being frugal/saving vs investments

[audreyh1]

Unless you are in a truly unusual position, you can't have meaningful investments without LBYM.

In our case, investments have been huge addition--but LBYM came first, and enables us to retire with far from enough to spend 80% (or whatever) of our present income (no matter how measured).

Exactly. You need to be able to put money aside first. Then investing wisely determines how long until the nest egg grows enough to retire. If it grows slowly, for whatever reason, it might take longer. If you're super lucky and hit the jackpot it might be short! But not if you weren't able to make the investment in the first place.

 

[ecowtent]

Thank you all. I think we are on the right track (especially based on feedback given), but I need to be more diligent and learn more about the investment side.

 

[ShokWaveRider]

Do you count paying home mortgage early as part of your savings ratio? We live on my salary and send hubby salary to our mortgage.

Absolutely!!!! One of the main contributors to our current wealth.

 

[FIREd_2015]

Definitely investments. Without the savings and being frugal I would not have had the money for the investments but without the investments I would not have been able to FIRE. I did a quick calculation and my lifetime investment returns to date are about 4 times greater than my lifetime salary earned.

I tried to edit my response but for some reason couldn't. Anyways due to my overly enthusiastic optimism I miscalculated my investment gains. It's only around 2.5x (not 4x) lifetime salary earned including equity gained from real estate. Excluding real estate, it's around 1.2x

 

[ABQ2015]

Savings had the larger impact because I was/am a lousy investor. I could have made about the same amount of money putting my savings under a mattress as into my investments. Fortunately being a saver also allowed me to pay off my mortgage in less than 20 years which has significant reduced my expenses. Working hard in my profession and achieving a good salary was important too as it increased my pension about $10K a year and helped compensate for the poor investments.

 

[Badger]

LBYM and planning provides the opportunity to invest. It also provides the opportunity to retire, whether early or later, by establishing the foundation to lower your financial requirements to retire.

Cheers!

 

[jollystomper]

DW and I started off by being frugal (but not cheap). As others had done, when we married we only lived off of one salary and tied our spending to that. As our income grew, we increased our lifestyle - but at a MUCH lower rate than our income growth. For example, a salary increase of 5% might only raise our spending budget by half a percent, if at all. If I received a bonus, we might splurge no more than 20% of it and save or invest the rest.

As we built up savings and then started to invest, I realized early in those personal finance years that I did have the time, patience, or knowledge to try to beat the market. I settled, in baseball terms, for trying to just make contact and hit singles instead of swinging for the fences. One result was shifting away from individual stocks into mutual funds, then index funds and index ETFs.

One result of combined savings and investing is that we don't need to try to beat the market to have a good financial year. We are happy to lessen our investment risk as we are still able to save 30-35% of our income (and in some years even more). In fact we have cut down our savings this year to spend one some hopefully one time home renovations, but should still end up saving at least a quarter of our income. Then we just invest a portion of that income in a diversified manner.

So I don't see it as being a "versus", for us starting with savings, then doing both in a balanced manner allows us to invest at the level of risk we are willing to take and still sleep at night. That helps us look at days like today, where the market will likely take a pounding, and not worry.

 

[COcheesehead]

Your income is your #1 wealth generating tool.

 

[GenghisKhan]

I keep very accurate financial records and am not quite at FIRE but close with 94% of the FIRE wealth I'll need. Saving has so far contributed 68% and investing 32%. I started investing in late 2007.

 

[Closet_Gamer]

Money Magazine ran the numbers on this a few years back. I forget the exact results but absolute savings rate crushed investment returns as the source of wealth creation even over the long term.

Obviously these things go hand-in-hand but their point was that no amount of savvy investors can overcome a mediocre savings rate while a disciplined savings approach can compensate for a mediocre/lower risk investment portfolio.

 

[Markola]

Money Magazine ran the numbers on this a few years back. I forget the exact results but absolute savings rate crushed investment returns as the source of wealth creation even over the long term.

Obviously these things go hand-in-hand but their point was that no amount of savvy investors can overcome a mediocre savings rate while a disciplined savings approach can compensate for a mediocre/lower risk investment portfolio.

I believe it. Plus, with a high savings rate one is keeping living expenses in check, so there is less of a portfolio needed to reach the point of FIRE. LBYM attacks the problem from both ends, shortening the timeframe needed.

 

[Totoro]

Savings gets you out of the door. Investments make sure you don't have to go back.

