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Investing Wealth

Saving (Not Investing) is the Key to Wealth Creation

Is it better to save 1% and earn a 10% return or save 10% and earn a 1% return?

99% of conversations between investors are about the next hot stock or something else related to investment returns. Over the long run, the market delivers roughly 10% annualized return. Beating this is next to impossible, yet it’s something that pre-occupies much of mankind’s energy.

Here’s the thing. For most people it barely matters. Indeed, most people would make a much larger dent building wealth by spending less, saving more and simply dumping their savings into an index fund to get that 10%.

Most people don’t save 10% of their pay, and instead focus their energy trying to find the next Tesla. If successful, the % returns might be satisfying, but when it comes to wealth creation it’s dollars that matter.

So is it better to save 1% of your salary and earn a 10% return or save 10% and earn a 1% return?

The chart below compares two extremes for two individuals who earn $40,000 with an expected annual pay increase of 4%.

Person 1 saves 1% of their paycheck but manages to earn the market rate of 10%.

Person 2 saves 10% of their paycheck but dumps their money into a deposit paying 1%.

Over a 30 year career, Person 2 builds a nest egg 167% larger than Person 1. Now imagine if that person could save 10% and earn 10%?

Savings is the bedrock of wealth creation. Everything else comes second.