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.