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Saving is not the Key to Financial Success

You’ve probably heard it a million times from financial “experts” – the key to financial success is saving.  The idea is that if we save more now then we’ll have more to spend later.  And while that’s true at the individual level it’s actually disastrous advice in the aggregate.   Saving isn’t the key to financial success.  Investing is the key to financial success.  A lot of this is counterintuitive, but stick with me for a few minutes.

Saving is our unspent income.  It is the residual of your income. And my spending is someone else’s income.  So if I decide to save more then someone else has less income.  All else equal, the economy has less spending power when I save more of my income.  If we all saved more then we’d all have less income.  So saving more can’t actually be the key to financial success because, in the aggregate, saving leads to lower incomes.  That’s simple enough, right?

Investment (not the financial type you’re probably aware of with regard to buying stocks and bonds) is spending, not consumed, for future production.  When you invest in your future you build an intangible (or tangible) asset that (likely) makes you more valuable.  In other words, when you invest in yourself you make your future production more valuable which makes your future income more valuable which allows you to save more of your future income in the future.

The key point here, that most people don’t understand is that investment spending drives saving and not vice versa. For instance, if I have $100 in income and save $10 then that is $10 less that the aggregate economy can save. It’s the old paradox of thrift. We cannot all save in the aggregate and grow the economy. It’s a fallacy of composition to argue that we can all save and grow the economy. So, importantly, it is investment spending that adds to aggregate savings because one does not dissave in order to spend on investment. That is, when you invest you have an asset that is as valuable or more valuable than your prior saving PLUS someone else has your spending as their income. For example, if I spend $100 to build a factory for my business then I have spent $100 that someone else can earn as income AND I have a $100 asset that should enhance my future income. I have added to someone else’s income (and potential saving) without drawing down my own savings. If my factory is productive then the economy will grow and expand and our savings will revalue over time as my corporation becomes more valuable and adds to productive output.

So, next time some financial expert tells you that the key to financial success is saving more tell them they have their economics precisely backwards.  The key to financial success isn’t saving, but investing in your own future production.


  1. bubbleconomics

    Oh well… it depends where the real return “r” is positive. In reality, unless one keeps the ‘savings’ under the pillow, it is ‘invested’ somewhere anyway, such as as bank deposit or US Treasury bonds. On the other hand of course, ‘investment’ too needs a +ve ‘r’ to make one richer.

  2. james

    …which is precisely why the wealth concentration of late is so harmful to the global economy. A billionaire does not need 1000 houses, whereas 1000 millionaires will need one house each

  3. Dinero

    Thats not quite right Cullen’s blog illustrates many times that Bank’s do not lend one customer’s deposit to another customer.

  4. Geoff

    “Investment is saving, not consumed, for future production”

    I see what you did there. Nice. I think it reads better (and clearer) with the commas.

  5. bubbleconomics

    It is correct that Bank lend first, but then it has to borrow to cover the amount lent, particularly if the amount lent is moved to another bank/withdrawn. One ‘invests’ in providing such liquidity to the bank.

  6. blonderealist

    I like the way Cullen differentiates “savings” from “investment”. I continue to find it interesting (and somewhat disappointing) when I read some “expert’s” article talking up the virtues of various types of retirement accounts, and how much more the U.S. economy would grow if only more money was put in such accounts. Most recently, Amity Shlaes and Chris Edwards had a piece in the WSJ talking about the success of Canada’s “tax free savings accounts”, suggesting that the U.S.A. should adopt a similar approach — and that the growth that comes from Americans saving more “can only be good for a wheezing U.S. economy.”

  7. Dinero

    at the macro level Bank deposits are liabilaties of the banking system and they cant be lent. But maybe a undertaking by the deposit holder to forgo spending for a period of time could be characerized as liquidity.

  8. Poseidon's Bear

    I guess the only umbrage I take here is not being more careful when discussing the individual level vs the aggregate level.

    Financial success is a more adequate term at the individual level and is less meaningful at the aggregate level. At the aggregate level, maybe the term ‘level of economic output’ is more apt.

