I have great news! Most of us have immediate access to the highest return investment in the world. The initial capital required is usually nothing, the return is sky high, and all the education you need you either already have, or will have by the end of this article! Here it is, are you ready?!?
I know. It’s not what you were expecting. Here on a real estate blog you were probably looking for some fancy-pants new technique to negotiate low-interest loans or buy under-market properties, we’ll get to that, but trust me, savings is a better investment than all of those. I’ll tell you why, from two different perspectives; an investment perspective; and a plan-to-financial-independence perspective.
First though, let’s set up the scenario. Let’s assume that Angie has the median personal income for a US citizen in 2015, $30,240 (1). Between her job, her friends, and all the things she loves to do, Angie doesn’t have time to actively invest her money so she just puts all her extra (about 4.5% of her income) into a basic investment that earns a steady 4% net of taxes and inflation between dividends and growth.
Angie likes to stop by Starbucks on her way to work in the morning to get a $2.75 slice of banana bread for breakfast, it takes her ten minutes per day to go to the Starbucks and wait in line for her bread. Angie just learned about the power of savings so she decides to look into making banana bread herself. It turns out that at home with the tools she has she can make a loaf of banana bread, slice, wrap, and store the pieces in 50 minutes, the ingredients of which cost $6. Each loaf lasts her 10 workdays. So now, every two weeks, instead of spending $27.50 and 100 minutes on Starbucks banana bread, she spends $6 and 50 minutes on her own, so she saves $21.50 and 50 minutes every two weeks. There are all sorts of things she could do with the extra time, and valuing time is a topic for later, but let’s say whatever it is, it’s worth $10/hr, so 50 minutes is worth $8.33 every two weeks.That’s a total of $29.83 every two weeks or, in a 50 work-week year, $745.83 per year.
She already had all the kitchen equipment, because she, like most people, cooks meals at home from time to time anyway, so that’s no additional cost to her, but she spent about an hour figuring out how much her ingredients cost and planning out the logistics. She’ll also have to maintain the habit to keep herself committed to the savings and enjoying her breakfast, so let’s say she invests an additional 5 hours to learn and price out other recipes of similar cost that she would also enjoy. That’s 6 hours of work that for our math we’ll consider $60 of time investment.
From an investment perspective, how much is $745.83/year on $60 of upfront cost? Unbelievable, is what! $745.83 divided by $60 is an astounding 1,243%! The plan is completely under her control so risk is limited to essentially just her willingness to actually do it, and there’s an awesome side benefit of her having those recipes and baking skills ready to go any other time they would be useful. I call that an awesome investment.
From a retirement planning perspective this savings plan just bumped her savings rate from 4.5% to 6.97%, which is a HUGE increase. How big of an increase? Savings has double whammy impact on retirement planning because it both increases the amount being put away into the investment vehicle and lowers the amount needed to retire.
If Angie had zero savings as of the start of this plan, the plan would move the date at which she could indefinitely live off the growth of her savings forward from a ridiculous 81 years to a not-as-ridiculous 69 years, so it’s worth 12 years of retirement. How valuable is that? Here’s a plot of her savings with a 4.5% savings rate and the 6.97% savings rate that is the result of her adopting the new baking habit.
Notice how much steeper the curve of the yellow line is? Angie will still have a long way to go, but she also clearly has some low hanging fruit ready for her to grab. Just three or four practices like this will put her far ahead of the average American consumer. Do you have any simple and safe savings ideas? Leave them in the comments below!