When thinking about their financial situation, most people spend way more time thinking about investing than they do about spending and saving. If I had to guess, I’d say the breakdown looks like something the chart below.
It should be the exact opposite, because saving and spending is something we have complete control over. We can’t know if our portfolio will be up or down next year, but we can decide whether or not to take that $5,000 vacation.
What often gets lost when reading financial blogs is that the authors, and usually readers have a passion for investing. But 99% of people don’t invest for fun or because it’s their hobby, they invest so that they can improve the odds of living comfortably in retirement, and to leave money to the next generation if they’re that fortunate. The good news for the 99% is that investors don’t have to duplicate Warren Buffett’s performance to stack the odds in their favor.
The chart below shows someone who has saved $1 million and spends 50k a year. Obviously, without investing, you will hit the bottom of the well in twenty years. But earning just 2% buys you another sixty-seven months!
This is oversimplified because I’m assuming, for ease of calculations, that the money grows and is spent at a steady rate, which is clearly unrealistic. But the point in doing this exercise is that it doesn’t take much in terms of returns to make a huge difference in someone’s life.
Investors would be better off if they spent less time thinking about the perfect portfolio and avoiding bear markets and more time thinking about why they’re investing in the first place.
Michael Batnick is a managing partner at Ritholtz Wealth Management. He is the co-host of Animal Spirits, What Are Your Thoughts, and The Compound and Friends. For disclosure information please see here.