    As well ‘investment’ at the individual level is rarely the form of investment that corporations make, e.g., a new building to make satellites. It is usually much more the pursuit of degrees or certifications that enable that person to garner employment at (much) higher salaries.

    And while I agree that at the aggregate level, attempts at increased saving leads to reduce economic output and reduced saving; at the individual level, once you have performed your investment, saving becomes an absolute necessity for retirement unless you want to die working.

    Economic output has to be ‘right-sized’ to recognize this drag, imho.

  9. tealeaves

    Maybe I don’t get something here because the difference between investment spending, spending in general and savings gets dicey.

    Savings is your unspent income but you do “something” with that (deposit it at the bank or purchase a bond or other financial asset). And only if you deposit those savings in a bank or stick it under your mattress, does the savings become an aggregate drain to income.

    That is, if I use my savings to purchase a dividend stock to generate future income that would seem to qualify as an investment. If I purchase a non-dividend company hoping to unload it on another person later at a higher price then I suppose that would be spending (even though one might call it investment). Savings then is money under your mattress or money deposited in the bank. ????

  10. tealeaves

    In the extreme, then aggregate (personal) deficit spending leads to higher aggregate higher incomes (and maybe some inflation or bubbles) if that spending is not directed to real wage growth.

  11. Cullen Roche

    Stocks are already issued when you buy them. You’re not really “doing something”. You’re just shuffling around existing shares for cash. In the aggregate, nothing is “happening” there. All securities issued are always held by someone until they mature….

  12. Dinero

    You are “doing something” you are allowing the seller to spend, consume, re-allocate savings or invest, without the liability of borrowing to do so.

  13. Cullen Roche

    Yeah, but someone holds that cash no matter what. All else being equal, there’s really nothing going on when two people swap holdings of stock/cash.

  14. Poseidon's Bear


    I was hoping that CR would give the more precise answers that he usually gives. So I will take a crack at it.

    Your 2nd paragraph (do “something”). This is really about ‘allocating’ your savings. You have not technically performed an investment. Purchasing stocks in the secondary market (where they are already issued) is a swap of cash for a stock. CR points out that the usual term of investing is really about an allocation of savings and not truly investment in the technical sense. Technically, the term investment is spending for future production.

    So your stock purchase really isn’t an investment; the company already spent the money on the investment.

    That is why a college education is a good example of an investment in the sense that you have spent in the hopes of future production (that great job you land when you graduate, that you could not have gotten w/o the degree).

    Hope this helps.

  15. tealeaves

    I may be splitting hairs here but then could on “argue” that if I use my savings to buy a new home or start a new company with hopes of generating income through rent or dividend stream that could qualify as an investment. But if I purchase a used home or a used “equity” then I’m simply swapping my savings with their already existing investment (assuming they were the first owners). That is, the first is example of investing new items is creating income for others in the aggregate economy and the second is “shuffling”. That said, from my personable perspective the new and used item maybe high interchangeable. But for the aggregate economy they have different ramifications.

    Taking it to an extreme if I purchased a newly minted shiny yellow rock or new piece of art instead of a vintage coin or historic piece of art then again one may qualify as an investment and another not. But for my personal view they both appear as “investments”?

    Is that fair?

  16. 1Don_Levit1

    Very interesting discussion. Up to this point, I have not differentiated between “saving” and investment.”
    A good friend of mine is in the midst of a family quarrel regarding a privately held company.
    Some of the shareholders want to cash out, because the business is in serious need of building a new location, and upgrading its IT system.
    The cost of doing so is about the value of the company’s worth (not including the land it owns). If the family decides to sell to a competitor, would the proceeds be considered “saving.” If the family does not sell, but invests in a new location and the IT system (with a payback of 7-9 years), is that considered an investment?
    If so, would the “investment” be better for the community than selling it to a competitor (assuming that is “saving.’).
    Don Levit

  17. John Daschbach

    Cullen seems to be getting some of fundamental economics correct: “The key to financial success isn’t saving, but investing in your own future production.”

