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Spoiler alert: Both saving and investing are key components to a balanced breakfast savings plan. Some folks would have you believe you can only focus on one or the other.

I’m not here to tell you to choose.

You should definitely be doing both. But one is definitely more important.

Just like using a $5.00-off coupon while an item is on sale for 50%… the order matters.

Let’s do the math.
If a fancy new hat is originally $10 and we apply the $5 coupon first, the total price will be:

($10.00 - $5.00) x 50% = $5.00 x 50% = $2.50

But if we apply the sale first and the coupon second, we get:
($10.00 x 50%) - $5.00 = $5.00 - $5.00 = $0.00

Your high school math teacher didn't lie.
Order of operations matters.

So which one should we focus on first? Saving or investing?

A Tale Of Two Frugalites

Consider two people: Suzie and Imelda.

Both women make the same income and have the same fixed expenses. But they handle their money a little differently.

Suzie is a saver. She’s really good at it. Every month she stashes away at least $200. She keeps it in her savings account, which earns about 0.00000000001% APY.

Imelda is an investor. As a child she was told to invest early and often. She’s got the early part down – she put in $5,000 and it’s grown at about 7% annually every year, compounding monthly.

After 20 years, Imelda has $20,194. Her money quadrupled!

Suzie, on the other hand, has $48,000. Twice as much as Imelda.

Without investing.

How did that happen?

Let’s do the math.
To find how much Imelda has after 20 years, we’ll use the forumla for monthly compounding interest.

Imelda's Investment = P(1+r/n)nt = ($5,000)(1+.07/12)12x20 = $20,194

Suzie isn't investing, so she has no compound interest. She saves $200 every month, so we simply need to count up the months.
Suzie's Savings = $200 x (20 years) x 12 = $200 x 120 = $48,000

What if Suzie saved less?
Suzie could reduce her monthly savings to $169/month and still match Imelda at the end of 20 years.

What if Imelda invested more?
To come out on top, Imelda would have had to initially invest $11,885.

Every year Imelda’s nest egg grew 7%. In the beginning, 7% of $5,000 was only $350. After 20 years, that 7% was more like $1,400.

But every year Suzie was putting away $4,800. To earn $4,800 in interest, Imelda would need $68,571 in the bank – ouch!

It’s clear that Suzie had the better strategy, but it wasn’t easy.

Saving is hard work.

In contrast, Imelda never put in a cent after her initial investment.

Not bad for zero effort.

In fact, after 44 years Imelda’s investment eventually overtakes Suzie’s savings since that 7% gets bigger and bigger as her nest egg grows.

But what if we combined these strategies?

A Lesson From Auntie

Imelda’s daughter Isabel is also a savvy investor. She invests $5,000 right away, just like her mother. But inspired by her aunt Suzie, she knows that saving is important, too.

In addition to her $5,000 nest egg, Isabel decides to save and invest $100 every month. In addition to the $20,276 that her initial investment yielded, her invested contributions add up to an additional $52,374.86 after 20 years – a total of $72,650.86. Yowza!

Suzie also has a daughter, Sofia. Just like her mother, Sofia is great at saving – she saves $200/month. Inspired by her aunt Imelda, she decides to invest it.

Sofia doesn’t save anything additional, she simply invests what she’s already saving: $200/month. Nearly a zero-effort change on her part.

That simple change, however, brings Sofia up to $104,749.71. WHAT!

That’s more than double what her mother ended with and more then five times what Imelda made.

Let’s do the math.
We know how much an initial contribution will grow over time, but what about our monthly contributions? There’s a formula for that:

Compounding Contributions = A((1+r/n)nt-1)(n/r)

Since Sofia is putting away $200/month, after 20 years she has:
Sofia's Invested Savings = $200((1+.07/12)12x20-1)(12/.07)= $104,185

Isabel had an initial investment *and* monthly contributions, but we can calculate them separately:
Isabel's Initial Investment = ($5,000)(1+.07/12)12x20 = $20,194
Isabel's Invested Contributions = $100((1+.07/12)12x20-1)(12/.07) = $52,093
Isabel's Total Investment = $20,194 + $52,093 = $72,286

Let’s recap.

Isabel had a head start of $5,000 and invested $100 every month. Every year that initial $5,000 grew by 7%, just like her mother’s nest egg. And every year Isabel contributed another $1,200 – all of which was also growing.

All Sofia did was invest $200/month. But 7% of $2,400 is a lot more than 7% of $1,200. Twice as much, in fact. And that gap grew bigger every year, as Sofia’s compounding interest accrued against a bigger and bigger pile of cash.

While both of them improved on their parents’ success, Sofia’s saving instinct clearly carried her to the top.

And unlike their mothers, since Sofia is investing more than Isabel over time – Isabel’s investment will never overtake Sofia’s.

The Bottom Line: Investing is great, but it works best on a solid foundation of saving.

Interest rate matters. Saving rate matters more.

Imelda may have spent some time managing her investments for a better return, but this is tricky at best. The market is incredibly hard to time, and many experts agree that a simple market-tracking index fund is probably your best bet.

Interest is also less impactful in the short-term. You’ll only see crazy growth after a crazy number of years. So if your goal is early retirement or an upcoming vacation, you’re better off focusing your efforts on saving.

My motto: It's easier to save $1 than it is to earn $1 in interest.

For the love of God, do both.

If you learn one thing from this story, it’s that saving is incredibly important. But if you learn two things…

Saving and investing is the best strategy. Hands Down. Period.

Look, investing is actually pretty easy to get into. In fact, you're probably doing it already! If you have a retirement plan through your work, it's very, very, very likely invested as a portfolio.

Nowadays, you can get started for as little as $5. In fact, you can get started for free.

You can use my personal referral link to get a free stock on Robinhood (it will also give me one free stock, pleaseandthankyou).

This stock is randomly chosen from stocks like Facebook, Apple, Home Depot, Fitbit, and Microsoft – stocks that routinely trade anywhere from $2.50 - $200. Literally free money, people.

It’s like a lottery you’re 100% likely to win.

After two days you can either sell it (free money!) or keep investing. For what it’s worth, it’s the easiest investing platform I’ve ever used. And unlike other platforms, they have no trading fees.

So what did we learn?

To be perfectly honest, I’m more of a Suzie – great at saving, but not so hot at investing. But I can manage contributions to my 401(k) – and that counts! If I have extra savings to invest, I use an after-tax account like a Roth IRA or Robinhood.

While both are important, saving is the force multiplier that gives investing a real edge.

Which frugalite do you relate to?

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