The younger one stops getting income, the more pronounced this becomes.

 

[devans0]

Both.

LBYM built up savings and dwarfed investment returns when young. As investments grew, I saw that even at extreme saving was barely keeping up with investments. Investments had become a silent partner, matching what I was saving. I've quit working but still like seeing growth, admittedly slower now.

Without compounding, saving in linear growth would have taken forever. Compounding without enough to compound takes so long to start growing that it doesn't work either.

 

[W2R]

LBYM and planning provides the opportunity to invest. It also provides the opportunity to retire, whether early or later, by establishing the foundation to lower your financial requirements to retire.

Cheers!

+1

Doing both is a far better approach than doing just one or the other, IMO.

 

[thefinancebuff]

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.

Another year later person B has $40k and person A has $23k. Another year later ... A higher return gets person B a higher total than person A.

 

[AnonEMouse]

A little late to the party, but this comic seems to sum up this thread nicely:

Non Sequitur Comic Strip, February 28, 2016 on GoComics.com

 

[FI by 2024]

Another year later person B has $40k and person A has $23k. Another year later ... A higher return gets person B a higher total than person A.

...in the fictional world where someone is able to consistently get 100% returns...

 

[Jerry1]

Your income is your #1 wealth generating tool.

I guess I lived below my means, but it feels like I earned greater than my desires. I focused on earning and the savings came naturally. Now that I'm close to FIRE, I wonder how much I could have saved had I really buckled down.

It's a recurring theme in my life. I got pretty good grades in school. I wonder what would have happened if I had spent a little less time partying and focused on studying. I've road the above average line most of my life without a lot of effort and now wonder if I'd had been able to actually excel at something if I'd have actually busted my butt and focused on something.

Oh well - life has been good to me. I'm thankful. Maybe I'll excel at something in the next phase which at 55, I hope is coming soon.

 

[unclemick]

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

Time in the market. Late 1976 - 2016. Index fund/s aka Bogle's Folly.

However even really really cheap SOB's get old.

heh heh heh - And and I heard this vicious rumor that you can take it with you.

 

[gayl]

I utilize the power of compounding so investing over saving.

 

[FIREmenow]

I guess I lived below my means, but it feels like I earned greater than my desires. I focused on earning and the savings came naturally. Now that I'm close to FIRE, I wonder how much I could have saved had I really buckled down.

It's a recurring theme in my life. I got pretty good grades in school. I wonder what would have happened if I had spent a little less time partying and focused on studying. I've road the above average line most of my life without a lot of effort and now wonder if I'd had been able to actually excel at something if I'd have actually busted my butt and focused on something.

Oh well - life has been good to me. I'm thankful. Maybe I'll excel at something in the next phase which at 55, I hope is coming soon.

I have a bit of this. I think we need to rip the rear view mirror off the windshield and start focusing more on looking forward instead of backwards......

 

[imoldernu]

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

I really admire those who can sum up their answer in a single post. I would not make a suggestion, because I realize that our own retirement would/will not be a path for others.

In fact, except for circumstances of health, not sure that the 12 years between leaving the workforce and age 65 would have provided much more in wealth or happiness. It was a different time, in the early 90's, when interest rates on savings were higher, housing value gains were substantial, and our untutored thinking that this "capital" appreciation would continue... guided the path towards living within our means, and adjusting our lifestyle accordingly, with no aspirations to wealth to advance our position in life.

Most of the members who post here, have read some parts of our retirement "life story" which has now extended to 27 years. Staying in savings and Ibonds, and with a tiny 2 digit "portfolio", we've managed to keep our heads above water... and the "frugality" has kept our capital virtually intact since 1989, and the balance will now hopefully provide a spend down that lasts beyond our life expectancy. Money is no longer a concern.

So... a different time, a different path, during a different economy, resulting in happiness and peace of mind, beyond our expectations.

Nothing new here, but an answer to the OP that I couldn't squeeze into one post.

http://www.early-retirement.org/forums/f27/sharing-23-years-of-frugal-retirement-62251.html

 

[dixonge]

Another year later person B has $40k and person A has $23k. Another year later ... A higher return gets person B a higher total than person A.

But not if they were both still saving...

 

[Car-Guy]

YMMV But, in my case, I've never been accused of being frugal, or a "saver", or one who practices LBYM. So based on the OP choices, I'd say investments.

 

[thefinancebuff]

But not if they were both still saving...

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