How Do You Know Which Is More Important In Building Wealth, Money Saved Or The Rate Of Return?

How do you know which is more important in building wealth, money saved or the rate of return?  From  in the calculator called Maximum Potential we can see that it is the money you save and the reduction of costs that matter, not the rate of return.

We'll look at a Period of 35 years with a personal example where you said your income was $100,000.  It should increase at least 4% a year if not more and for starters we'll set an after tax Earnings rate of 5%.  You can see on the right hand side that if you didn't have to eat or pay taxes or spend money in any way, your Maximum Potential would be 16 million. 

Now, watch what happens as we add Truth to the situation.  Right here in the middle we have Total Taxes at 40%, that's everything, fed/state/sale tax/property tax you name it.  Notice how 2.9 million of taxes dropped the savings down to 9.8 million.  That is opportunity cost in action.  For now let's stay focused on this issue of increasing returns or decreasing costs being the better way to build wealth. 

So, we'll set Debt Service at 34% as statistics show the average American family spends about 34% of their income in debt service.  Now were down to 4.2 million.  And we'll set Life Style at 23%.  Ouch, now we're down to$ 494,000.  Let's change Other to Gifts at just 1% and here in the middle we have what most people are doing, which is saving 2% of their income.  So there would be 329,000 and you can see that is not even one years worth of income  (which is 379,000)  So, on the right we'll stay focused on that 329,000 figure to see if we can improve it. 

Again, lets stay focused on our question here:  Can we build wealth more effectively by changing the 5% net annual earnings rate on the left or by decreasing costs in the middle?  If we decrease costs, then we can save more money.

Right now I'm not including inflation to keep this simple.  On the left hand side, let's try changing our 5% to say 10%.  I know it might mean increasing risk, but let's try it.  Before I do, you watch the 329,000 on the far right.  Going from 5 to 10% did what?   Brought it up to only 885,000. That's horrible! At least that is  two years of income, but that won't do. 

You are right, so let's go back to 5%.  What if we reduced costs?  Now when I say that, are you thinking I'm going to ask you to eat out less? YES!   Well, let's see if we can find ways to reduce costs that won't reduce lifestyle.  What if we shifted our assets around a bit and were able to reduce taxes to 35%?  What did that do?  It changed 329 to 1.1! 

And what if we reduced debt down to 24%?  IT MORE THAN DOUBLED!