Updated: September 15, 2020
In recent years, as more and more people seek financial advice from me, I’ve come to realize one important lesson about saving and investing.
And that is: It’s better to maximize the amount you save first, before optimizing your investment returns.
Truth be told, people ask me “What’s the best investment?” more often than “How to save more money?”
There’s nothing wrong with looking for the best investment, and you should. But if you really want to grow your wealth fast, then your initial focus should be to maximize the amount you save every month.
In other words, save more money first so you can invest more. Don’t obsess on finding the best investment at the start, do that later on.
The Story Mr. Super Investor and Mr. Super Saver
Mr. Super Investor and Mr. Super Saver are friends and both earn P30,000 per month. Early this year, they both decided to start investing and see which among them could grow their wealth better after 10 years.
Mr. Super Investor focused on finding the best investment. He found a mutual fund that earns around 20% per year. Without much effort, he can save 5% of his annual income, which in the first year, amounts to P18,000.
Mr. Super Saver focused on maximizing the amount of money he saves and calculated that he could save 20% or P72,000 of his income that year. He then looked for investments and found one that earns around 5% per year.
Assuming they both experience a 10% increase in their salaries every year. Who do you think will have more money after a decade? Here are the results.
Mr. Super Investor
Mr. Super Saver
The Real Story of Mr. Super Investor and Mr. Super Saver
Realistically, Mr. Super Investor didn’t really found a mutual fund that gave a 20% annual return. He only found one that gave a 5% return.
So he spent the next few years looking for a better investment. He found one that gave 10% annual return the next year, then one that gave 15% on the year after that, and finally, he found his ideal investment that gave 20% annually.
Happy with a 20% annual return, he then focused on increasing the amount he saved every year. And was successful at saving and investing from 5% of his salary towards 20% of his income by Year 7.
On the other hand, Mr. Super Saver wasn’t able to save 20% of his salary immediately. He could only save 5% in the first year, the same amount as Mr. Super Investor.
But he focused on saving more money. That’s why on the second year, he was able to save 10% of his salary, then 15% on the year after that, and finally, he was saving as much as 20% his salary.
Realizing that he has already maximized the amount he could save, he then focused on finding better investments. From the initial 5% per year, he moved his investments to another one that gave 10% annually, then 15%, and finally decided to stay with the one he found on Year 7 that gave 20% return every year.
Mr. Super Investor and Mr. Super Saver started at the same place. Saving 5% of their salary, and investing in an instrument that gave 5% annually. However, they then did different things.
Mr. Super Investor focused on finding the best investment and then worked on increasing his savings after.
Mr. Super Saver focused on maximizing his savings, and then looked for better investments later on.
Who had more money by Year 10? Here are the results.
Mr. Super Investor
Mr. Super Saver
It’s important to save and invest. And the best way to build your wealth is to maximize your savings and put the money in an investment that gives high returns.
Do both if you can.
However, results come faster if we focus on one goal. And if you must choose, then you should maximize your savings first.
And this doesn’t only mean trying to lower your expenses or managing your spending. You can also find ways to increase your cash flow. Maybe even building multiple sources of income, so you can save more, and consequently invest more money.
Invest where it is convenient at first. Even if the returns are lower than what you hope to get. What’s important is that you are investing, while you’re focused on maximizing your savings rate.
Once you can save a significantly good amount of money regularly, then that’s the time you should shift your focus towards studying and eventually putting your money on investments that give higher returns.