Investing Is Easy. Saving, Not So Much

By Gus Sauter  |  The Wall Street Journal  |  June 18, 2015

GUS SAUTER: There are thousands of books written to educate investors how to invest. In reality, once you determine your appropriate asset allocation between stocks, bonds and cash, investing can be quite easy. Simply execute your allocation by investing in index funds and you will have an efficient portfolio. Or, invest in a balanced fund that has an allocation aligned with your desired one.

Far more important than investing is establishing a budget and saving.  After all, if you don’t save, you certainly don’t have to worry about investing.

Unfortunately, for most people saving is also very difficult.  We all have urges to purchase things that we don’t really need. I was in an airport restaurant a couple of weeks ago and I overheard a young woman telling her friend that she had recently gone to Las Vegas. She was complaining that her tax refund came the day after she left and she could have had more fun if she had that money to spend.

The reality is that she still went on the trip and presumably had fun. We can always have a little more fun by spending more, but we must realize that every dollar spent today is some multiple of that dollar that we won’t have to spend in the future. Assuming an investment return of 7% and inflation of 3%, that dollar would be able to buy $3.14, in today’s dollars, 30 years from now.

Ironically, as the woman was leaving the restaurant I noticed that she paid with a credit card. According to The Motley Fool, the reason that people blow their budget is because of credit cards. Research shows that people are more willing to spend if they use a credit card.

As important as saving is, it’s equally important to start saving at an early age. Everyone is familiar with the magic of compounding. A simple example is a person who saves $5,000 per year for 20 years starting at age 21 and stopping at age 40. Assuming a 7% return, she will have $793,000 when she turns 61. Another person who starts saving $15,000 at age 41 for 20 years will have $615,000 when he turns 61.

In some ways it may be easier to establish a budget and start saving when you get your first job. You’ve gone from having no income to drawing a paycheck. The first item in your budget should be savings–as the saying goes, pay yourself first. Then figure out how you can meet your spending needs. It’s not easy. It involves tradeoffs and sacrifices, but it works. I have a friend who never made more than $40,000 but through disciplined saving and investing he is now worth more than $4 million and enjoying his 80s.

If you’re already working and not saving, it’s going to be more difficult because you’ve already established a lifestyle and it’s difficult to cut back. One way to get started is to save your raises. When I first started working at Vanguard Group, I used my raises for several years to get up to the full 401(k) contribution.

Many people have a strong urge to live for today with the idea that tomorrow will take care of itself. That’s not a good strategy. It’s important to budget and save. The sooner, the better.