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Saving is not the Key to Financial Success
Topic Started: 23 Sep 2014, 07:01 AM (1,559 Views)
peter fraser
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Saving is not the Key to Financial Success

By Cullen Roche · Monday, September 22nd, 2014
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You’ve probably heard it a million times from financial “experts” – the key to financial success is saving. The idea is that if we save more now then we’ll have more to spend later. And while that’s true at the individual level it’s actually disastrous advice in the aggregate. Saving isn’t the key to financial success. Investing is the key to financial success. A lot of this is counterintuitive, but stick with me for a few minutes.

Saving is our unspent income. It is the residual of your income. And my spending is someone else’s income. So if I decide to save more then someone else has less income. All else equal, the economy has less spending power when I save more of my income. If we all saved more then we’d all have less income. So saving more can’t actually be the key to financial success because, in the aggregate, saving leads to lower incomes. That’s simple enough, right?

Investment (not the financial type you’re probably aware of with regard to buying stocks and bonds) is spending, not consumed, for future production. When you invest in your future you build an intangible (or tangible) asset that (likely) makes you more valuable. In other words, when you invest in yourself you make your future production more valuable which makes your future income more valuable which allows you to save more of your future income in the future. Importantly, investing adds to aggregate saving because one does not dissave in order to spend on investment. That is, when you invest you have an asset that is as valuable or more valuable than your prior savings PLUS someone else has your spending as their income.

So, next time some financial expert tells you that the key to financial success is saving more tell them they have their economics precisely backwards. The key to financial success isn’t saving, but investing in your own future production.
Any expressed market opinion is my own and is not to be taken as financial advice
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hoofarted
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Soo.. just to clarify debt peddler Pete...

Is equity, offset account or paid off mortgages the same as savings in a bank account?
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skamy
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It is better as it is working for you providing a home, lowering accommodation costs into the future and generally money in property increases better than sitting in the bank.
Definition of a doom and gloomer from 1993
The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
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peter fraser
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hoofarted
23 Sep 2014, 07:24 AM
Soo.. just to clarify debt peddler Pete...

Is equity, offset account or paid off mortgages the same as savings in a bank account?
These are not my words but I do think they are interesting and if more people understood this reasoning they would probably be better off.

If you had read this in full you would have noted that he said buy productive assets both tangible and intangible. He in fact didn't mention leverage or housing specifically, I think that he concentrates more on buying shares, but I guess a guy with a 95% LVR loan of $850,000 would be a bit sensitive about leverage and you have superimposed your own situation on what is a simple line of reasoning.

Borrowing money is buying time by bringing forward an asset purchase and then paying it off with an added cost for the time saved. We call that interest. In the case of business it allows them to expand much faster than they otherwise would, employing more people and driving higher profits for the business owners.

In the case of housing it allows people to get into a house earlier with the cost of that "time saving" largely offset by the savings in rent costs which rise over time.

I help people do sensible things and I work to help them get that finance on the best possible cost structure for their situation, and I work to ensure that their proposal best fits the lending policies of banks who all have different lending policy preferences. It's quite unproductive to apply at a bank for a proposal that is outside their lending policy when the bank up the road is comfortable with that type of proposal.

I've learnt over the years that people like you don't understand any of that, you are simply unable to take that all in, which I guess is why you took a 95% loan of $850,000 which would have cost you a small fortune in mortgage insurance costs. For a guy who claims to have $400K in savings and earns $200K per annum taking a loan of $850K @ 95% LVR was a very curious choice to say the least. I strongly suspect at least one of your claims is complete BS - but that's your prerogative - I've found over time that about 99% of those who post here and at MB are compulsive liars - but that's life.

Glad you didn't come to me for that, I prefer a smarter group of clients who want better product outcomes than that.

Now what was your point again?
Any expressed market opinion is my own and is not to be taken as financial advice
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Drgonzo
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i dont understand the notion of saving and having a fat bank balance but living frugally - what is the point?
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Veritas
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Drgonzo
23 Sep 2014, 08:11 AM
i dont understand the notion of saving and having a fat bank balance but living frugally - what is the point?
Peace of mind.

Also, being a tight arse is basically a psychological condition.

If you have ever encountered tight arses you will know that their reluctance to spend is usually not logical but something that was inculcated into them or the result of DNA.
Edited by Veritas, 23 Sep 2014, 12:18 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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stinkbug
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Veritas
23 Sep 2014, 12:18 PM
Peace of mind.

Also, being a tight arse is basically a psychological condition.

If you have ever encountered tight arses you will know that their reluctance to spend is usually not logical but something that was inculcated into them or the result of DNA.
It is also an issue on gratification, now and/or later.

I used to be a tight arse, but as my wealth has grown I've become more relaxed. I figure that as long as I am consistently spending less than I earn from working, and my investments are providing positive returns, then a bit of spending isn't a problem.
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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herbie
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peter fraser
23 Sep 2014, 07:01 AM
The key to financial success isn’t saving, but investing in your own future production.
Just playing devil's advocate here, but wouldn't that mean that by boosting your own production potential you are effectively out-competing someone else and thus negatively impacting their income regardless? Unless one assumes unending need for increases in production???
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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hoofarted
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peter fraser
23 Sep 2014, 08:06 AM
.. which I guess is why you took a 95% loan of $850,000 which would have cost you a small fortune in mortgage insurance costs. For a guy who claims to have $400K in savings and earns $200K per annum taking a loan of $850K @ 95% LVR was a very curious choice to say the least.
Just because I got it, does not mean I am stupid enough to take it. I would very much rather save my money in paid off debt than in a saving account. The point is, it is easy to see a positive bank balance and blame the worlds financial crisis on people who do not spend it when you turn a blind eye to someone who has 500K paid off of their mortgage... Same thing.
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stinkbug
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An offset account is where all my cash savings reside. Higher interest rate than a bank account, guaranteed return, money at call and no tax on the benefit. Makes perfect sense to me.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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