Don’t Budget

The  well respected Jonathan Clements is not in a good mood and when he is not in a good mood, he dishes some advice that may sound questionable. To be fair I think I agree with all of them. Perhaps except this:

Don’t budget. It’s a tedious exercise favored by nerdy individuals. Instead, make sure you save enough every month. Do that, and there is no need to budget.

This basically smacks the engineers in the face. To be fair, I do agree. There are many folks who cannot stand to budget, and lament its too much work. To all those, this advice is good.

But I felt that there is something you would not be able to gain if you don’t do this nerdy stuff.

I wonder how many felt the same way.

Earning 3.5% saving returns more VERSUS Saving 100% more

Earning 3.5% saving returns more VERSUS Saving 100% more eyQH4Vg

Two person earning the same amount of money annually, one knows how to build wealth through paper assets like stocks and bonds, another only knows how to put more in insurance savings policies, who comes out on top?

Here are the permutation:

  • Both makes $2,500 gross monthly, with 2 months bonus ($35,000 annual at the start), income growing at 3% per annum
  • Both takes home after a 20% deduction ($28,000 annual at the start)
  • Guy A channels 15% of his take home income into a portfolio of stocks and bonds making a consistent 6% per annum
  • Guy B channels 30% of his take home income into insurance savings endowment making a consistent 2.5% per annum
  • Both starts at 25 years old and plans to retire at 65 years old

We use my Wealthy Calculator available to all for FREE to compute the figures.

Earning 3.5% saving returns more VERSUS Saving 100% more c9JBR8g

Guy A would have channelled $316k into building wealth with his stocks and bonds portfolio, if worked out well, will build up $983k. Saving $4,200 in year 1, he would be left with $23,800 to spend or $1,983 per month.

Earning 3.5% saving returns more VERSUS Saving 100% more XNc13fv

Guy B would have channelled double that of Guy A, or $633k in total to building wealth by putting money in savings deposits. He would have build up $969k, pretty close to Guy A. Saving $8,400 in year 1, he would be left with $19,600 to spend or $1,633 per month.

Different paths to eventual wealth

You might profile yourself as Guy A or Guy B, and this comparison shows that there is no one path to eventual wealth building success. Channelling more to building wealth, and channelling it early are the most important actions within your control to build wealth. I explained all this in detail how I use my wealthy formula to build my wealth, which is applicable to everybody.

Earning 3.5% saving returns more VERSUS Saving 100% more izdTpee

There is a mental block in a group of people that would like to build wealth. They are the folks who have known only 2 ways of building wealth their lives, fixed deposits and property. Well, perhaps that is the third, which is insurance endowments.

They felt that stocks and bonds are risky, or that they are not savvy enough to use that to build wealth. Property down payment for a second investment property for rental is out of reach for them.

The less risky route can still reach your destination, and the starting point is to channel more to building wealth.

The illustration above shows different savings increases, or in my terms different increases in wealth channelling. Each have 2 different growth rates, a 8% return per annum and a lower 4% return. Usually higher returns comes with taking more risk in terms of volatility, meaning your wealth cost could go down 30-50% in some years.

Higher returns enables you to reach your wealth goals faster, but a higher savings rate enables you to get there with less returns, and less risk.

The mathematics is immutable, its up to you to decide your path.

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