    This seems to get confused with “Saving is our unspent income.”

    Money is the unit of account we attempt to measure this with, but there is only a poor correlation between “spending” and “investment”.

    Take Einstein as an example. He wrote the Nobel prize winning work while a Patent Clerk. He had very low income, but a lot of free time. He invested his mental effort in his “future production”. But there was no “spending” associated with this. He couldn’t find a suitable lectureship and invested his “time savings” from his Patent job in developing some of the great physics we cherish (the photoelectric effect, and brownian motion).

    What Einstein had was not “unspent income” but “unspent productive capacity”. Not unsurprisingly, both Brownian motion and the quantization implied by the photoelectric effect, dominate both our understanding of the world and technology. Not to mention E=mc^2 which came later. In an equilibrium world, Einsteins heirs would be, by at least an order of magnitude, the wealthiest people in the world. He, and his heirs, captured only a minuscule fraction of some of the greatest physics of all time.

  18. Cullen Roche

    Another excellent piece of internet trolling!

    Insult me again and that Disqus “blacklist” tool is going to come your way….I am tired of your bad attitude and having to warn a grown man about his commenting style. it’s absurd. You should be embarrassed by your behavior here over the last few months….

  19. Cullen Roche

    I should also add, for the edification of anyone who might read your commenting thinking it is coherent – money is not the unit of account. I think you meant to say that the unit of account is the measure by which we record money. The unit of account is the Dollar, Euro, Yen, etc. “Money” is not the unit of account. The unit of account is the record of measurement. On second thought, I am pretty sure you don’t actually know any of this stuff….

    Last week I taught you what productivity was (I see you use the term “productive” correctly above – nicely done). This week unit of account. Maybe by next week you’ll be up to complex topics like saving and investing, but for now this will have to do.

    Also, nice use of big words and a fancy (but simple) example. It made your comment sound much smarter than it actually was, which, I’ve learned is how you think you can barrel through people. I guess your thinking goes something like this:

    1. Tear people down by insulting them first.
    2. Establish weak point only after you’ve torn opponent down.
    3. Affirm established weak point by using overly verbose jargon that most people won’t understand, but will suffice in making comments sound smarter than they are.
    4. If called out on weak point by someone who actually understands the topic at hand then insult further using more verbose jargon.
    5. Hope no one notices that your comments mostly amount to rude, verbose nonsense.

    I’ll give you one thing – as far as internet trolls go, you’re at least a sophisticated one.


  20. Frederick

    His comment is actually more wrong than you give him credit for. Investment is a quantifiable measure in economics. Someone who has lots of money has not “invested” or “consumed” just because they have lots of investing or spending capacity. By the same logic, someone has not invested just because they have intellectual productivity that has not been applied. Einstein was not investing when he came up with his ideas. The actual quantifiable investment in economic terms occurred when his idea was put to good use.

  21. Iluvatar

    Well this has been a treat!

    There was a commenter here who really added SO much to the subject matter at hand (if you have forgotten, it was about differentiating investment from the allocation of savings – but after his comment, it would be no surprise to end up somewhat confused).

    Actually, we now view this commenter as a treat – a form of comedic relief.

    It now makes no difference to us whether or not this person is relevant – or, in the act of not being relevant, he is actually close to the mark in his divergence – typically, not at all.

    It is comedic relief. We get our giggles and move on to the comments that can truly help us learn.

    But this learned gentleman forgot some important facts. Fact of the matter is that what Einstein discovered (along with his colleagues) was the ‘Ultraviolet Catastrophe’ that occurred in 1907. He, along with his colleagues: Heisenburg (of the ‘Uncertainty Principle’), Schroedinger, De Broglie, Jeans, Planck, Pauli (of the Pauli Exclusion Principle), and (Sir) Eddington all coupled up for something called Quantum Mechanics (not the photoelectric event???????). It came about b/c of an absolute failure of classical Newtonian Physics at the atomic level.

