Why Your Saving Rate Is More Important Than Your Investment Return

Investors love to focus on their investment return. From 2009 to 2017, it was hard not to get excited about the double digit returns even the average investor could achieve. While it was nice to see those large returns, it really just made up for the 40% drop in the 2008 Market Crisis. And it is highly unlikely that we will repeat those returns over the next 10 years. So that brings us back to the expectation that over a long period of time we should hit the S&P 500 historical market average of 7% (1950 to 2009 adjusted for inflation and dividends).

What about the savings rate. Well, Americans suck at saving. Personal savings in the United States averaged 8.82 percent from 1959 until 2018, reaching an all time high of 17.30 percent in May of 1975 and a record low of 2.20 percent in July of 2005. In 2018 we are saving only about 6%. (US Bureau of Economic Analysis)

So let’s take a look at the difference. Two individuals who have income after taxes of $50,000 (assume they do not get any pay raises). One of them only saves 1% ($500) of his income, but focuses on beating the market and earns 10% per year. After 30 years he would have $82,247. The other guy (our Saver) takes the current 6% savings rate ($3000), but he sucks at investing and only earns 1%. 30 years later he would have $104,355.

I’m not saying you should not try and get the best return possible, but the time that it takes to increase your savings rate is much less than the time involved with trying to beat the stock market’s returns. So YourSmartMoneyMove is to save in a disciplined and consistent way.

About the author  ⁄ Van Pappas

Van Pappas

Van Pappas, CFP® - Van is a native of Atlanta. He holds his undergraduate degree in Finance with an emphasis in Real Estate. As a planner for 15 years, he earned his CFP designation from Kaplan University. He is currently the Chairman and founder of the Chamblee Chamber of Commerce and sits on the Downtown Development Authority for the City of Chamblee. In 2012, he noticed the value of helping the X-Y Generations and decided to merge his practice with oXYGen Financial. Background and qualification information is available at FINRA's BrokerCheck website.Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

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