Many financial coaches and advisors report difficulty in working to improve their clients’ consumption patterns for the purpose of increasing their savings rates. One helpful approach in this endeavor is to provide concrete evidence of the future value that a client will receive by improving his or her consumption habits today. Compound growth may be a powerful force, but it can be very difficult for individuals to visualize when it really matters.

One conclusion that is consistently unavoidable in analyzing this trove of data is that in the arena of personal-finance outcomes, behaviors matter. They matter a lot. This is an idea that we routinely discuss in a qualitative manner, but we wanted to provide a more quantitative approach to describing this reality. So we had our financial advisory team undertake the mission of quantifying—from a dollars and net-worth perspective—exactly how much behaviors matter, with a focus on the data point of the personal savings rate. 

One of the tools that DataPoints offers to its clients is the Building Wealth assessment—this tool allows an advisor to measure a client’s behaviors and attitudes in six key behavioral areas that have been shown to have a strong positive correlation to building wealth over the long-term. In fact, many of these characteristics were first identified in the research that was the foundation for The Millionaire Next Door back in 1996. Individuals scoring high on the Building Wealth assessment (referred to as “high-potential” individuals) saved on average 17% of their disposable income every month and year, as compared to only 7% for their lower-scoring peers. (And note that 7% is higher than the current national average savings rate.) That’s an additional 143% in savings every month and year for the high-potential individuals.

Quantifying Savings-Rate Future Outcomes

We talk about this significant difference in savings rate a lot, highlighting the dramatic impact that behaviors have on this critical data point and the resulting impact on individual financial well-being. But often it seems that in this discussion the real impact of this disparity in savings rate is lost because it isn’t quantified over time. After all, 17% as opposed to 7% is really only 10% more of your salary every month. Individuals (and maybe even their advisors) may think: does it really make that big of a difference when you’re talking about real-life savings figures? And by that I mean real-life dollars? And surely it must be the case that the real wealth differentiator over the long-term is investment returns, not something so simple and dull as savings rates, right? 

These are fair questions that need to be addressed. Let’s answer them by looking at a hypothetical situation and running some numbers. Here’s the hypothetical: we have two young women, Rita and Alison, fresh out of school and starting their careers as public-school educators. They are now ready to begin earning and saving at the advantageous age of 22. They both start at a salary of $30,000/year. They both receive annual pay raises to the tune of 4%. Both invest their savings in identical low-cost index ETFs earning a total annualized market return of 6%. They are identical in every financial respect except for one: Rita manages to save 17% of her gross annual salary, whereas Alison saves only 7%. And because their financial circumstances are otherwise identical, we can stipulate that the difference in savings rate is attributable strictly to spending and consumption behaviors, not a difference in economic circumstance such as outstanding student debt.

So what happens over a 40-year working career? Here’s a chart showing their respective net worth over the ensuing four decades:

At age 40, after 18 years of work, Rita has amassed roughly $211,273 in net worth compared to Alison’s $86,995. And this dollar disparity only magnifies over time. By the age of 50, Rita has eclipsed the half-million mark at $538,811 compared to Alison’s $221,863. And by the time they get to the end of their 40th year, Rita has banked a whopping $1,398,598 compared to Alison’s $575,893. 

You don’t have to be a financial planner to recognize that these disparate amounts are gong to have a significant impact on the quality and timing of Rita and Alison’s retirement.

The Role of Investment Returns 

Changing behaviors—especially spending and saving behaviors—can be hard. So hard, in fact, that it can be tempting for financial advisors and their clients alike to put their faith and hope instead in oversize investment returns. The thinking goes: “well, I’ll just have to do better on the investing side in order to make up for poor savings behaviors.” 

Let’s consider this variable by changing the hypothetical. Let’s assume now that instead of receiving the paltry market-average annualized returns of 6%, Alison is able to find an advisor or asset manager that beats the market every single year by 2.5%. We’ll keep all of the other variables the same, except now Rita earns 6% in investment returns every year as compared to Alison’s market-beating 8.5% return. 

Here’s what the future looks like now:

The additional 2.5% investment alpha every single year for 40 years closes the gap for Alison, but not nearly as much as we might have expected. Now at the end of that long period of time, Alison has amassed $995,493 as compared to Rita’s $1,398,598. Still a very significant and meaningful delta at a 40% larger retirement nest egg. 

And keep this in mind: while Rita’s result based on 6% annualized total returns and a 17% savings rate is completely plausible and largely within her control, the 2.5% investment alpha scenario (consistent and unfailing over a 40-year period) is, if we’re being realistic, largely if not completely impossible. 


Using future-value calculations to put dollar figures on these various savings rates over a 40-year working career vividly and dramatically paints the picture of the disparate financial results to be achieved through a change to this critical variable. In our experience, it is easy for both professional financial advisors and their clients to be focused on the more sexy data point of investment returns. But in reality the savings-rate variable has a much greater impact on long-term financial success. And as an additional plus, it also happens to be wholly within your control. 

Guest Contributor: Tim Fallow, DataPoints

December 10, 2018

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