We all know the secret to having more money is either to earn more or save more. And doing both together is even better!
As a saver myself, it's not my intention to slap my own face or to belittle the savers. But we need to see things in context and have a proper perspective on which comes first.
The Chinese have a idiom for it:
开源节流 - to broaden the sources of income and economize on expenditure
It's no coincidence in my previous post I put Earn More before Save More.
As investors, don't we prefer companies we own to secure their profits through top line revenue growth? Why? That's a sign of virility! The company is growing and gaining market share from it's competitors. It's or-yi-or Tarzan stuff!
But if the same profit is engineered through downsizing, rightsizing, outsourcing of non-core processes, will that comfort you? Does the image of a leaking ship - where everyone is busy jettisoning the dead-weights off the ship - comes to mind?
Saving is important. What's the point of earning $10,000 but you spend $11,000?
A jolly good time? Eh! I never asked you! Keep quiet and sit down!!!
Ahem, as I was saying... What is the maximum savings rate a person can achieve for his/her income?
100% of course. And it's possible!!!
That is if you are lucky enough to be still living off your parents as an adult. Or you have a high income earner spouse that you can sponge on. My mainland lady friends call it securing a long term meal ticket ;)
For most of us, a savings rates of 30% would be great. 50% would put you in awesome category. And for those who can save 70% of their income, that's MONSTER kill!!!
That all and good in percentages.
There are 4 big chinks in the savers' armour:
1) Your money saved cannot exceed your income - there's a cap.
You cannot save $11,000 if you earn $10,000. Or?
2) 100% savings rate on zero income is still zero.
Life is not a straight line extrapolation. You could be laid-off, fired, met with an accident or contract an illness.
Ok, ok. Choy choy and spit spit. Touch wood touch wood. Why you touch my head? It's not wood ok?
3) Growth is better than austerity.
If I earn $3,000 per month, to save $2,100, I need to save 70% of my income and make sacrifices on my lifestyle choices.
But if I focus on broadening or increasing my sources of income, let's say I double my income to $6,000 per month, saving the same $2,100 income per month now represents 35% savings rate. Which is more sustainable?
It's a bit like evaluating income stocks. Do you prefer a stock with 90% dividend payout ratio that yields 5% or another stock with 45% dividend payout ratio that also yield 5%?
4) Crossing over to the dark side
There's a fine line between being thrifty and stingy. Between financially prudent and simply being a scrooge.
Delayed gratification is good; but delayed gratification till the afterlife is over planning! Albeit hoarding cash is better than hoarding thrash; it's still the same psychological disorder.
Just flip through the obituary pages once in a while. You may see quite a few who left for a better place at 55 or 65 years young.
When making beautiful plans like when I have XX amount at YY age; or when I retire then I will do this and that - do remember to include: What if tomorrow never comes?
In my next post, I talk more about Earn More.
Singapore Man of Leisure (welcome to my blog; just google it!)
