Maximizing Frugality Is More Important Than Maximizing Investing (Unless You’re Already Rich) 23
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July 24, 2007 @ 10:00 am - Written by Trent
Categories: Frugality, Investing
Bookmarks: del.icio.us, reddit
With a title like that, I’m sure to grab some attention, but it’s true - unless you are already rolling in the cash, frugal choices and finding ways to save money is much, much more effective than maximizing your investments. That’s not to say maximizing your investments isn’t worthwhile, but that you can often find a lot more money at home than in the stock market.
Let’s look at Joe, a reader of mine who actually wrote to me a while back asking some financial questions. He and his wife bring home about $3,000 a month and they have a $900 mortgage payment. At the end of the month, Joe reports that they’re usually about $250 ahead, and that $250 goes into a savings account.
Joe’s initial question to me is how he could invest that money better so it would get a better return. I told him to just stick it in a low-cost index fund at Vanguard and instead spend his time worrying about cutting his spending so there’s more breathing room. Here’s why.
Let’s say Joe just sticks that $250 a month in an index fund that returns 10% a year. At the end of five years, Joe would have $19359.26 in that account. That’s a nice little amount to get started - you can buy an excellent car in cash with that kind of money.
Let’s say, instead, that Joe gets seriously into investing. He manages to spend three hours a day doing stock research and takes that $250 a month and actually gets a return of 18% a year. Tremendous! At the end of five years of focusing on investing, Joe has $24,053.66 in his account! The investing is paying off, right?
Let’s take another tack. Let’s say Joe just spends one hour a week looking for frugal things to do, like going for more energy efficient lighting, installing low-flow showerheads, making some homemade meals, and so on. Joe manages to save $75 more a month in the budget this way, giving him $325 a month ($75 isn’t hard to do at all from almost any monthly budget without much life change). If he puts that $325 into that index fund at 10%, he’ll have $25,167.05 in his account. Even a bit of frugality blows away an incredible investment.
Unless you have a tremendous amount of money to work with, you’re better off spending some time looking at frugal techniques than looking at investments. Naturally, there comes a point where the effort of squeezing out an extra percent on the return will be much more worthwhile than preparing meals at home, but most investors simply aren’t at that stage - and the ceiling is much higher than people think. If your investment isn’t well in the six figures yet and you don’t have an immediate clear way of adding more than a percent to your investment return, you’re better off looking at how to increase the amount you can add to the investment.
So, the next time you have an hour to burn and are looking for ways to improve your bottom line, spend the time figuring out ways to tighten your budget rather than looking for an extra percentage point on that investment. Frugality provides far better returns.
Location: When I dare to be powerful -- to use my strength in the service of my vision, then it becomes less and less important whether I am afraid.
Posts: 9,502
LOL Patti!
We have found this true as well. Frugalness has won out again and again over investing. We do have a bit of investment though.
I have a small investment mutual fund which has about $650 in it. Don has his retirement which the city he works for will match up to $200 each month. Eventually we will be putting $50 in both each month, and as we get more debt free, we will add more to each one monthly. For me, it is part of paying myself first. We haven't been able to do this in the past... but we can now. And we will as soon as the dust settles.
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Val; Living the dream we have been working towards for over 5 years.
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I think the point of the article isn't "don't invest". He is obviously saying, yes, do invest BUT... cutting your expenses IS investing in your future!
I know for some of us, who are at that point where there actually IS money leftover at the end of the month, the temptation can be high to spend it. Good reminder on why living below your means is so important and even more basic than that, just not wasting money on stuff that we don't really need.
oh...and i didn't mean that i felt relieved that the article was saying not to invest. my insecurity about not investing is kind of unrelated to the article. and we do have a 401K account. well...dh is working for himself now and has not made any money yet...but we *did* have one. dh's parents have stock in coca cola and disney and all sorts of places...and knowing that and hearing them talk about stuff...it makes me feel like we're not doing something we should be doing. lordy mercy...we just need to be working on a savings account. heck...someone needs to make some money around here period LOL!
Last edited by stephanielynn : 07-26-2007 at 10:11 AM.
Reason: typo
Location: When I dare to be powerful -- to use my strength in the service of my vision, then it becomes less and less important whether I am afraid.
Posts: 9,502
Honestly, I totally understand Stephanie. I just found out about the Mutual fund that I have (like last week), and Don just got that retirement option in June. So we have JUST gotten there to having more than the money in our account. I am keeping the mutual fund... I was thinking of cashing it in and then paying bills down with it, but I decided that since I didn't know about it, having a little cushion would be nice.
This check we got a bunch of overtime from Don's check, so we are paying all our copays, and a few things forward. That will be really nice... but I can't expect things like this, so I take them as they come and do with them what I can. It is all you can really do. {{{hugs}}}
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