    Here is the link to the standard text book I used back in 1979: and note the very cool beard (in the infrared):


    This is the stuff us engineers, physicists, and applied mathematicians have had to learn to work in our field. Any qualified optics engineer understands ‘Brownian motion’. But what we pay attention moreover than that random process is ‘Bose-Einstein’ statistics. That is the underlying process of light, long, mid, and short wave infrared statistics when we can not extrapolate into Poisson statistics because the number of photons we are receiving through our telescope and onto our focal plane are too few.

    As a matter of fact, we are completely agog in anticipation of the ‘Catastrophe of Mathematics’. That occurred circa 1927-1931, wherein Godel proved via a device of meta-mathematics that a complete system of logic could not prove everything but an incomplete system could prove everything, a partial link is given here:



    I am sure you will find somehow a way to comment on this in yet another irrelevant post. We are just covering the ground before you get there!

    But, in retrospect, we actually are no longer angry at your divergent, misdirective and malinformed posts; actually WE love your stuff! Don’t stop bringin’ it! We could really use the laugh.

    On the other hand, and to be germane, the issue was determining the allocation of savings from investment. And there were some key questions that were entered that needed resolution. They were good questions that needed answering.

    Perhaps our focus should return to that? A work colleague said he was going to sleep on some of those questions and attempt a reply tomorrow.

    And for the esteemed and erudite commenter, I give you this – it is a propos, read `em & weep:


    And, oh by the way – ‘va’te faire enculer’ (oh? I forgot, we are also multi-lingual as well!).

    But, TPC, seriously, don’t cut this guy off. He is our only source of giggles at lunch time!

    His idiocy has us laughing for 30 minutes straight. In absence of the libation, we could really use the levity.

    Peace, Iluv.

  22. LoLattheUS

    “When you invest in your future you build an intangible (or tangible) asset that (likely) makes you more valuable.” –

    So all those years and amounts of share buybacks are an investment? Who knew?

    In the case of government, they have actually stolen future production for consumption today, pretty sure our youth won’t see that as an investment in the future. We’re already seeing the results, and they not pretty.

    All this is great if you’re benefiting from it and actually earned it through the fruits of your labor, but since that is a relatively and extremely small pool of recipients, who cares?

    I read one time that eating cake was a solution.

  23. Poseidon's Bear

    Hi TL
    Para #1: using your savings to buy a home new or used is not an investment. You are swapping cash for real estate (or really a durable good). You might find that a head scratcher in the case of the new home b/c it wasn’t there before. But even then, you have purchased a durable good and durable goods don’t ‘produce’. This is true even in the case that you rent the house out. Still not an investment, no production is occurring. Indeed, the rent you get is much like a dividend paying stock. In the act of buying the new house, people get paid (and save) in your act of consumption. When the house is built they go onto another job.

    Starting a new company however, IS an investment, as the company must produce to stay in business. Purchasing an existing company already in production is a swap of cash for company ownership. If you add to the production of the existing company you are investing.

    Para #2: Involves the purchase of commodities. Not an investment. A gold rock produces nothing.

    Is it starting to make more sense to you, or did I just make it worse?

  24. tealeaves

    Yes it is helpful but the definitions is still not clear for me.

    Let’s compare me buying a rental property to a property business or REIT. I think you are suggesting that the purchased property itself does not constitute an “investment” in the aggregate economy (even though for tax and legal purposes it maybe considered to be one). [That I think is the confusing part]. That said, they employ staff to manage and upkeep the property which is the what the business produces as a business. Again, the purchased property itself is not investment in the aggregate economy but then what constitutes an investment. The only thing I can think of is the fact that the property business/REIT employs and pays staff and that portion of expenditures is an “investment” in the aggregate economy?

    Further does this mean that most spending on factory expansion (durable goods) is not an investment because they like a rental property does not “produce” something. From the aggregate economy then the investment is waged employers? [I’m not sure what this means for automation and robotics, but I suppose they don’t produce nothing on their own with direction of labor].

    Or the other point you might be making is that REITs, property business and in general rentier financialization (making money off capital) does not quality “investment” in the aggregate economy, whereas a factory expansion does?.

