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Starting Down the Road to Financial Independence? Don’t Obsess Over Investment Returns, but you MUST Obsess Over this

Last updated by on March 31, 2014

The 20somethingfinance motto is “Get a Head Start on your Freedom”.

“Freedom” is a bit ambiguous really, and as with a lyric on a favorite song, you can take it to mean whatever you like. But if I’m being honest about what “freedom” means for me, it is “financial independence“.

Who wouldn’t want the freedom that financial independence can provide? So I thought I’d focus for a moment on a trap that I see some people fall in to and what truly matters when it comes to financial independence.

What type of things can contribute to you getting a head start or even a strong late start? There are many, but one of the most prevalent is to invest your money and let the magic of compound interest take over from there. Take a little bit here and there, invest it for a few decades, and Voilà! You’re rich one day.

It’s the promise that has been laid out by the financial industry. And if you are consistently maintaining/adding to your investment position through the good market years and bad, there is merit to it.

But there’s something that worries me a bit when I hear certain people say,

“I was able to sell off that old bike/car/toy/etc., get a few $K’s, and now I’m looking to invest it. Any recommendations?”


“I’ve crunched the numbers and put aside about 10% for retirement, which should be enough over the long haul with the 10% average investment returns.”


“You know that money I got from X, Y, or Z? I just put it in to a few of the best performing mutual funds.”


“I’ve got $5,000 saved. Where should I put it – a Roth IRA, a CD?”


How much should I save?

The intentions here are mostly good. Saving money for retirement is definitely better than not. And investing it is better than letting it get eroded by inflation.

What worries me is that it often comes from someone who has poor spending habits and their mindset is:

I’m going to be good and save and invest this, I’ll get a great return, my work here is done for a while.”

And then they resume normal spending behavior: getting takeout food every night, purchasing bottled water or soda, driving cars with $300+/month leases and/or getting 15 miles per gallon, buying a home that is too big and then filling it with stuff, accruing credit card and other high interest debt, etc., etc.

financial independence variableHere’s the thing: when you have low asset levels, personal savings rate > investment rate of return. Actually, I think that’s a bit of an under-statement, so lets try this: personal savings rate is 90% of the battle. Investment returns (i.e. asset allocation A vs. asset allocation B) are comparatively insignificant. Sadly, the average personal savings rate for Americans is now at 3.9%.

If you want financial independence, personal savings rate should be priority #1, 2, and 3 to get you there. And 3.9% isn’t anything close to being able to cut it.

And this stays true until one amasses a few hundred thousand dollars in assets or more. When one reaches those levels, then investment returns start having a much larger impact, and at some point can even surpass non-investment income.

So… it’s great that you’re saving early – congratulations. But there’s no need to obsess over investment returns. And if you truly want to look towards the future, you will have a much higher impact if you instead obsess over your spending habits, in order to boost your personal savings rate to 10 times 3.9% and beyond.

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About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Zee says:

    I hear the same things from people that are just starting to save. Yes 10k is a good chunk of money, but to be honest, where you put it isn’t that important if you don’t plan to keep adding to it for another few years.

    I usually just recommend a large index fund so it can beat inflation, keep up with the general market, and not have to be checked up on very often.

    I wish people had more discipline when it came to saving more or spending less. But then again, if everyone saved a lot to retire early then the bar would be set higher for early retirement which would ruin my plans 🙂

  • Jon says:

    Mr. Miller, what are your thoughts on building a savings vs. paying off debt? For instance, let’s say one has a second mortgage on their house and its at a relatively high interest rate. No other significant debt on the books (other than the first mortgage of course, at a great rate). I am guessing this answer is different for each individual, but generally speaking what are your views on savings vs. paying down debt?

    • G.E. Miller says:

      Good question – I think this post covers it pretty good detail (whether retirement or not):
      1. get a 401K match, if it exceeds high interest debt
      2. pay off high-interest debt
      3. pay off minimums to avoid fees on low interest debt
      4. save the rest

      • Jon says:

        Thank you for the link, and we are in agreement on philosophies. That article was a good summary. My effective interest rate on the mortgage is probably somewhere nearby your 5% break-point when you factor in the federal deduction in my tax bracket. I am contributing to my 401k to maximize my employer’s match, and the remainder is going towards paying off that mortgage using additional principal payments monthly. Once that is paid off I will free up that money each month for additional future savings (and maybe treat the wife to a vacation). Thanks for the articles and advice.

