“You must gain control over your money or the lack of it will forever control you.” -Dave Ramsey

Last month I wrote about why it is futile to constantly search for the best return generating investments (Link). The one thing I suggested was to focus on your savings along with other things. Though the comment on the savings caught the attentions of many, some agreed while others disagree, and some requested to prove this. I consider myself as an experimenter of personal finance and like experimental scientist you need to keep the records of your experiments and results, there you go with the proof.

Everyone who is starting their journey in the world of finance will obviously has to start from 0, So if you do not have any investments and starts with 10k investment in a year, the funny mathematics will show an infinite growth, adding another 20k next year form a growth of 200%. Though this is theory does it sustain in long run. Below are the records of last 9-10 years data which I was able to gather around, and think can be considered as long run.

Networth Growth Trajectory

Between 2008 – 18, the Net worth has grown by CAGR of 82% YoY, Can I get this as return on investments? Probably no, Obviously the base here was too low so let’s just ignore it. If we just look at the last 3 years, when the overall net-worth growth has been in range of 35-45%, roughly 2/3rd of this is driven by savings and not by actual return on your existing savings.

Some people will ask if this be the case forever? Simple answer is no, but in the initial years of your growth it will & must be driven by your savings. You can win a lottery for a $1 million but to stay a millionaire you must save & invest that money to grow it to $2 million. If you won’t save, you won’t stay rich is a simple truth.

Few people argue that if I will keep saving what is the fun of all that money when you can not enjoy it for your luxuries. A very valid question, and I want to make sure they understand the phases of money to become wealthy. In First phase, your focus should be on savings as this will help you accumulate the necessary capital to generate significant investment income. In second phase, your returns on investments will start outshining the amount you are saving. This is the phase you will have more income to spend in your hand and still your net-worth will continue to grow. The third phase, will be when your investment returns will be so high that savings will not be of importance and you can sustain all your expenses and still grow, this is the phase when you are actually financially free and can be called Rich/ Wealthy.

Three phases of wealth cycle

It is on us to decide; how long do we want to stay in each phase. If we cut corners from saving, we will stay in phase 1 and struggle the whole life & might see the terrible retirement period which requires the person to work all their life. Or we can squeeze some years in saving to jump into the next phase to enjoy our money and retire comfortably. To get our self in last phase, we will require a dedicated approach towards money, once you reach at phase 2 and are keen to get into phase 3, you will figure out your own way.

Happy Investing & Start Saving!!