  25. slotowner

    Sorry, but I have to disagree. Investing is great & it is how you can juice savings but honestly, you can’t invest unless you save first, & even if you don’t invest your better off if you save.
    The main reason why is I think so it because the aggregate is a model concept. The aggregate does not make financial decisions any more than the 1% or the middle class does. I think when you place your focus on investing, more individuals will save less because investing is inherently competitive. Its great to have a good investment but many will only have opportunities for sub par investments because of wealth, knowledge, opportunity, & needs. When people are faced with bad investments they often use it to justify not to invest & therefore not to save. If heard plenty say, why save when banks pay a pittance or the market is pricy?
    In the end, a person is better off save in a lousy investment like a negative interest bond or cash in a high inflation environment than by not saving. Savings builds wealth which will lead to financial security, greater risk tolerance, & ultimately better investment options.
    As for investing in yourself that’s wonderful & frequently useless. What is the worth of an intangible skill? Most people have a difficult time properly judging all to complexity of taking out a mortgage to buy a home but “investing” in personal betterment is a magnitude more complex. In the end I would equate it to a high risk/high reward investment & definitely decrease in value as you age & your employable horizon shrinks. In the end, education & training is a sweat equity business; your personal work, effort, & follow through will determine how good of an investment it is. Its one of the reason why many Millennial’s are finding that a college degree does not mean a good job. But the intelligent, hardworking, socially networked, college degree Millennial’s are getting top notch careers.

  26. Cullen Roche

    This is the common fallacy. People think they can’t invest unless they save first. But that’s not true at all because, in the aggregate, saving does not create more saving. In fact, investing creates the saving.

    You have to think in terms of aggregates and not at the micro level. If you save more then someone else has less income. If you invest, on the other hand, and build a factory, then you have a factory and someone has your spending. You have added to aggregate savings. Your investment led to more savings.

    People often think that saving leads to more investment. But it’s precisely the opposite. Investment leads to more saving.

  27. slotowner

    I think you need to think in terms of the micro level. The Aggregate is dominated by high wealth individuals. Their actions will overwhelm any response of the lower 60%. Please tell me what is the suitable investment for a waitress to invest $10 a month in excess tips & are any of them significantly better than a tip jar?
    Yes, I know according to Macro theory that savings stored in & mattress will decrease the velocity of money & shrink the aggregate money supply thereby decrease the positive monetary stimulus on demand. By aggregate macro theory, it would be better if no drain happened on the economy & if not invested then the money should be spent.
    Now under behavioral theory, given the competitiveness of human nature, if people believe that their getting a raw deal compared to Jack Ma, Warren Buffett, & Donald Trump they will just spend vs saving & investing because their investment options are lousy & the contrast produces a behavioral disincentive against deferred consumption. Since they spend everything & save nothing they are unable to withstand even small financial hardships & are at risk for a debt spiral. That is because the first rule of SAVING is to have a cash reserve to protect against those hardships.
    On a personal level no one really cares if the aggregate in the form of the 1% gets richer if they keep on getting poor. You can invest in a college degree or a new building, & that money will help that aggregate but investment also means uncertain returns so you could still be flipping burgers or in foreclosure while society thanks you for your investment.

  28. Cullen Roche

    Still doesn’t matter. Cut out the 1%. If two poor people spend less then someone else has less income. The math is irrefutable here. Saving more does not lead to more saving even if it’s only being done by poor people.

  29. slotowner

    Two poor people saving does not increase aggregate savings but does increase personal savings & personal wealth. Since people do not make macro decisions I don’t think that should be the deciding factor. In the end it is all about quality micro decision. One of the primary financial investments that a person can make is to defer present consumption enough to build up a cash reserve so they do not need to fund emergency expenditures with high interest credit cards or high fee payday lenders. Anyone who is not an economist would call that type of investment saving.

  30. Jonah Thomas

    It depends. If they sell, what better use do they have for the money? How much cash will they need in the next 7-9 years?

