Investing won’t make you rich. Not on its own.
Done right, it will certainly help grow your money — and, over time, that growth can be considerable. But if you really want to build enduring wealth you should also focus on saving.
That’s the fuel on which the fire of compounding burns.
If you can scrape together $2,000 and invest that for a decade at a 10% annual return, you’ll grow that initial seed into more than….$5,000. Not bad, but hardly life changing. Even if you start with $50,000, it’d take over 30 years of 10% annual growth before you hit $1 million — which is about what you’d need to buy an average house in Sydney.
But if you can invest and save along the way, well that’s when things start to get interesting.
Continuing on from our example above, if you manage to save only $1 per day, and invest the total at the end of each year, your $2,000 starting portfolio is now worth more than $11,000 under a 10% annual return. Seems a small sacrifice to roughly double your wealth.
Save $50 a week, and you’re almost 10 times better off after a decade.
The rate of return you can sustain is, of course, super important. The nature of compounding is such that even small differences in the pace of growth can make a huge difference in the long run. Then again, as a self-directed investor, you’re already trying to maximise that — as you should.
But too many of us focus on chasing the big returns while forgetting the importance of making regular contributions — even though the amount we save is something we have much more control over, and is the major determinant of our long-term wealth.
Spend less than you earn. Invest it regularly. Wait.
NB. After a point, when your capital base is large enough, the rate of saving does become far less important. eg. If you have a $1 million portfolio, a 10% return is going to add another $100,000 to your total. Money begets money.
But then again, at that point you’re already relatively rich. The point is, to become rich, saving is what really matters!
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