When it comes to investing, most people focus on their rate of return.
However, an often overlooked part of the investment process is the “savings rate.” This is simply how much you’re contributing to your investment accounts.
Earning a positive rate of return is important, but it might surprise you to learn how important the savings rate is.
The chart below shows the value of an investment account after twenty years for someone earning $100,000 per year. The savings rate and rate of return are the variables:
As you can see in the highlighted cells, someone saving 2% of their income earning 10% per year ends up with a smaller balance than someone saving 6% of their income earning just 1% per year.
In other words, the amount you contribute is far more important than your investment returns.
We all want positive returns, but your savings rate is a major factor that can help lead to financial success.
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