Scrimping and saving to start your snowball rolling

I love the analogy of saving and investing as rolling a snowball down a hill. Your portfolio starts off ping pong ball-sized – but you can end up with an avalanche of money.

The Snowball was the perfect title for Warren Buffett’s biography.

That said, sometimes in the midst of your journey to financial freedom you may doubt your snowball is growing. Especially when the markets are going nowhere.

You’re automatically adding money to your accounts each month but your number isn’t growing. You might even feel like your snowball is melting.

Keep at it!

Those regular contributions to your equity funds are buying you ever more productive and money-making assets – regardless of how the market prices them in the short-term.

Sooner or later you’ll be rewarded.

Self-fulfilling prophecy

The point of the snowball analogy is that your savings and investments will gather their own momentum.

You may still be pushing – by adding new money – but most of the extra mass added becomes self-generated.

A snowball gathers ever more snow as its surface area expands while it moves forward.

Your investment pot does this when compound interest moves the dial on your returns. Eventually, when your pot is big enough, just a single year’s returns can equal serious money.

A 10% annual return on £500 – fifty quid – won’t have anyone daydreaming of chucking in their day job.

But a 10% annual return on £500,000 is a cool £50,000 added to the financial freedom fund.

When exactly these numbers start to matter for you – when the importance of internal momentum outweighs new contributions – will depend on your own earnings, savings, and expectations.

But keep saving and investing smartly for long enough and you’ll inevitably get there.

It’s just maths.

Ice ice baby

In a typical year for the markets (as opposed to a rubbish one like 2022) my annual portfolio gains now dwarf anything I’ve ever managed to save over 12 months.

Maybe this sounds like a boast. But it’s just me getting paid for actions I started taking decades ago.

I lived like a graduate student for many years to get my snowball rolling. Lots of people would have seen that as a slog, though personally I never felt very deprived.

So I won’t say I’m lucky. I’m in a position I planned for – and bought and paid for.

(I do though feel fortunate to have been able to make it happen without health mishaps or similar.)

I’d have to earn much more than I ever expect to earn again for additional savings to be the main driver of my wealth from here. My portfolio now does most of the work for me.

It could be you

Perhaps you’ve just begun your own march to financial freedom. Money is tight and the idea of having even £10,000 to compound seems out of reach.

So a portfolio that out-earns your day job feels as faraway as Peter Pan’s Neverland.

I remember that feeling.

Indeed one of the challenges of writing Monevator from the other side of financial freedom is your priorities change as your wealth grows.

To some readers – younger, less flush readers – an article by our contributor Finumus about how best to manage a seven-figure pension pot tax-efficiently might seem fantastical, if not offensive.

But Finumus isn’t likely to write about turning down his central heating to save a few quid. Perhaps he’d do it out of principle – once you have the saving habit it’s hard to kick – but it’s no imperative for him.

And many of our readers are in such a position, or close to it. The challenge has turned to how best to extract the wealth they’ve worked so hard to accumulate.

But many of you still have a long way to go.

Now I happen to think that regularly reading about money management at the wealthier end of the spectrum is still useful and educational.

I’d even dare to say aspirational.

It gives you a vision of where you’re headed. And perhaps what mistakes you might avoid along the way,

But it can also feel a bit like pressing your nose against the window of a restaurant you can’t yet afford.

We’ve tried to find a younger contributor to help with this issue, but nobody has quite worked out for the long haul.

Perhaps they’re all off shouting into an iPhone on TikTok? I have my doubts but who knows.

For now you’re stuck with older duffers trying to recall our roots as young would-be FIRE-ees.

The upside is we’re living proof it can be done. The Accumulator, Finumus, and I all achieved financial freedom in different ways.

It’s not easy, but it’s very doable.

We might disagree about what FIRE means in practice. (I don’t take private helicopters, for example. Finumus’ mileage may vary…)

But for all of us, compound interest is the real deal.

Ignore the haters and just get started.

Money matters

I was prompted to think about all this recently for two reasons.

Firstly, there was Warren Buffett’s latest Berkshire Hathaway meeting – the first without his sidekick Charlie Munger.

Buffett made himself one of the richest men in the world on the back of early frugality, a de facto hedge fund, amazing investment returns – and of course compound interest.

So did Charlie Munger, who was so absent from this year’s meeting. And all the money in the world can’t bring him back.

Memento mori.1

Secondly, and much more prosaically, InvestEngine extended its cashback offer for ISA transfers. (Affiliate link, terms and conditions apply.)

Now, I have ISAs with a few platforms. Why not transfer one to bag £1,000? It’s free money, after all.

A decade or two ago, when I had much smaller pieces to move around the board, I’d definitely have gone through the hassle – and the risks of being out of the market – to bag the cash.

Even today a grand is a grand. That’s still proper money. Far better to have it than not.

And maybe if I was a passive investor I’d still do the transfer for the cash. InvestEngine is a good platform – see our broker table and review – if you’re building out a very cheap-to-run ETF portfolio. So why not?

