Blog - Why Focusing On Investing Isn't The Best Path To Financial Freedom

Why Focusing On Investing Isn’t The Best Path To Financial Freedom

Once you start reading about personal finance, it won’t take long before you become inundated with investing ideas. People will tell you all of the great investing tips they’ve learned along the way, the newest tech company they’ve invested in, or even how they’ve been trying their luck in the cryptocurrency space.

It’s not a surprise that this happens – investing is a sexier side of personal finance. People would much rather talk about a tech company that could turn into the next Amazon instead of discussing the value of cutting expenses and increasing your savings rate.

This is exactly why you never see any “savings specialists” on the daily investing shows. They always have on analysts, or some CEO talking about how their company is “disrupting” an industry.

But here’s the thing – when it comes to building wealth, Investing is just a piece of the puzzle.

And for the average person, it isn’t even the most important piece…

WHY FOCUSING ON SAVING IS MORE IMPORTANT THAN INVESTING (AT FIRST)

The problem we all run into initially is that one of the most important parts of personal finance is one that we all struggle with – Saving!

Think about it. If you want to invest, you first need some money to invest with. The main way to acquire that money is to earn some form of income and to SAVE some of the money.

Anything to get started is good, but your investments won’t have as much of an impact on your overall wealth until they hit a critical mass. And if you’ve looked at any type of chart that depicts compound interest, you see that it can take a while before the magic really kicks in.

But no matter how much you are currently saving, focusing on INCREASING your savings rate is a better endeavor than focusing on investing.

EXAMPLE OF SAVING BEING BETTER THAN INVESTING

Whenever I’m trying to explain this point to someone I usually walk them through a basic scenario. So, let’s do the same right now.

Let’s imagine you earn $100k each year. And being the good little saver that you are, you are saving $5k each year and investing it. On top of this, your investments are earning an average return of 10% each year.

If we flash forward and look at your accounts, your balance at the end of the first year will be $5,500. This accounts for the $5,000 you invested, and the $500 in returns you received (10%).

Now, you think you can do better, and believe that by doing a ton of research and laboring over numerous analyst reports, you could increase your returns up to 20% for the next year.

What I like to point out to people is that if you simply focused on increasing your savings rate by an extra 1% of your income, you’d save an additional $1,000 over the course of the year.

This $1,000 is equivalent to a 20% return on your $5,000 investment, and you didn’t even have to risk your money.

And that is just a 1% increase. Considering you were only saving 5% of your income, and it’s recommended that you should save at least 10%, by focusing on increasing your savings rate, you could get way ahead of your investment portfolio. In fact, you could DOUBLE the value by getting your savings rate up to 10%.

The Rule of 72 tells us that with a 10% return, it will take you just over 7 years to double the value of your investment portfolio. By increasing your savings rate to 10%, you’ve accomplished that feat in a fraction of the time, and with no risk.

WHEN IS IT BETTER TO FOCUS ON INVESTING

As you can see from the above example, for those in the early stages of their savings, it is better to focus any additional effort you have toward increasing your savings rate. Even if you were successful in increasing your investment returns, you’d come out ahead with increased savings.

But later on, once your investment portfolio has grown to a sizeable number, the math changes.

If we used the same numbers as above, but instead of a $5,000 investment portfolio, you had a $500K investment portfolio (after years of saving and investing), things change.

Now, a 20% return on this portfolio would be $100,000! That’s your entire annual salary. And any additional percentage increase in returns would be worth an additional $5,000 (the initial size of your investment account).

In this situation, you might be tempted to say that it’s better to focus your time and effort on increasing your investment returns.

However, I’d still advise against it. But this has a lot to do with the fact that for the average person, I’m an advocate of passive investing.

NEVER STOP FOCUSING ON LIVING YOUR IDEAL LIFE

Even if you get to this point, I’d recommend against putting a ton of time into evaluating investments.

I’ve always said to people that building wealth isn’t about amassing more money, it’s about creating control over your finances so you can enjoy the lifestyle you desire.

In other words, financial planning isn’t about increasing the amount of money you have, it’s about increasing the quality of your life.

WAYS TO IMPROVE YOUR FINANCES WITHOUT FOCUSING ON INVESTING

So, if saving is a better thing to focus on than investing, what other ways can you have a positive impact on your finances?

ASK FOR A RAISE AT WORK

We’ve already laid out why it’s important to save more of your income, but what about increasing your income as well?

In the example above, if you get yourself up to a 10% savings rate, then you’d be saving $10,000/year.

But if you asked for a raise and received a 5% bump, then you’d be making $105,000/year. If you maintain your 10% savings rate, you’d now be saving $10,500/year.

But there is nothing stopping you from saving the ENTIRE pay increase.

In theory, you could save thousands more each year by putting all of that additional income toward savings.

Double bonus!

ASK FOR DISCOUNTS ON EVERYDAY ITEMS

I recently wrote an article discussing how I regularly save anywhere from 10-30% or more on everyday items by simply asking for discounts, even when they aren’t advertised.

If you’re one of those people who are saying, “I just don’t have more money to save,” this could be a great way to change your situation.

But, really, we all could be saving more if we tried.

MAKE EXTRA MONEY WITH SIDE GIGS

If for some reason your employer won’t budge and give you a pay increase, look outside of your job for ways to make additional income.

In a piece I wrote titled “Earn Additional Income Through Garage Sales, Ebay, And Online Marketplaces,” I spoke about how people are making over $1,000/week with side hustles like garage sale hunting.

You read that right… $1,000 per week! And some are making much more.

WHERE TO FOCUS YOUR INVESTING EFFORTS

If after reading this you still feel the need to put time into the world of investing, I highly recommend you do it in industries where you can have a direct impact on the outcome.

I have invested in Real Estate for a while, and I continue to do so with friends and family.

[The 5 Key Reasons Why Real Estate Investing Is Awesome]

The reason I love Real Estate so much is that, to a certain degree, you can dictate the outcome of the investment.

If you are flipping a property, you can choose what type of materials to use, what type of properties to flip, and you can find ways to buy properties at super discounted prices that will help you lock in great returns.

If you own rentals, you can rehab the rental and make it more attractive to higher-end clientele, thus increasing the cash-flow and profitability of the investment.

You can’t have this same control and effect if you are buying stock in Apple.

SHIFTING YOUR MINDSET

As you can see, I’m an advocate of NOT focusing much of your effort on the investment side of personal finance. I just think there is too much noise and too little valuable advice.

This isn’t to say that it’s not possible to have a positive impact by investing well, I just think that there are so many additional levers to pull and buttons to push. So, why focus on just one area that has a mixed track record of success.

After all, the track record for increasing your income and savings rate is pretty stellar. In fact, I can’t name a single person who has faltered by focusing their time and effort that way.

Capably Yours,

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