2764: Why Hardcore Saving is Much More Powerful than Masterful Investing by Mr Money Mustache on Frugality

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[00:01:10] This is Optimal Finance Daily, Episode 2764. Why hardcore saving is much more powerful than masterful investing by MrMoneyMoustache of MrMoneyMoustache.com. And I'm your host and personal finance enthusiast, Diana Merriam. This is the show where I read to

[00:01:29] you and to myself frankly, from some of the best personal finance blogs on the planet, every single day. For now, let's get right to it and continue optimizing your life. Why hardcore saving is much more powerful than masterful investing by MrMoneyMoustache of MrMoneyMoustache.com.

[00:01:53] I was recently enjoying a conversation with a new friend. Despite my best efforts to sound normal and busy, this person eventually figured out that my wife and I don't actually do enough paid work

[00:02:04] to sustain the normal middle class life we seem to lead. From here, he pried out the fact that I am MrMoneyMoustache, the freaky magician who retired at 30. When people learn this, they immediately start grilling me on my presumably amazing investment skills. You

[00:02:22] have to be a stock market wizard to retire unusually early, don't you? Unfortunately, I have a pretty poor investment record myself. As an early 20-something, I thought I could pick winning stocks and ended up buying some that went nearly to zero. These were balanced by some that

[00:02:40] went up nicely, and these experiences combined to average out to about the same return the stock market as a whole would have given if I had just bought a nice index fund. Through my later 20s and 30s, I thought I was wise by squirreling lots of money away

[00:02:55] in the excellent Vanguard 500 Index Fund, or VFINX. But then the Great Recession happened, and temporarily backed out all those gains. I did make some reasonable money from home ownership and managing a rental house, but most of that was earned by increasing the value of the houses with

[00:03:14] old-fashioned sweat equity. Renovations I did myself. In investments, you will win and lose on average, and statistically the best you should expect is to match the market, which historically is about 7-8% annually after inflation is subtracted out.

[00:03:32] But let's hypothetically say you were a masterful investor. The best investor in modern history, Warren Buffett, has averaged investment returns of about 20% per year for over 40 years. This is about 4 times higher than the laziest investor who just bought guaranteed return bonds.

[00:03:50] Now let's say you are a masterful middle-income saver. You are married, and you and your spouse earn $120,000 combined per year, say $90,000 after taxes. With skill, the two of you can save at least $50,000 per year of your combined income between regular and retirement accounts.

[00:04:09] Next, compare this with the average personal savings rate in the US, 6% at the time of this article, which is actually higher than usual because we're in a recession. As low as 1% during the big credit and spending boom of the mid-2000s,

[00:04:23] an average couple would save less than $5,000 per year. So the difference between average and amazing investors is 4 to 1, but the difference between average and mustache-level savers is at least 10 to 1. So over the short time horizon we're

[00:04:41] talking about, which is 7 to 10 years to retirement, you'll get much better results from learning from this blog, in other words working on your spending, than you will by trying to be a fancy market-beating investor. That's why I often repeat the message of just

[00:04:56] pay off all of your debts, then start throwing it all into the Vanguard Index Fund. Sure, it will go up and down with the broad stock index, but these are your retirement savings.

[00:05:06] You'll be living off of them for the rest of your life, and while we can't predict the future, we can choose the statistically best place to get a high long-term return. And that place is in low-fee index funds. Also, by wiping out your debt, including your mortgage

[00:05:22] early on, you're effectively investing in some guaranteed bonds. Paying off a 5% mortgage guarantees you a 5% return forever, although this is not an inflation-adjusted number, since if you leave your mortgage unpaid forever, the remaining balance will eventually deflate away

[00:05:39] to a very small number relative to the cost of other things. In other words, you may be able to pay off your $150,000 mortgage when you're 100 with just the change in your wallet. But even 5% before inflation is still a good guaranteed return with today's treasury rates. Cautious people like

[00:05:57] me are still wise to pay off their mortgages early. With no mortgage or other loans, my family's fixed costs are only a tiny fraction of what the typical indebted person needs to pull in, so there's lots

[00:06:10] of flexibility in when to sell off portions of the index fund for future living expenses, and the dividend checks keep coming every quarter, rain or shine. Back to the point. By concentrating on saving rather than minute details of investing, you're stacking the odds in your favor while also

[00:06:28] freeing up time for the real deal, maximizing your fun in a cash-efficient way. You just listened to the post titled, Why Hardcore Saving is Much More Powerful Than Masterful Investing by MrMoneyMustache of MrMoneyMustache.com. And I'll be right back with my commentary. Looking to part ways with

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[00:08:45] for me. Sometimes I wonder, am I really doing all I can to optimize my investments? I've been thinking about this a lot lately with all the excitement around cryptocurrency and other speculative investments. I'm someone who talks about money every day. Shouldn't I try to be a more savvy

[00:09:02] investor? When I get into these thought loops, I inevitably turn to friends who are much more knowledgeable about investing. And the answer is always the same. The likelihood that you're going

[00:09:13] to beat the market over the long run is slim to none. So why bother? There are people who enjoy the process of stock picking or analyzing different kinds of investments, but I'm not sure that's

[00:09:26] really how I want to spend my time. I also noticed that when it comes to investing, I've put a much bigger focus on how much I'm investing rather than the return on those investments. Think of it this

[00:09:38] way, let's say there's a super savvy investor who hits big with a 50% return on his $100 investment. He ends the year with $150. It's a fantastic return, but I will still make out better with my market matching 10% return if I invest $150. I'll end the year with $165.

[00:10:00] I'm passive about the actual investing part, but I'm very active in the areas of increasing my income and reducing my expenses. This is the aspect of money management that I have the most

[00:10:12] control over. So I feel that it's worth the majority of my time. I also think keeping things simple makes my strategy more sustainable as it allows me to be consistent. I focus on fully funding retirement vehicles and keeping a healthy emergency slash opportunity fund. It may not sound

[00:10:33] as sexy as optimizing investment returns, but it's guaranteed to help me reach my long-term financial goals. And that should do it for today. Have a happy rest of your day and I'll see you on the Tuesday show tomorrow where optimal life awaits.