posted by: Radnor Financial Advisors
A common question often asked is “How much should I be saving?” The answer depends on so many different factors: how much do you have, how much you make, what you are saving for, what rate of return will you earn, how long will you live? As a result, the answer is never the same from one situation to the next. However, when it comes to accumulating long-term wealth, good saving habits beat good investment instincts.
Who are the people that may have millions in savings? They are the people who systematically save 10%, 20%, 30% or even more of their income year after year. People build wealth. They don’t luck into it or invest their way from nothing to millions.
As a simple example, if someone makes $100,000 per year, saves 20% annually and earns a modest 6% return each year, after 30 years they’d have nearly $1.6 million. If someone else makes the same $100,000 per year, saves just 6% but earns an annualized return of 10% they wouldn’t even have $1 million saved after 30 years. The rate of investment return was almost double but the accumulation isn’t even two-thirds of what the saver accumulated. It takes huge investment returns to make up for a savings shortfall.
The best part of this for savers: saving is easier than investing and more predictable and reliable. Savings rate is something that each of us controls for ourselves and increasing our savings rate doesn’t increase the risk we take in achieving it. Investment returns can be managed but not controlled and the higher we want our return to be, the more risk we must take. So how much should I be saving? The answer to that question is up to you and your family but the more you save the more you likely end up with whether you get good investment returns or just average returns.