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John Engle
John Engle
Articles (525) 

Bridgewater’s Ray Dalio on the Importance of Saving

Saving is the first essential step of capital formation and key to wealth creation

April 09, 2019

When Ray Dalio (Trades, Portfolio) speaks, it usually pays to listen. The founder of Bridgewater Associates, the world’s largest hedge fund (which also boasts an enviable track record of success), has been making the media rounds of late. His latest topic of choice has been the economy, specifically how it does not work for everyone. Indeed, Dalio has been talking quite a lot about the perceived failures of capitalism.

Dalio is clearly unafraid of addressing controversial and politically charged issues. But sometimes these remarks - and the media coverage they produce - can drown out his more mundane, but arguably more useful, insights. For example, during a December interview with Yahoo Finance, Dalio focused on his advice for millennial investors. We discussed the most useful insights from that interview in a previous research note, yet we left out one topic of discussion that is of key importance: savings.

Savings are the gateway to wealth creation

Without savings, one cannot invest. Yet many people fail to save, even when they can afford to do so. They prefer consumption now over a payoff later on. While it may seem obvious to individuals clued into capital markets and interested in investing, the idea of putting savings to work is often alien to many individuals, especially young people.

According to Dalio, “Savings is freedom and security.” This is undoubtedly true. Savings are the tool we use to grow capital, the cushion that provides a margin of safety in an uncertain world as well as the means by which we sublimate our desires into material reality.

Yet so many people fail to appreciate the power of savings. They do not see the wealth savings can be used to create, if deployed wisely in capital markets or other earning assets.

Inventory your spending and saving

Dalio advises millennials to "Think about your savings." Specifically, he admonishes them to take an inventory of their spending, savings and how much of a cushion those savings provide. He recommends all millennials ask themselves a few questions about their savings and expenses:

  • How much do I spend each month?
  • How much money do I have saved?
  • How many months will I be OK without an income?

These are certainly important questions to ask yourself, whether you are a millennial, baby boomer or anything in between.

To people interested in investing and growing their capital, this advice might seem obvious. Yet far too many young people fail to think far enough ahead to consider their financial futures, let alone retirement. Older people have usually learned this lesson already, oftentimes the hard way. Hence, the sooner an individual commits to the financial discipline, the better.

Verdict

It may seem like a mundane topic, but it is critically important to investors of all ages. Every dollar we spend on consumption today (and every bargain or deal we do not take, for that matter) has an embedded opportunity cost. We often discount the future. That is a costly psychological tendency ubiquitous among human beings.

Serious investors have taken many steps beyond the norm already in their pursuit of wealth creation via prudent deployment of savings into investments. However, even the best and most disciplined of us have blind spots. Inventorying one’s spending on a regular basis should be considered a part of the investment process.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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