being frugal/saving vs investments

[daylatedollarshort]

For us I would have to say saving had the biggest impact - two income household with tech jobs. We tried to stay current with whatever software or methodologies were in short supply / high demand.

We consistently had a LBYMs lifestyle compared to some of our co-workers and neighbors, but in hindsight I would have optimized our expenses even more. Like now we changed where we grocery shop, dropped the expensive cable TV packages, have some seat filler subscriptions for entertainment and made the house more energy efficient. None of those changes have lowered our quality of living, some improved it if anything, and 100+ or so changes like that has had a huge impact on our annual run rate. We could have retired in our forties instead of fifties if we'd done that decades ago.

 

[gayl]

Saving > investing in most cases.

Take two people each earning 100K. Assume for the purposes of this example both put their money away on Jan 1st each year and don't add another dime all year.

Person A saves 20% and gets a modest 7% annual return = $21,400 at the end of the year.

Person B saves 10% and gets a nearly-impossible-to-achieve 100% annual return = $20,000 at the end of the year.

Saving more gets person A a higher total than person B.

A more realistic example of DCA and variable returns will result in different end of year totals, but the concept is the same. Saving more is generally more important and more likely to result in higher totals than the best investors in the world can hope to achieve.

however a saver typically saves in a bank rather than investing and achieving a 7% return.

A: saves 20% + .25% interest x 10 yrs = 223k

B: invests 10% + 7% investment return × 10 yrs = 163k. Although it does take 18 yrs for B to pass A

C: invests 10% on a monthly basis + 10% (SPY average) reinvest dividends × 10 yrs = 201k. Passes A in 11.5 yrs
http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

But C got to go out to eat more, vacation every year, never really denied themselves. It's not all "live for tomorrow" sometimes ya gotta smell the roses

 

[doneat54]

Would have to be savings for us. We always LBYM'ed and saved hard, but as 2 incomes from megacorp grew over the years, we kept out lifestyle pretty constant and net savings went from 15-ish to nearly 35%. Luckily the little bit of "old money" had a chance to do pretty well growth wise pre-2008, so overall we did pretty well.

 

[Cobra9777]

What had a bigger impact-saving/being frugal or investments - on reaching FIRE? Can you quantify or give one suggestion?

I wouldn't say we were "frugal," but we did save a lot. We had 2 incomes and priority #1 was always to max out both 401Ks, no matter what. We set our lifestyle based on whatever was left. It was tight early on with young kids, but became substantially easier over time as our income grew, and we spent accordingly. Later when the kids went to college and our income was peaking, we also built up the taxable account in a significant way and started to accelerate mortgage repayment in anticipation of ER.

Having said that, I still think that the compounding effect of intelligent and disciplined investing over a long period of time was the larger factor in making ER a reality for us. I hesitate to try and quantify this... but I know exactly how much we put into the 401Ks and the taxable accounts. The current value of our investment assets exceeds that figure by a factor of 3. So obviously, just sticking money in a coffee can would have left us drastically short of what was needed for FIRE.

My "one" suggestion is: start early, work hard, LBYM in a balanced way, save consistently, educate yourself on low-cost passive index investing, make a plan and stick to it, check progress regularly, update the plan as needed, and follow it with the discipline and determination that any important goal requires.

 

[Big_Hitter]

But C got to go out to eat more, vacation every year, never really denied themselves. It's not all "live for tomorrow" sometimes ya gotta smell the roses

good luck getting 10% net returns over the next 10 years, js

 

[GSMAN]

I think savings was a much bigger impact to our FI. We both had/have great jobs in the Aerospace business that allowed us to save a good portion of our salaries in the last ten years of our careers. We never were big spenders. The only thing that I can look back and say we didn't do a good job of keeping expenses down is in the eating out department. We love to eat out! Although I have noticed that we now would rather stay home and cook as we have gotten older. The other stuff like fancy housing, expensive cars, jewelry or other luxury items were never a temptation.

 

[gayl]

good luck getting 10% net returns over the next 10 years, js

Dividend reinvesting

I refuse to deny myself so all my kids can inherit more than 1m each -- says the person who's highest annual income was 66k. They'll be content with the 750k apx each that's there

 

[W2R]

I always contributed the maximum to the TSP, plus the entire over-50 catch-up when it applied. That maximum was a lid on how much I could save in that account that aggravated me no end. Investing really helped a lot although I still wanted to save more in my TSP than was allowed. Still, looking back on how much I saved in the TSP, saving helped more than investing.

Beyond the TSP, I did some pretty extreme LBYM and managed to both pay off my house and build a good sized taxable portfolio.

So overall, I would say that saving helped more for me both in taxable and in the TSP. But really, this is like being asked which of your children is your favorite. Both saving and investing were needed and effective.

 

[Big_Hitter]

Dividend reinvesting

still won't get you 10% for 10 years, not at least according to consensus means and standard deviations for any asset class

 

[Taxman59]

In the early years, maxing out the savings will allow the accounts to grow more than your contributions you make annually. That being said, a continued pattern of maxing out the savings for many years will be the biggest reason your account balances are what they are (remember, if you earn 5% on your accounts, 5% of $1,000,000 will be more than 5% of $100,000).

