If you want to build your wealth, you need to save money and invest. But where should you put more of your effort? In this article, you will know why your savings rate is more important than your rate of return.<\/strong><\/p>\n During your early years of saving for financial independence<\/a><\/strong>, the savings rate<\/a> is your most important number. Sure, having a high rate of return is fun, but it shouldn\u2019t be your priority. After you have some leverage in the form of thousands of dollars, your rate of return comes in.<\/p>\n This means that you need to save rather than think about and prioritize your returns. Do you know why? Because you cannot control your returns.\u00a0<\/p>\n Especially when you invest your money, there are certain risks that can affect your returns. This is always a possibility, so you need to consider risk all the time.\u00a0<\/p>\n Do you want to understand this more? Then look no further and get to know my friend Dave as an example.<\/p>\n Dave keeps talking and talking about his cryptocurrencies<\/a><\/strong>. He checks his portfolio every day, where he shares what his year-to-date return is. Dave bought a lot of crypto\u2019s when the market was low throughout the year, for around $1000. Now his portfolio has a value of $1500 within a year. That\u2019s a 50% increase in only one year. Talk about beating the market!<\/p>\n I know how Dave is wired. We talk about how we\u2019re going to retire early<\/a> and save most of our income<\/a>. He\u2019s very interested in personal finance. His habits are different from mine, though.\u00a0<\/p>\n He plans to buy new shoes, clothes, an Xbox, and a Macbook every time he gets his paycheck. He\u2019s setting aside $80 per month for his cryptocurrency investments, which after a year grew to $1500.<\/p>\n In his mind, he\u2019s killing it, and his cryptocurrencies will for sure enable him to retire before 45. Of course, a 50% return on investment in one year is impressive.\u00a0<\/p>\n He\u2019s outperforming the market and doing a great job.\u00a0<\/p>\n He turned his $1000 investment into $1500 in a year\u2019s time. If my investments did that, my time to retirement would be a lot shorter.<\/p>\n The point is that he thinks that this monthly $80 in cryptocurrencies will be able to retire him at 35. While I love his determination, I also think there should be a realistic plan on the table for how you\u2019re going to accomplish retirement.\u00a0<\/p>\n If he\u2019s putting money aside for a year and has saved $1500 until now \u2013 it\u2019s not really moving the needle. I didn\u2019t ask if he had any specific retirement number, but $1500 isn\u2019t going to be enough for anyone.<\/p>\n We want dollars. Thousands and thousands of them. Preferably even more.<\/p>\n How are we going to do that? We\u2019re going to save a big percentage of our income from getting a lot of money in our savings and investment accounts.\u00a0<\/p>\n New investors often look at big returns. Big returns are sexy, and they give you the feeling that you\u2019ve received \u2018free money.\u2019<\/em> While big returns are every investor\u2019s dream, it\u2019s not something that you should focus on at the beginning of your journey.<\/p>\n If you\u2019re a new investor and have $1000 invested, will the rate of return make a big impact? For a 50% return on investment, you \u2018only\u2019 gain $500. What if he would have saved 50% of his income, and he would have $10,000 in the bank. His investments would need a 5% increase to have the same absolute gain.<\/p>\n While big returns are sexy, it\u2019s important first to build up your investment portfolio. Once you\u2019ve built up your investment portfolio, your rate of return will start having some impact.<\/p>\n \u201cCompounding interest is the eighth wonder of the world. He who understands it earns it. He who doesn\u2019t pays it\u201d<\/em> \u2013 Albert Einstein.<\/p>\n Compounding interest is awesome. It means that your returns are also generating. When you\u2019re, for example, having $10 that doubles every day for two weeks, you get the following results:<\/p>\n Day 1: $10<\/p>\n Day 2: $20<\/p>\n Day 3: $40<\/p>\n Day 4: $80<\/p>\n Day 5: $160<\/p>\n Day 6: $320<\/p>\n Day 7: $640<\/p>\n Day 8: $1,280<\/p>\n Day 9: $2,560<\/p>\n Day 10: $5,120<\/p>\n Day 11: $10,240<\/p>\n Day 12: $20,480<\/p>\n Day 13: $40,960<\/p>\n Day 14: $81,920<\/p>\n When we put this into a graph, you get the following visual representation:<\/p>\n This example illustrates compound interest and its returns<\/a><\/strong>. When you double the $10 for only two weeks, you already have $81,920.<\/p>\n When you double a penny for 30 days<\/a><\/strong>, you even get to over $10 million!