Cinderalla Investing

I was reading a post in my forums about which is a better use of your time, learning more ways to save or spending time to become a better investor. While both are important, I think that many people go around the process in the wrong direction.

Let’s face it, saving money is like the Cinderella of personal finances. It’s overlooked as it works away in the background while her step-sisters go about garnering all the attention. Think about it. When is the last time you went to a gathering where people huddled around each other were talking about saving money? Now how many groups were there talking about stocks and other “hot” financial tips?

But in the end, it’s the person in the background that develops into a beautiful princess.

Again, I’m not saying that learning how to invest is a waste of time. It’s important, but getting the fundamentals of learning to save money will get you much farther ahead when you are first starting out.

Say you have an extra hour a day that you can devote to either helping yourself save money or learning how to invest better. Let’s say that putting that hour to work learning to save money will get you an extra $100 a month (extremely conservative in my opinion) and that spending that hour learning to invest will get you a return 5% higher than the S & P 500 (extremely generous in my opinion). For the sake of ease, let’s assume that for a ten year period the S & P 500 returns 10% annually and both people start out with $10,000.

If you do the calculations straight, you’ll find that the person that saved the $100 a month ended up with $47,555 after 10 years (assuming he invested in a S & P 500 Index Fund and added his $100 in savings each month to it) while the person who learned how to invest ended up with $3,000 less ($44,402). But to really see the difference, make the calculations realistic and add a federal tax of 25% and state tax of 6% when doing the math. The difference in savings then comes to over $8000 during the same period ($41,147 versus $31,906) Much of this is because the $100 saved each month is post tax dollars.

This is why learning to save money, although it may not appear to be glamorous in the beginning, turns into Cinderella in the end.

This entry was posted in Investing, Saving Money. Bookmark the permalink.

5 Responses to Cinderalla Investing

  1. Clint says:

    I completely agree with you. The problem with learning to save money is that it usually just isn’t much fun. Not to mention that many attempts to save money really dont save any money at all, proven by your enevelope example and the numerous studies that show the people who clip coupons normally spend more money while shopping.

    However, if you want to be financially secure without learning to save more and spend less, you better make a big salary.

    Million Dollar Goal

  2. Nina says:

    Wealth really doesn’t have much to do with income… unless it’s coming from passive income. If you plan to accumulate wealth, it has less to do with how much money… rather it is all about how you spend what you have.

    Sitting Pretty

  3. Pingback: MyMoneyBlog » Blog Archive » Carnival of Personal Finance #18

  4. fred gill says:

    Kudos to Cinderella! It took me many years to learn this lesson and I still have plenty to learn. My parents were both blue collar kids but they knew how to economize and how to postpone gratification. Their motto was: “It’s not what you earn, it’s what you save.” Eventually, they learned how to invest as well and were able to leave my sister and I a tidy sum. Thanks to an excellent retirement system and my own belated but serious conversion to the Church of Savings, I should do okay in my own retirement. But it was a close call. Like so many, I wish I’d had more sense when I was young. But I’m grateful I finally got some.

  5. Cash says:

    These calculations are inaccurate.  They don’t account for inflation, and pairing someone who invests vs. someone who saves and invests doesn’t seem like a fair comparison.

    Also, the investments don’t get taxed as income if they’re held for over a year.  The capital gains (and ONLY the capital gains) might get taxed at a maximum of 15%.  If the investments are stored in a Roth IRA, they won’t get taxed at all.

    If you save $100/month for 10 years, you wind up with less than you saved in terms of purchasing power. Approximately $8,508 in today’s dollars, assuming an inflation rate of 3.38% (the historical average).

    If you invest $100/month in a no-load index fund that tracks the S&P 500 and keep it tax-sheltered in a Roth IRA, you’ll wind up with around $19,310 after 10 years.  Assuming an average return of 9.34%, which is the historical average.

    In today’s dollars, that investment would be worth around $13,692.  That’s still 60% better than saving cash.  You’ll never have to pay taxes on it.  No fees, either.

    The difference becomes clearer when the numbers are bigger.  If you start out with $20,000 and save $400/month in cash for 30 years, you’ll have to settle for $58,459 after inflation.  If you invest that money in the S&P 500 instead of cash, you’ll have $362,857.  Again, with the same assumptions as before.

    You could be thinking, what if the stock market doesn’t perform that well?  I guess that raises the question, what if cash doesn’t perform that well?  What if the value of your dollar decreases by 5% per year?  10%?  15%?

    Inflation has reached over 23% in the United States before.  Are you honestly willing to lose over 1/5 of the money you save each year?

    Cash is a decent investment ONLY during periods of deflation.  Deflation is highly unlikely, and if it did occur, you’d be much better off owning long-term US treasury bills.

    There is one reason to save money, though.  Everyone needs an emergency fund.  It’s good to have several months of expenses saved up, but realize that each of those dollars are likely to lose value each year.

    Saving money is quite possibly the worst way to save money.  In the long-run, all you get out of it is a measly portion of what you put into it.

Leave a Reply

Your email address will not be published. Required fields are marked *