending in this Consumer Wonderland of ours.
The big problem with investing is confidence. It doesn’t take motivation to invest; you are forced to do it once you acquire assets, once you save. But most middle-class investors squander a high percentage of their investing dollars as a result of being taken in by one or another of the surface-plausible theories of how to invest that just do not stand up to serious scrutiny. It stuns and amazes me how little most of us know about the investing fundamentals. The other side of the story is that it excites me how much progress we could make in our quests for early financial freedom if we got our acts together.
There was a time when I had no more confidence in my investing abilities than most others and less than many others. Few would say that about me today. I have limitations and I like to believe that I am aware of them. On the issues that I have studied in depth (the valuations-related issues), however, I feel the confidence needed to take my place on any stage on Planet Earth and to argue my case before any group of “experts.” I know what I know, as the Paul Simon song asserted.
That confidence has its roots in my earlier efforts to come to terms with what it meant to be an effective saver. I spent lots of time mastering saving and the skills that I developed just naturally over time made me an effective investor. Not in a direct way. There are still lots of aspects of the investing project regarding which I have little knowledge. What my success in saving gave me was the confidence I needed to sort through the gibberish that often passes as investing “wisdom.” My success as a saver left me far less inclined to accept on faith nonsense that causes so many middle-class investors to fall into traps.
Investing is one of those fields in which it is not what you don’t know that hurts you so much as what you come to think you know for sure that just isn’t so. You don’t need to be smarter in an I.Q. sense to see through the cons being worked on you by 80 percent of the material published in the conventional media. What you need to do is to think clearly enough to ask hard questions and to be stubborn enough to insist on meaningful responses to those questions. That takes not I.Q. points, but confidence. Saving well can give you the confidence needed to figure out what is needed to invest well.
Saving and investing go together like a horse and carriage because one can take the place of the other.
The quickest route to early financial freedom is becoming both an effective saver and an effective investor. I think it is worth taking the time to becoming reasonably effective at both important life tasks. Some of us, however, are just never going to get the saving bug. And some of us will never feel comfortable with investing, no matter how much we save.
It is sometimes the thrill of investing that draws someone to master it; investing really is a game in many respects. The type of person who is drawn to the sport of investing might not be the type who is ever able to accept the “boredom” of saving. I don’t accept the idea that saving needs to be boring. It’s a reality that many see it that way, however.
Effective savers are often people who like having control over how their lives are going to turn out. If you admire this trait, as I do, you will describe them as people with independent spirits. If you are inclined to disparage it, you might refer to savers as control freaks. Either way, the thing that drives one to save — the desire to have and to hold the power to decide one’s own fate — can in some cases make it hard to turn over one’s life savings to an investment class that can at times experience price crashes. And all of the ones that provide the best long-term returns do that! Many effective savers will find it hard becoming effective investors, no matter how hard they try.
In those cases, effective saving can make up for ineffective investing and effective investing can make up for ineffective saving. It’s the harder and rockier and longer road to master only one of the two essential money management skills. But you can get from here to there with a mastery of only the one that you take to naturally, if you really must limit yourself to mastery of only one.
Saving and investing go together like a horse and carriage because they are two steps in a three-step process.
I like the idea of integrating the various money tasks. Neither saving nor investing takes place in isolation. They are related tasks, and seeing the connections can help you develop a holistic and healthy overall take on the money management project.
Money works its way through our lives via a three-step process. We get hungry. We work. That’s trading our time for money. That’s earning. Eventually, we put aside a portion of what we earn to allow us to buy stuff not today but tomorrow. That’s saving. Then we figure out that by becoming more sophisticated about this business of putting aside a portion of what we earn, we can overcome the need to work earlier in life. That’s investing.
Working effectively can take the place of investing effectively. Earning more often brings in greater benefits because most of us devote a large portion of our lives to the earning aspects of the life project. Saving can take the place of working. That’s the entire idea behind the Retire Early Movement. Most middle-class workers of today have the option of overcoming paycheck dependence long before they turn old; it’s done by saving more effectively than those content to work until they turn sixty-five. Investing too can take the place of working, of course. And saving can take the place of investing and investing can take the place of saving, as noted above.
I view working, saving and investing as spokes on a wheel that might be termed “The Life Fulfillment Wheel.” This is why I argue that there is no such thing as complete financial freedom. Financial freedom is everyone’s goal, but it is a goal that is never achieved; once you attain the state that you think of today as financial freedom, your vision will expand to take in elements of a bigger and better and bolder life, one that will cost more money and require a more expansive vision of financial freedom.
This is not a bad thing, it is an exciting thing. The suggestion is that there is always something new to live for and to strive for, no matter how high up the mountain you climb. You will never have done enough work. You will never have saved enough. You will never have learned all you need to know about how to invest.
Don’t feel bad if there are aspects of saving or investing that you just do not get at this time. Not getting something means that you have something ahead of you to get in the time remaining to you. Not getting something now gives you something to strive for tomorrow. We are meant to learn from and enjoy the journey, not the temporary destination points.
