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I worked out what I’d have made if I’d followed internet financial advice

papers and calculator, working out finances

It’s easy to spend a load of time reading financial advice on the internet. Doing anything about it is harder. So to give myself a clearer picture of how it actually works in practice, I calculated what I’d have made if I’d followed that internet advice as soon as I started working.

Please note this does not constitute financial advice. It’s just information about my personal financial situation – whatever you do with it is up to you.

There are whole chunks of the internet devoted to personal finance, from cryptocurrency Telegram channels, to FIRE blogs, to the business sections of major newspapers. You could spend a whole life just reading it, let alone getting round to actually sorting out your money. It’s so overwhelming that people don’t get the basics right.

I’ve certainly been guilty myself. So I decided to do some calculations to see just how guilty. I worked out roughly what I’d have made if I’d followed a very simple formula since I started working. This formula seems to have become accepted wisdom, at least in the parts of the internet I’ve been reading:

  1. Save 15% of your post-tax income
  2. Invest it in an ETF that tracks the S&P 500

The results

If I’d just kept the money under my mattressIf I’d invested it in a decent savings accountIf I’d put it in an S&P tracker

How I calculated the results

If you’d prefer, here’s a graph of the money over time.

Graph showing the growth of money from 2007 to 2021, with three lines representing savings, compound interest, or investments. Investments more than doubles the others.

What does this data show?

That investing hugely outperformed saving over this period. That’s even with the 2008 financial crash, which meant the gains were about neck-and-neck till 2012. If I’d have invested 15% of my earnings over the period, I’d have ended up with more than twice as much than if I’d saved it.

The figures I’ve done here don’t include taxes and fees, which would have been significantly higher with the S&P 500 strategy – but it would still have come out way on top.

This is also skewed by the fact that I invested relatively heavily later on, when my wages were higher. And because I’d already accumulated a decent chunk by then, the stronger performance of the S&P 500 toward the end of the period made a bigger difference than it would have done at the start. If the S&P gains had started off strong and then we’d had a 2008-like crash in 2020, the picture would be different.

Is that data representative of the usual figures?

To try to make it a fairer fight, I took the data back as far as I could. If you take the mean UK savings rate since 1980, you get 5.29%1 (which seems tremendously high by today’s standards!). If I’d had that rate since I started working, I’d have £71,542 now. That does seem pretty good .

But if you take the mean growth in the S&P 500 over that same period, you get 10.68%, which would give me £111,151. Because there’s more data on the S&P 500, I went all the way back to 1928.2 The all time mean percentage increase is 7.98% per year.3 Applying this rate to the 14 year period since I started working gets me a total of £88,670.

Of course, it doesn’t work quite like that because your S&P 500 investments can fall, so the timing tends to matter more than with the savings interest, but it gives a decent indication. £88,670 might not seem all that much more than £71,542, but as a percentage difference, it’s pretty significant.

So what?

But what does this actually tell me about what I should have invested, or what I should invest in the future? To be honest, I was expecting the result to be a little bit more dramatic in favour of the S&P 500 route.

In the first example, it is big, but we’ve had a period of extremely low interest rates, rather than a period of extremely high S&P 500 gains.4 So it makes me more keen to keep an eye on what interest rates do – especially because, as of 2022, inflation is climbing in the UK. I’ve been used to extremely low savings rates all my life, but I’m not sure if they’ll always be like that.

Don’t get me wrong: I’m not expecting savings rates to jump higher than average S&P 500 returns. But if they climb significantly, it might alter my calculations if I think I might need to get the money out soon.

I should have saved more aggressively when I was younger

The other thing that jumps out at me from this analysis is that compound interest seems like a myth until you have a decent amount to compound. Obviously that’s basic maths, but it can help to see it in a graph.

Personal finance blogs will often quote Warren Buffett’s snowball analogy, or even Einstein calling compound interest “the eighth wonder of the world”. But if you roll a teeny tiny snowball, it takes a fucking long time to get bigger, and you probably die of hypothermia first. If you can make your snowball bigger early on, it might get big enough to roll you to retirement.

  • If you compound £1000 at 10% over 30 years, it turns into £19,837.40.
  • If you compound £10,000 at 10% over 30 years, it turns into £198,373.995

That’s without putting any more money in!

I’m not going to lie: it would have been hard for me to save £10,000 in my first three years of work, but I could have done it, giving my living costs were a lot lower back then.

The less bleak news

Of course, I didn’t follow even this basic financial advice. The idea of investing was preposterous to me at 18. But thanks to learning some of the basics, mainly from Mr Money Mustache, and a period of earning significantly more than my average, I’ve invested a bit.

But the good news: if I just wait another 33 years and 5 months, at historic rates of return, fees, and inflation, I’ll be a millionaire 🤣🤑

And the other good news: if I spend the money on other people instead, it’ll make me happier.

Further investment resources

Other resources I like on personal finance are:

Mr Money Mustache – shit name, but well-argued advice on how to ‘retire’ early

The Early Retirement Calculator, which I found through the above. It helps to read some MMM basics first though.

I also read an article on Warren Buffett and compound interest while I was writing this article. It’s mad how small $1.4bn can look on a graph…

How I calculated the results:

I did these calculations with this excellent calculator. It took me a while to find one that could do negative interest to calculate the times when the S&P dropped. The calculator also lets you specify when the additions are made to your account (i.e. at the start or the end of the month), and you can calculate periods shorter than a year.

I used a website called Macro Trends for data on the S&P 500 over time, and this kooky little website for the UK savings rates data. For the latter, the data roughly matched what I could find on a newspaper website for historic savings rates, but I can’t swear to its accuracy.

The later average calculations are actually a bit less accurate for me, given I had three years as a student where I didn’t earn anything. I factored this into my calculations on what I would have earned, but not to the later calculations using averages of savings rates and S&P 500 growth.

All of the calculations are somewhat inaccurate, given I didn’t earn the same each month, and because the figures for savings rates and the S&P 500 are based on the whole year. Things would have been a different in reality, due to the timing of investments.

None of the calculations include taxes or fees, which would have been significantly higher for the S&P 500 route. But what you were allowed to save tax-free over this period changed so much that getting that right would have taken a hell of a lot longer.

None of this takes account of inflation, which would also have eroded the gains significantly.

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  1. The data seems less reliable this far back, and is from a single source, but let’s go with it.
  2. how the S&P 500 was calculated changed in 1957, which is why you get a lot of calculations coming from that time on.
  3. Using this ‘arithmetic mean’ average is questionable, I’ll admit. Typically this sort of calculation is done with the ‘geometric mean’, but I’m just doing a quick calculation here, so what the heck.
  4. The annualised average of the S&P 500 since its 1957 incarnation is around 10.5%, or roughly similar to the average I worked out for my period.
  5. Using The Calculator Site.