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Savings Rate vs. Rate of Return

I fall into this trap as much as anyone I know, looking to increase my rate of return without paying as much attention to my savings rate. The most potent thing you can do to build your retirement stash is to increase your savings rate.

Most physicians are focused on how to increase their rate of return. Which investments will get them the biggest bang for their buck. In fact, the sexiest blogs and sites out there are those where the author is talking about all sorts of investment types.

Boring investments are… fucking boring. Who wants to take $1,100 and transfer it to their Fidelity mutual fund account, buy some S&P 500 stock mutual fund and watch it grow maybe 3% in a year? There is nothing exciting about it – and there isn’t much you can write about it.

Your Savings Rate Matters Most

For most of us our savings rate is far more important. Savings rate is how much of your money you actually put towards investments. Forget the percentage, we’re talking dollar figures. If you are putting away $1,000 a month versus putting away $3,000, you likely know that your retirement stash will be that much larger with the latter.

Even with the ugliest of rates of return, your savings rate will make a massive difference in your overall portfolio. Until you have amassed some serious savings, worry yourself less with the various investment options out there. If you only have $165k to invest, a rate of return of 8% vs. 3.5% means a difference of only around $6k.

Power of Your Paycheck

As the title states, it’s not like you’re a low-wage earner trying to set aside every little penny you can, just to end up with maybe $230 a month in a savings account.

As a doctor you are earning in the ballpark of $100-400 an hour. In a weekend you can earn what that poor barista earns in 3 months.

It’s far more important that you focus on how you can actually keep that money versus how you can increase your rate of return. Many of us doctors are making a ton of money every year, but because of our lifestyles we aren’t keeping a whole lot of it.

My buddy S. from residency used to set aside more every month in residency than most of my colleagues do now as attendings earning $300k a year. He is doing quite well for himself, not even a decade out of residency and he is now finally broadening his investment portfolio.

When To Worry About ROI

When should you worry more about your return oinvestment (ROI)? There definitely is a time for that, no doubt about it. A time comes when you have a gang of cash saved up and invested. You have created wiggle room for yourself. A time when you are okay continuing to work, when you are still young and you have extra money to work with.

It’s somewhere in our 40’s, for most doctors, when we can take a little bit of the money we have saved, take it out of those dinky mutual fund companies and invest it in P2P lending or real estate or a business or trade options with it.

As with medicine, it’s important to crawl before you walk. I won’t get a CT for abdominal pain until I have examined the patient. First things first. When it comes to investing, you have to first learn the savings game. Master that and you are ready to invest. You start by investing in safe investments – in 2017, the safest investments seem to be mutual funds.

A Doctor Saving $3,000 A Month

If you set aside $3,000 every month for a 25 year period then you will end up with $900,000, just from this savings rate alone. Your savings rate alone is quite powerful – most people can’t set aside $900k over the lifespan of their career. Even with the shittiest rates of return out there, you would likely end up with $1.3 million in this timeframe.

If you only saved $1,500 a month then you would need a 7.5% rate of return annually in order to get to this $1.3 million sum. I assure you, getting 7.5% every year for 25 years is really, really, really hard.

It’s not just hard but it’s risky. You might have a chance to increase your funds by 7.5% every year but you will have a 75% chance every year to lose it all as well.

So, it’s possible to make $1,500/month grow to over $1 million throughout one’s medical career but the risks are far too high. Instead, by saving $3,000/month you are far more likely to achieve the same goal – with far less risk.

Breaking it Down

The point is to actually take $3k, transfer it to your investment account, buy some safe mutual funds and watch it grow (and sometimes drop).

But there are months where you can’t do that, right? Especially early in your career you might only be able to set aside $2k/month. Or you might be able to set aside nothing. And then a decade into your practice you suddenly hit your stride, you can set aside $6k a month.

But that’s the point, isn’t it, that even though you may not be able to set aside $3k every month, over those 25 years you end up averaging about $3k/month – that’s where your savings power really starts to shine.

You Save But You Don’t Invest

I am not saying that everyone should invest in mutual funds. But you have to do something to keep your money from losing value due to inflation.

Inflation is that nibbly little fucker that makes your $100k be worth a little less every year. Remember bread costing $1? Now it’s $4. Remember cars costing $8,000? That same car is $15,000 less than a decade later.

If you don’t like investing in mutual funds then consider SPIA’s or bonds or a CD or something that will, at the very least, keep up with a portion of inflation. The lower the interest rate the less risk you will take on. Do your research, there are still good options out there, even more so now that the interest rates are creeping up.

Consistent Vs Sporadic

So where is all the hype right now? I would say options trading, other stock trading techniques, real estate crowdfunding, and real estate flipping.

These little investment sectors are hot. How do I know? Because nobody even talked about them a couple of years ago or thousands of people went belly up trying to make money off of them.

I am not saying they are bad ideas, I actually got no clue if they are or if they aren’t. I just know the trends in the market. Things go up and things go down. Those sectors that soar to the heavens, come crashing down deep into the devil’s rectum.

Boring Investments

Boring investments, in turn, have been around forever. They likely will stick around forever, too. Sure, they dropped a little but they also recovered. Then they went up, not a lot, but they did. And soon they will come down, again.

Every person who actually puts in a slight effort to save for retirement will know exactly when top stop worrying about their saving rate and when to start focusing on increasing their ROI. 

Time to Take Risk

Imagine your kiddos are grown up, off to college somewhere, or living their own life with their loved ones, or securely locked away in a prison somewhere. Your home is paid off, even if it cost $2 million and you have 2 reliable cars between you and your partner.

Your student loans are paid off and the most exciting thing you do is take a trip to an exotic destination every year, setting you back at most $10k a year.

You also happen to be working a little, still. You actually like what you do, so does your partner. You both have so much money coming in that you don’t really know what to do with it.

Your savings rate is now on auto-pilot. You have run out of things to spend money on. Even if you went all out, spending $100k a year on who knows what, you would still be left with around $8,000 a month that would go straight towards your savings.

By then Elon Musk will have established a colony on the moon and you will access to P2P real estate investing on martian soil. That’s the time, that’s when you gonna turn to your partner and say “Hey, we should invest in that, looks promising!”

2 replies on “Savings Rate vs. Rate of Return”

Nice read! Savings Rate is hugely important in building up a nest egg. Rate of return is important in making it last once you decide to stop earning income.


Nice dude, I like that a lot. You need to tweet that or whatever it is cool people do when they have a meaningful quote. It’s incredibly germane, puts the saving and growing into perspective.

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