Earlier I argued that the best investment that the majority of people can make is learning how to save money and referred to it as Ugly Duckling Investing. The reasons I see saving as such an important investment is because:
Low Risk: Saving money money is an extremely low risk investment to make. While it is possible to lose money while trying to save it, these instances are few and far between.
High (sometimes instant) Returns: If you gain 20% a year on a stock investment, it would be considered a banner year. You can get the same 20% return (and often more) instantly without any risk and with minimal effort several times a week when you use “saving money” as an investment strategy.
No Capital Gains or other taxes: The money that you save completely tax free — it isn’t subject to any taxes on the Federal, state or local level.
No Brokerage or other Fees: There are no broker or other fees that eat away at your return since you achieve the savings yourself. That means when you have a 20% return, the entire 20% goes to you.
Easy To Implement: A money saving strategy is easy to implement and doesn’t require extensive study. Basically, anyone can do it — even a child.
A new article at Money Magazine confirms this. While people continue to focus on trying to get high returns, the time spent trying to do so would be better utilized toward saving money.
Putnam created Average Joe, a hypothetical 28-year-old who made the least of his 401(k) between 1990 and 2005. He contributed too little ( just 2 percent of his pay, starting at $40,000), invested too conservatively (only 30 percent of his assets in stocks) and owned funds that ranked well below their peers.
Putnam then measured how different moves would have increased Joe’s balance.
It turns out that picking better funds and adopting a more growth-oriented strategy would have led to modest improvement. But by raising his contribution from 2 percent of salary to 6 percent, Joe would have tripled his 401(k) balance, nearly an $80,000 increase.
That’s even if he remained invested in underperforming funds. Superior fund picking alone would have netted him a mere two grand.
This is especially true for people that have less than $50,000 in investment funds. Until you get to that point, you’re far better off expending your energy on ways to save money rather than trying to maximize the return on the investment. This can be done following a simple 5 step process.
The benefit of adopting such a strategy is that by learning to save the money early, even when you reach the $50,000 mark and begin spending a bit more time looking at how to maximize your investment, the foundation of saving money will have already been put in place so that the investments will continue to have even more money added to them.