There’s no such thing as a finished saver or a finished investor. We’re all at different stages of a lifelong learning process.
Saving and investing go together like a horse and carriage because how you handle the one affects the risk involved in doing the other.
In my best year, I saved $88,000. There was a reason why I was saving like a madperson at that stage of my life. I was desperate to get out of my corporate job (the one plus was that they paid me a madperson’s salary) and into work that meant something. Stocks were selling at extremely high valuations that year, at price levels that have rarely been reached in the history of these United States. How much of that $88,000 do you think I put into stocks at those price levels?
Those who know Farmer Hocus well can shout out the answer — a Big Fat Zero! I invested a Big Fat Zero in stocks at that time because I was desperate to get the accumulated wealth number up fast and stocks did not look like a good bet to be helping me to do it.
Say that I had saved only $8,800 that year. Would I have been inclined to put something into stocks? Perhaps. I don’t think it’s a bad idea to invest 30 percent of one’s savings in stocks, even at times of extremely high prices. I don’t see that any great harm would have been done by me having put $3,000 into stocks in that year.
Much of the conventional money advice suggests that saving and investing decisions are entirely separate. It’s not so. Both saving and investing are activities you engage in to enhance your enjoyment of life. If enhancing your enjoyment of life means getting the accumulated wealth number up quickly in the saving area, enhancing your enjoyment of life means getting your accumulated wealth number up quickly in the investing area too. How much you save affects how much risk you can take in your investing strategies and how much risk you take in your investing strategies affects how much you need to save.
Say that there’s a company that you have researched that you would like to invest in. But say also that this investment is a risky one and that you cannot afford to take on too much risk in your investing plan. You could turn to your budget and identify another $40 of monthly cuts in spending. The Multiply-by-25 Rule (see the article on “How to Start Saving” at the “Upsizing” section of the site) tells you that that move reduces the amount you need to save to attain financial freedom by $12,000. It could be argued that that move “permits” you to take on $12,000 worth of risky investing that you couldn’t afford before. If the investment pays off, you’ll be that much more ahead!
Saving and investing go together like a horse and carriage because how you handle one affects the return obtained from doing the other.
Stocks are down. Way down. Prices have dropped 50 percent. You’re tempted to sell. You know that buy-and-hold is what works. But you cannot stand to see your retirement stash grow smaller month by month by month.
You could save more. That could be what you need to stabilize the ship. If saving more permits you to stick to a buy-and-hold strategy (and if buy-and-hold actually makes sense for someone with your stock allocation), that extra saving will in time almost surely come to enhance your investment return.
It works the other way around too. Investing more effectively increases your motivation to save because each dollar saved counts for more in the hands of an effective investor. I have been thinking recently that we need to change The Multiply-by-25 Rule to the Multiply-by-20 Rule. In earlier days, I was not sure that Passion Savers could count on earning a real annual return of five percent in all market environments. So I used The Multiply-by-25 Rule, which demands only a 4 percent annual return. With the development of the Valuation-Informed Indexing approach, I have become increasingly confident that a 5 percent annual return can be assured regardless of where valuations stand. I think it is perfectly realistic for those who have a handle on the investing ideas discussed at our boards in recent years to employ a Multiply-by-20 Rule when constructing their financial freedom plans. How you invest influences the efficacy of your saving strategies.
Saving and investing go together like a horse and carriage because the attitude taken towards one affects the attitude taken towards the other.
It’s not hard to save and it’s not hard to invest.
It’s unsettling to think about either.
We all have made mistakes in our money lives. Putting together a plan requires us to face those mistakes. That makes us anxious. Many of us put off saving and investing as a means of avoiding the anxiety that pursuing those life projects causes us.
Get started somewhere. That’s the key.
Get started somewhere and you will develop the good feelings it takes to get you to the next stage of the process.
The hardest part of learning how to run a marathon is learning how to run three miles. That part is ugly. But after that, it’s all downhill.
Saving and investing go together like a horse and carriage because seeking early financial freedom is the key to doing both well.
Pursuing early financial freedom changes everything.
If you’re saving because you think you should, you’re going to do a slapdash job of it. If you’re looking into investments because you have some money sitting around and you know it doesn’t make sense to leave it in a money market account, you’re going to do a slapdash job of it.
Those seeking early financial freedom are saving and investing to make their lives what they always wanted them to be. Make early financial freedom the engine of your plan, and you won’t find the idea of putting together a budget a giant bore. Make early financial freedom the engine of your plan, and you won’t get so caught up in the dark emotions as to talk yourself into believing that there really might be something to that Efficient Market Theory business.
It’s not what you know that counts. It’s what you feel that counts. Knowing matters. But feeling comes first. Get the feelings right, and the rest will fall into place. Only a customized saving goal can generate the sort of power that will put you in the ranks of the world’s best savers and investors.
Passionate savers really do save. Passionate investors don’t fall for the tricks that do in so many others somewhere down the line.