  • Ryan Wilder says:

    Great post. I think my personal finance debates at work center around this idea. Recently a single mom with one kid was complaining about her financial situation, especially with her recent car situation. She wants to go to school and do several things so I ask about her situation and how much she’s saving for it. She has too big of a house, smart phone, cable, drinks plenty of wine, buys bottle water at work, and loves her country concerts. We had a good conversation about how to cut each of these (each one with your related blog post in mind. Yes, I’ve read them all).

    She quit talking to me about it when she mentioned her stock broker. I asked how much she has invested in her 401k, to which she said she needs to do that too.

    Some people … I don’t buy into everything Dave Ramsey, but you really “need to live like people won’t so you can live like people no body can.” It’s a mindset and a heart attitude.

  • Catina says:

    This just made me think about how MUCH I need to get my savings rate in check and stop buying silly things (I.e. bottled water). Great post!

  • Jeremy says:

    I’ve had similar conversations as Ryan at work. I’ve become the de facto personal finance guy around the office and the other day found out two of my coworkers have never contributed to the IRA (the company matches dollar for dollar up to 5% of our income!) I ran some numbers to show how much the girl who’d been here for 7 years would have in a 401k if she’d been contributing 5% since she started and she got a little sick and enrolled that night.

    The next day, it came out that one woman who has been with the company for 20+ years has over $200k in her 401k, which impressed everyone until I pointed out that she better have savings elsewhere, because if she wants to continue even a modicum of her $40k/year lifestyle, she’ll have 5-6, maybe 7 years of happy retirement before she’s on welfare! Two more 20/30 somethings went home and enrolled that night.

  • Kristin Wong says:

    First time commenter! Great post. I always cringe a bit when I come across those questions, too. And I think you articulated it perfectly–“if you truly want to look towards the future, you will have a much higher impact if you instead obsess over your spending habits.”

    I mean, I know there’s a strong argument to be had for earning more, but a big part of building wealth is learning to truly live below your means. I think in the process of looking for ways to make more money, people forget just how how much they can save by cutting back and rethinking their financial habits.

    • G.E. Miller says:

      Welcome, Kristin.

      You bring up a great point. Earnings come and go (as do investment returns). Spending habits can be much more persistent and in your control. I may be making 30% or 300% of what I am making today, 10 years from now. Maybe I’m retired, maybe I sell my blog. No clue, really. But I do know that with the spending habits I’ve been working on, I am significantly more likely to be spending at levels consistent with today (adjusted for inflation).

  • Gabe says:

    Great post as always. It’s funny because just last night I started reading the book “The only investment guide you’ll ever need” and on the second chapter he said a phrase which I had never though of this way, but he basically says

    “A Penny saved, is two pennies earned”

    If you think of it it’s so true. Because if you spend x amount of money on something, in reality, you would have to almost earn 2x that amount to make up for it after all your tax and deductions are taken out.

    So the best mindset one can ever have, is to just live frugally. Not necessarily cheap, but smart.

  • John says:

    I usually just recommend a large index fund so it can beat inflation, keep up with the general market, and not have to be checked up on very often. Thanks.

  • Syed says:

    A great point. The numbers don’t lie. Contributing early and often is the best way to start your investment journey. Once your account balances get high enough, then asset allocation and expense ratios play a much bigger role. Every few months or so just evaluate your regular expenses, see what you can reduce or eliminate, and put that towards your investments and/or debt repayment.

  • Alex says:

    Essentially you’re highlighting the methods of financial common sense, and we sure all do need to be reminded of this at times.
    Paying for expensive meals but taking investment risks is a clear example of imbalance.

  • Harry King says:

    Great read!

    Saving and Contributing early can definitely come a long way. Investing for the future is the key and how you invest it will determine your success.

    Thanks, this reminds me to keep my savings and investment in check.


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