<\/p>\n While compounding interest is great, it might focus on the wrong things early in the game. When your investment amount is not so big yet, increasing the principal amount is more important.\u00a0<\/p>\n If you look at the example early in the day, compounding doesn\u2019t have as much effect. $20 becomes $40, that\u2019s it.<\/p>\n You can see that most of the growth happens in the last few days when there is already a significant amount saved. That means instead of focusing on the rate of return, we should only focus on our savings rate at the beginning of the game. The savings rate is the only number you can influence \u2013 put as much money away so that you can get to those big numbers earlier.<\/p>\n The only way to get to compounding significant numbers over time is by saving as much as you can to get to the bigger numbers as soon as possible. That\u2019s basically how I\u2019m approaching financial independence, by focusing on my savings rate.<\/p>\n First, let\u2019s talk about how to calculate your savings rate<\/a>. I calculate it as the Amount Saved divided by Net Income.\u00a0<\/p>\n Now, let\u2019s look at steps you can take to increase your savings rate. You must set up a budget<\/a> that fits you. A budget has this reputation<\/a> of being restrictive, which I disagree with. A budget is a way to prioritize the things that are important to you. Saving money can be fun and exciting<\/a>! Anyways, if you\u2019re not the budget type, you can simply pay yourself first.<\/a><\/p>\n I\u2019ve also listed how I save over 50% of my income, and you can too!<\/p>\n Besides saving more money, you can also make more money. A lot of people underestimate the importance of your career <\/a>in the whole picture. If you\u2019re getting consistent raises over a specific time, the compounding effect will also kick in. Not sure how to get a raise? Read more about it here.<\/a> After one year of working, I got a 20% raise, so I\u2019m giving you my tips and tricks to get the same thing done yourself!<\/p>\n Besides all of this, I received some great money lessons from my dad when I was young. You can read more about them here.<\/a><\/p>\n I\u2019ve read Seven Habits of Highly Effective People<\/a>, which is truly a great book, and I would recommend it to all of you. They speak about this circle of control and circle of influence.<\/p>\n Seven Habits of Highly Effective People says that you should only focus on the circle of your control. When you focus on the circle of concern, you\u2019re wasting your energy on this you can\u2019t change. Because you\u2019re wasting your energy on the circle of concern, the circle of control will get smaller \u2013 as less energy is directed there.<\/p>\n What I\u2019m trying to say is: focus on things you can control.<\/p>\n As I\u2019ve mentioned earlier, it is best to focus first on saving when building your wealth. This means it is best to put effort into your savings rate while you are still in the early stages of increasing your nest egg. You may do that by doing side hustles<\/a> <\/strong>aside from your normal day job.<\/p>\n As your financial journey continues, you may now give importance to your investments. You need to make sure that you do your research and conduct due diligence with your investments. During this time, you need to protect them from losses by improving your portfolio. You become more sensible with your investments when you try to grow your money.<\/p>\n This means that you also need to invest to maximize and reach your financial goals over time. As you become more experienced with investments, you will consider what risks you can take to get the returns you want.\u00a0<\/p>\n As your savings rate is pretty much secure already, you have some leeway to take some risks through investments.<\/p>\n Try M1 Finance<\/strong> for your investment needs. Check out our full M1 Finance review<\/a><\/strong> to learn more about the services and start investing for free.<\/p>\nThe Story Of Dave<\/h2>\n
50% Return On Nothing \u2013 Still Nothing<\/h3>\n
Big Returns Are Sexy<\/h2>\n
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\n<\/figcaption><\/figure>\n<\/div>\nCompounding Without Anything To Compound<\/h2>\n
Let\u2019s Make It Visual<\/h3>\n
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How To Get To Those Numbers?<\/h2>\n
Focus On Things You Can Control<\/h2>\n
Maximize Your Savings And<\/em> Return<\/h2>\n
![\"Woman](\"https:\/\/radicalfire.com\/wp-content\/uploads\/2023\/02\/Woman-Stacking-Coins-Stock-1024x576.jpg\"\/)
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\nVadimVasenin\/Depositphotos.<\/figcaption><\/figure>\n<\/div>\nIn Summary: Your Savings Rate Is More Important Than Your Rate Of Return<\/h2>\n
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