 

[gayl]

still won't get you 10% for 10 years, not at least according to consensus means and standard deviations for any asset class

did you read the link? FWIW: I tripled from 2008 - 2016 but only experienced a 15% drop in 2008 - 2009. The link I posted was 1920s - now and cites 10% annual if reinvesting dividends in S&P Index. Even if you only got 7%, you only need to invest 1/2 as much to outstrip savings in 18 yrs. How many of us only worked for 18 yrs? And we're willing to sacrifice everything to live well in our old age? Not me

 

[Big_Hitter]

did you read the link? FWIW: I tripled from 2008 - 2016 but only experienced a 15% drop in 2008 - 2009. The link I posted was 1920s - now and cites 10% annual if reinvesting dividends in S&P Index. Even if you only got 7%, you only need to invest 1/2 as much to outstrip savings in 18 yrs. How many of us only worked for 18 yrs? And we're willing to sacrifice everything to live well in our old age? Not me

understood, but the forward-looking consensus doesn't support historic returns, at least not for the next 10 years


for example, how many pension funds that are 100% passive in the S&P index assume a 10% rate of return - none

 

[gayl]

Whatever works for you. I still think the sky isn't falling and want my money to work harder for me than I work for it

 

[Big_Hitter]

Whatever works for you. I still think the sky isn't falling and want my money to work harder for me than I work for it

I agree, I'm pretty aggressive with my investments. I like the 55/25/20 portfolio myself....

 

[Big_Hitter]

Here is an expert opinion


John Bogle says you won’t make much money from stocks - MarketWatch

 

[gayl]

A little reallocation this week:
65% Large Cap
10% Small Cap
10% Bonds
14% Cash
1% Options

but limit orders in on individual stocks & options. Comfort zone = 10% cash. I make $$s in stocks / index ETFs (3 accounts (IRA, ROTH, KIDS INHERITANCE) indexed = SCHA, SCHB, SCHD, SPY)

Who's "John Bogle?" Is he like Jim Cramer and the other TV personalities? Yeah, I don't follow them either

I read a book once (I think by Little) UNDERSTANDING WALL ST. Plus OPTIONS put out by OPTIONS INDUSTRY COUNCIL

 

[Big_Hitter]

Who's "John Bogle?" Is he like Jim Cramer and the other TV personalities?

no, he's actually a rational human being

I'll let the others chime in...

 

[gayl]

Yeah Cramer is quite the entertainer. As long as I'm beating SPY I'll use my own perspective (combo of fundamental, technical, and emotional analysis)

 

[FI by 2024]

however a saver typically saves in a bank rather than investing and achieving a 7% return.

A: saves 20% + .25% interest x 10 yrs = 223k

I'm fairly certain most/all of the respondents here understood savings to mean the money set aside for the future, not a literal savings account. I am not advocating using a bank savings account to grow wealth.

 

[FI by 2024]

Are you sure? After a second year of saving, person B has $60k, person A has $44k.

Again...assuming person A continues to get realistic returns while person B gets completely unrealistic 100% returns. In the real world, a higher savings rate outweighs better investing as shown by PP. If person A consistently got 7% while person B consistently got 10%, it would take 31 years (and a LOT of luck) for person B to catch up.

 

[thefinancebuff]

Again...assuming person A continues to get realistic returns while person B gets completely unrealistic 100% returns.

That was your own example. It only proved the opposite of what you wanted to prove.

 

[gayl]

I'm fairly certain most/all of the respondents here understood savings to mean the money set aside for the future, not a literal savings account. I am not advocating using a bank savings account to grow wealth.

Using that premise, it's an entirely different question:

Is an investor better off investing 20% of their income with 7% return or 10% of their income at 10% return?

Obviously 20% at 7% return as they equal out in 33 yrs

 

[travelover]

..........Who's "John Bogle?" Is he like Jim Cramer and the other TV personalities? ................

Bogle is that crackpot that thinks people would be foolish enough to put money into mutual funds that just invest in all stocks as opposed to just investing in the good stocks. Crazy idea.

 

[FI by 2024]

That was your own example. It only proved the opposite of what you wanted to prove.

Not really. The point I was trying to make is that a higher savings rate can result in achieving your goals while relying merely on investment returns with a lower savings rate requires unrealistic returns. If you are able to save more, that's a better way to build wealth than chasing unrealistic returns, IMO. Nobody can consistently achieve returns 10x the historical average.

ETA: apparently I need to up my hyperbole game to be clear. I'll try that next time.

 

[SJ1_]

What had a bigger impact-saving/being frugal or investments - on reaching FIRE? Can you quantify or give one suggestion?

for us being frugal. It also has the advantage of needing less to live on.
the closer you are to being to live on SSN (and maybe Pension) the less
money you'll need from your investments