Saving Money Matters More Than Your Investment Choices

by Andrew Hallam, Personal finance best-selling author

Imagine you’ve wandered into the packed stands of a professional football match. Before the fans root for their heroes, they complete an intrusive online survey. It asks their salaries. It asks what they like to drink, wear, and the sorts of restaurants they frequent. It asks how they invest their money and how much of their income they invest.?

Who would be the wealthiest? According to Thomas Stanley, author of The Millionaire Next Door, most of the wealthiest are business owners. But entrepreneurs can be among the poorest too. Have you ever watched newly hatched turtles? They race over treacherous beaches into the hungry sea. And like people starting businesses, most get gobbled up.

According to Eurostat, more than 50 percent of European businesses fail to reach their five- year anniversary.? The US Bureau of Labor and Statistics says 48 percent fail in the United States. ?

That leaves plenty of “would have,” “could have,” “should have,” turtle-like tales of woe. That’s why saying, “Everyone who started a business is rich” is like believing every Kenyan can run a 4-minute mile. ?

How about investment smarts? We’re getting warmer now. But that still misses the mark. For starters, when the sexes go toe-to-toe in financial literacy tests, men beat women. And yet, every study proves women’s investment accounts outperform men’s (I’ll buy you a pizza if you can prove me wrong).

So, would the women in those football stands be richer than the men? For a host of reasons, no. ?Fidelity Canada’s research aligns with several others:? women save a higher percentage of their income than men. But they still earn less and are less likely to invest it. More women’s money is mired in the sands of savings accounts. While there—like hungry birds of prey—inflation pecks away.

So, if you were in that football stadium and trying to predict who was wealthy or who might become wealthy, here’s how to do it.

First, you would determine the median income of the fans. Those whose incomes were higher than, or at least close to the median, would have the best shot. But the highest income earners wouldn’t necessarily be the richest. Income and wealth are often two different things.

Next, you would determine which people invest at least 25 percent of their income. That’s an acid test. Someone who earns €500,000 a year, drives a Ferrari, dines in Michelin 3-star restaurants and flies business class to 5-star resorts knows a lot about spending. Heck, they might even know a lot about investing. But as Thomas Stanley found, high income, white-collar, big spenders are a lot more show than go when it comes to their wealth.

Wealth, after all, is the money you have. It isn’t money you’ve spent.

Some wealthy people own flashy sets of wheels. But most Porsche, BMW and Maserati drivers aren’t wealthy. They just have expensive tastes. Toyotas, Hondas and Hyundais are the preferred steeds of the rich.

In his book, Stop Acting Rich, Thomas Stanley reported that most wealthy people don’t drink expensive wines, either. Seiko and Timex are their favourite watch brands. I’m not saying there aren’t exceptions. Several wealthy people own Rolexes, drink bottles of Chateau de Co?teuse and drive high-status cars. But most do not. So, if you’re trying to best predict the wealthy from a crowd, here’s one of the best ways to do it.

1.??Coral those who earn at least a median income level to the home side of the pitch.

2.???Among that group, see who’s investing at least 25 percent of their income. Guide those who don’t to the visitor’s side.

3.???Some will have credit card debt. If they do, push them to the visitor’s side.

4.???Now, remove from the home team’s side, everyone who drives flashy cars, drink expensive wines and wears Rolex watches. This will, unnecessarily perhaps, move plenty of wealthy people to the visitor’s side. But this final selection will nearly guarantee that those who remain on the home side of the pitch, will be wealthy or on their way.

If you want to grow wealthy, stack the odds in your favour. Be like the home pitch side.

People investing in low-cost ETFs will have higher odds of success, compared to those buying their own stocks or actively managed funds. But saving and investing large, regular sums is even more important.

?Research says spending less and investing more is a recipe for success. ??

?Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

?