    If they sell for stock in the competitor’s company, for enough stock, that’s likely to be better in the short run. With less competition, the competitor is more likely to generate good profits. But will they share enough in those profits? There are lots of ways that management or owners of a controlling interest can drain a company without giving much to minority stockholders.

    In the long run, society does better if you personally come up with good innovations that let you deliver a better product. Succeed in that and you are better off too. Even if for one reason or another you deliver the better product but you only break even or worse, society is better off. When you do anticompetitive stuff that you hope is good for you in the short run, somebody else might still grab the benefits and society is worse off either way. So if the business has a real fighting chance to succeed, that’s the better approach unless you see something you can do that’s likely to work even better.

    Krishna said that you do not have a right to the fruits of your work, but you have a right to the work. In the USA, all to often people are not allowed to work. You will feel better working at a business you have part ownership in, even if it is not very profitable, even if it ultimately fails, than if you find yourself permanently unemployed.

    There are people who can feel satisfied being idle rich, but it takes background and training to do that.

  31. Chris MF

    This seems a bit silly and almost self rationalization, or maybe only applicable to someone in their 20’s. What happens when you’ve made sufficient investment in your own future production, or when the investment in your own future production requires time rather than money? I have an BS and an MBA, my future growth comes from continued learning and reading, not dollars.

    For the average person in their 40’s and 50’s that have a goal of retirement, spending less and saving more is exactly what they should be doing.

  32. Chris MF

    Right on. Cullen, you’re trying to apply Macro principals at the Micro level which doesn’t make any sense.

  33. Cullen Roche

    Yes, and the way you’ll be able to save more in your 40s and 50s is by having OTHER people who are investing more….The whole point is basic accounting – if you save more then someone else saves less….by definition.

  34. Nathaniel Waters

    “Saving is our unspent income. It is the residual of your income. And my spending is someone else’s income. So if I decide to save more then someone else has less income. All else equal, the economy has less spending power when I save more of my income. If we all saved more then we’d all have less income. So saving more can’t actually be the key to financial success because, in the aggregate, saving leads to lower incomes. That’s simple enough, right?”

    Must not be, because I can’t follow anything from “all else equal” forward. What is the all else? What is spending power? Are you using your usual definition of saving here or do you mean stuffing cash under the mattress? (i.e. What happens to aggregate savings when you buy securities? [rhetorical, but answer if you like])

  35. Nathaniel Waters

    Also, if savings is “unspent income” and investment is “spending, not consumed, for future production,” I do not follow how investment (a type of spending) is not dissaving. What is the difference between spending and dissaving?

  36. Cullen Roche

    The point is that one does not dissave when they invest. If I spend $100 to build a factory worth $100 that will produce more than $100 in the future then my savings has not declined. I have spent, but not consumed, for future production. It’s just accounting.

    I hope that helps.

  37. Nathaniel Waters

    I understand that you have not shrunk the assets side of your balance sheet when you spend to create productive tangible assets (well, hopefully not anyway), but if this is not dissaving then I simply don’t know what you mean by savings, particularly given your distinction between savings and investment. [Unless savings is income not CONSUMED, and investment is a verb?]

    What I don’t understand at all is what are these intangible / invest-in-your-future assets you are referring to? (and how are they savings?) ….

  38. Cullen Roche

    Chris, you can’t save unless someone has issued and spent the financial assets that you save. The economy isn’t one man on an island. You can’t say you only care about yourself when your ability to save is actually dependent largely on the actions of other people operating within the economy. That’s the ultimate fallacy of composition.

  39. quaking

    How do I fix up a rental property or pay for my kids’ college or give my neighbor money so he can start a business …. until I have saved by deferring some spending.
    Are you saying that to invest we must borrow?
    In the aggregate, those who do not save must be supported by the rest of us. In the aggregate, those who do not save for college are spending money now and will have less later. We always forget the other half of the equation. So if you do not save, my future income will be less.
    So much of our economic ideas only measure what happens right now today. So yes, if I spend my excess money on hookers, that will be good for the economy today — but bad for the economy tomorrow. We must measure the consequences of our actions.

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