By Daniel Rodriguez | Dr. Budgets
Recently, I have been thinking about my purpose in life (my WHY). And, I have been thinking about how that WHY ties into Dr. Budgets. This year, Dr. Budgets hit a big milestone… 5 years in business. As I reflect on those 5 years and on what lies ahead for the company, I have come to realize that the reason why I started Dr. Budgets was to achieve one overarching goal…
To enable people to live the life they truly want.
I believe that my goal as a financial advisor during the seven years I spent in that profession was the same. As a financial advisor, I did it by showing people how to invest to grow their wealth. Now, I do it by showing people how to spend wisely and build healthy spending habits. In this way, I can have a greater impact on people’s lives. And, one of the primary ways I’ve been able to have that impact on my clients is by holding them accountable to their financial goals and enabling them to save more money.
Before we start on why savings rate is more important than rate of return, I want to define two terms I’ll be using:
- Savings Rate. This is how much you consistently save reflected as a percentage of income. This is something you can control.
- Rate of Return. This is the average percentage rate you earn on your savings. This is how much money your money is earning for you. For example, if you have $1,000 saved or invested, and after one year you have $1,100, then your rate of return is 10% ($100 divided by $1,000 = 10%). This is something you don’t have as much control over.
I believe that by being conscious about how we spend our money, we can increase our savings rate. And that increased savings rate will have a much greater impact on our future than increasing the rate of return on our investments. When I was a financial advisor I remember being inspired by an article titled Retirement Success: A Surprising Look into the Factors that Drive Positive Outcomes. In the article, it states that savings rate is the most important “driver” of retirement success. In fact, it goes on to state that the savings rate is approximately five times more important to achieving retirement success than the next closest “driver” (asset allocation). Wow!
As a financial advisor, I felt great about the work I was doing with our clients to position them for financial success, but I was only able to impact the things that were less impactful for their long-term success. And, most of the folks I was working with already had good savings habits. Said a different way, the people I was working with were already doing well with the most important “driver” for achieving financial success, so I was primarily working with them on the less important factors, such as asset allocation and selecting the best investments. Essentially, I felt that I wasn’t able to impact their lives in a big way.
I think deep down I always felt I could do more, which is why on January 4, 2013, I officially launched Dr. Budgets. And, the focus of Dr. Budgets since inception has been to show people how to reduce their unimportant expenses so they can shift that money toward the most important factor for financial success: savings (or, for many people, debt repayment so they can then ramp up their savings). This, in turn, enables them to live the life they truly want.
For those “numbers people” out there (like me), I have an example that illustrates how savings rate is more important than rate of return. Let’s assume two people start out with the same exact salary of $60,000/year with an annual 3% raise. The first person (let’s call her Sally) saves 5% of her income with a 9% rate of return, while the other person (let’s call her Mary) saves 15% of her income with a 6% rate of return. Who ends up with more money after 30 years?
The person who saves more (Mary in this example)! After 30 years, Mary ends up with $994,869 and Sally ends up with $542,021. Additionally, if the high saver can also generate a higher rate of return, then that would generate the best outcome (so, if Mary also generated a 9% rate of return, then she would have $1,626,062 after 30 years). That is where I believe a great financial advisor can be an amazing resource to guide people toward that outcome.
I hope this illustrates how important your savings rate is to your financial success. Ultimately, my goal is to enable more and more people to live the life they truly want by guiding them toward a life where they can have what they want in the present while simultaneously working toward their long-term financial goals. And the more people can do that, the better our world will be for everyone.
What are your thoughts on this topic? Please share them in the comments section below. If you would like to learn more about Dr. Budgets, please take a look at our website or contact us today for more information. I wish you much success with your financial goals!