Savings rate versus return

If you have unlimited attention to learn about both budgeting and investing, you have plenty of time to optimize both your savings rate and the returns your money is getting.

For the rest of us, it probably makes sense to prioritize one or the other first, attention being finite.

I bring this up because smart folks I know tend to focus excessively on returns, when their budget is lower-hanging fruit. I do this.

I'm not sure how to quantify the tradeoff. It's complicated because savings has a clear opportunity cost ($1 saved is $1 not spent on chariot races), whereas if you're investing with money in, say, an RRSP it's already "written off" as not spendable until retirement.

Anyway, the imprecise way I think about it is:

(1) How elastic is your savings rate? Would saving an extra 10% of your paycheque per month be fairly easy to accomplish (e.g., by spending less on luxuries or cutting down electricity usage), or are you already about at the limit of how stingy you want your budget to be?

(2) How much money do you already have saved? If you have a fair bit saved (say, $100k and up), each 1% per annum of return is an extra $83 per month of income (albeit some may be in an RRSP, so untouchable for now). Compare that to the most you could hope to pare away from your budget.

As I begin this blog, I find myself in the regime where budgeting offers tons of low-hanging fruit. I only have about $10k of liquid investments. Annual return of 1% on that is only $8/mo, so it's pretty obvious I should focus on putting more away, especially when my electricity bill is inexplicably high (more on that another time perhaps). The budget is the leakiest part of the ship, for now.

Don't optimize for mote removal when you've got beams to worry about.