Personal Savings Rate is the Most Important Measurement in Personal Finance

“Save” – the sum of all financial planning wisdom in one word.  –Phil DeMuth, author and investment advisor

Moneyball

I recently finished reading the excellent book Moneyball, by Michael Lewis.  The book tells the story of how the Oakland A’s, with a payroll well less than half of baseball’s glamour teams such as the New York Yankees, won more regular season games over a several-year period around the turn of the twenty-first century than any other team in Major League Baseball. 

How were the A’s able to accomplish this?  By using a revolutionary method to evaluate players.  Baseball is a game of statistics, and from the beginning of the game the most important offensive statistics were considered to be batting average, home runs, and runs batted in (RBI).  These are the glamour stats of baseball and a player who excels in one or two of them commands a high salary on the open market.  Baseball’s “Triple Crown” is awarded to a player who can lead his league in all three of these statistics.    

In the 1990s a group of computer nerds examined every major league game ever played and came to the startling conclusion that baseball had it all wrong in the way it valued offensive players.  While the glamour stats were important there was a mostly-ignored statistic that was vital.  The overlooked stat was on-base-percentage, which includes walks.  The most important stat in baseball is simply not making an out.  Patient, disciplined hitters who refuse to swing at bad pitches are more important to a team’s offensive success than the free-swinging sluggers that baseball has immortalized. 

Most baseball people scoffed at the work of the computer nerds, but the A’s, unable to pay for the glamour players, implemented it.  To their delight the A’s discovered that players with a high on-base-percentage were relatively cheap to obtain.  The rest is history. 

The Most Important Statistic in Personal Finance

Reading Moneyball got me thinking: What is the most important statistic in personal finance?  Could it be something surprising, like on-base-percentage in baseball; something requiring patience and discipline rather than the brute force of making lots of money. 

The glamour stats of personal finance are annual income, net worth, and investment return.  These might be called the Triple Crown of personal finance.  While these are important I believe there is a much more important measurement; one that just about anyone, regardless of income, can excel in.  The humble, often-overlooked, but vital statistic in personal finance is the personal savings rate.

While net worth is a good measure of what we have done in the past, one’s personal savings rate is a much better indicator of how well we are doing currently, and where we might end up in the future.  Without saving there will be no money to invest and we are destined to muddle along in our current financial situation.  Saving can free us from this pattern and put us on a different path.  Writing on the importance of saving Jonathan Clements, financial journalist and author stated:

Give me a choice between some savvy investors and some diligent savers, and I’d bet on the savers every time.  The fact is, committed savers can add so much more to a portfolio’s growth.  Let’s say our savers sock away 20 percent of income each year.  That would put them far, far ahead of their fellow Americans, who – as a group – save perilously close to zero.  By contrast, if a group of stock market mutual fund managers beat the market averages by one or two percentages a year over the course of a decade, the managers would likely be hailed as market-beating heroes.  Yet the margin of victory is hardly impressive – and the real heroes would be our diligent savers.

Saving is the key to financial success, and, when measured as a percentage of income, anyone can excel.  Like taking walks in baseball the major attributes required for success are patience and discipline.  How successful are you at saving?  Next time we will discuss how to calculate your personal savings rate and track it over time.                      

3 comments for “Personal Savings Rate is the Most Important Measurement in Personal Finance

  1. July 31, 2013 at 2:16 pm

    Home run Brent! The discipline to save can provide the resources to take advantage of opportunities that may come your way. One other very important statistic one must track is their credit and credit score. We can’t just sit back and avoid debt to increase our credit. The only way to build credit is to use it wisely. whether you are planning a major purchase like a home or starting a business of your own having capitol through savings and great credit can give us the leverage to take advantage of opportunities so we can reach our dreams. I help people start business on the internet and I have to disqualify most people because they have not been wise in their financial lives so they have no savings and/or no credit to leverage.

    • Brent Esplin
      August 4, 2013 at 10:24 am

      Thanks for the kind words and your additional advice.

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