But for my sins I find I don’t want to chase the bonus at the cost of curbing my naughty active investing adventures. Not even for the guaranteed return of cash back.

The Investor to himself: “You’ve changed!”

FIRE and forget

Buffett’s billions, Charlie’s absence, and the dulling of my own dash for cash instinct got me thinking about some other things I no longer do to bolster my investment pot.

Have I become lazy? Or is this a natural reaction to having a snowball that’s taken on a life of its own?

Some things I used to do to save that I don’t do anymore

Open bank accounts for switching bonuses. Once I’d move money across numerous bank accounts to get sign-up bonuses and time-limited interest rates. Now it’s too much hassle.

‘Stooze’ to arbitrage interest rates. Stoozing is borrowing low interest debt – typically on 0% credit cards – to earn interest elsewhere before paying back the debt without penalty. I was on The Motley Fool boards when user Stooze popularised it, and I did my time in the trenches. For various reasons, no more.

Ruthlessly track and cut my investment fees. I use several platforms – not least because I’m paranoid – and there are slightly cheaper options I could switch to. For mostly non-financial reasons, I don’t.

Avoid all foreign holidays except for special offer weekend breaks. Fortunately I used to go abroad a lot with work, so this didn’t feel like a huge sacrifice. As I got more guilty about flying I dropped the short getaways too. But these days I will go on holiday, at least in theory. (I still hate organising it!) Contrarily, I still think experiences are overrated versus buying stuff you really want or need. But dropping thousands of pounds just to be somewhere else for a week is no longer almost physically impossible for me.

Shun expensive takeaway coffee. In the 1990s I laughed at friends spending coffee at a 10x markup. Yet the first thing I did when the March 2020 lockdown ended was to head to an indie coffee place for a latte to go. Walking through London again with it felt like freedom. And this from someone who loves making my own coffee! Time was I’d have rather fainted in the street then spend larcenous amounts on a flat white. The latte factor won’t make you rich. But at the start it really does all add up.

Shun buying lunch at places like Pret. I used to wince at the cost. If I had to buy food when out and about I’d go to a supermarket and buy cut-priced pastries and a banana or similar. To be honest I still avoid £6 sandwiches if I’m on my own, but I no longer make a fuss if with my girlfriend or others. Part of my annoyance is I’m a decent cook and I’m amazed at what people will happily pay up for. But I don’t begrudge spending on great food. (Or smelly cooking that I don’t want in my flat. Fish and chips, I’m looking at you!)

Buy all my clothes at TK Maxx, in a charity shop, or in the sales. I still enjoy finding discounted fancy stuff at TK Maxx, but I’m not averse to sometimes spending money in a full-price shop these days. Between 18-30 I mostly I wore what I was given for Christmas and miscellaneous bargains, which I wore until they fell apart.

Buy wasting assets at all. Actually, aside from my aquarium habit – which since childhood has stood in for owning cars, smoking 40-a-day, and crack cocaine when it comes to my budget – you had to prise money out of my hands with a crowbar until my 40s. I’m still no huge fan of rampant consumerism, not least because everything you buy tends to bring extra faff in its wake. (Set-up issues, add-ons, upgrades, return hassles). But once you buy your own place, the ultra-frugal gig is mostly done for.

Get a coach to visit my family instead of the train. For a few years after Uni I’d always go to a bus terminal and trundle around the houses for hours to save on long distance journeys. Nowadays I’m a baller who pays through the nose for a seat on a crowded train with somebody’s luggage in my face.

I could go on (and on) but you get the idea.

Snowball’s gonna snowball

I will always like a bargain and I add money to my SIPP each month. But I’m no longer in Defcon 3 savings mode.

True, if I still religiously did all the stuff above then it would mean a decent chunk of extra cash going into my portfolio.

But I guess that given where I’m at financially, it no longer feels it’s worth all the friction and going without.

Does this mean I was foolish to ever sweat the small stuff, as some writers like to suggest?

Emphatically not!

A snowball has to start somewhere and getting started is the hardest thing.

Moreover, the act of cutting back and developing a savings habit is its own reward. One that will pay off big time over a long life.

Those habits are still with me, after all. It’s really just that the sticker prices that have changed.

I’ll happily buy a latte today. But I’m still not driving a show-off car, for example.

Time waits for no one

I don’t care for maths that says frugality can wait until you can earn and save a lot more – even as late as your 50s.

Or that one day you’ll look back and see you could have gone for sushi more often in your 20s.

I don’t believe it works that way.

Sure, you’re 50, earning £X and chucking £Y into your pension.

But I’m already financial free by then, thanks to saving hard, investing, and compound interest.

And as I said, saving and investing is a habit.

Yes, some people get religion late – say 10-20 years away from their State Pension. A few might cut to the bone and still end up comfortably ahead.

But personally I’d bet every day of the week on the person who begins to put real money away by age 25 as the one more likely to end up financially free.

Of course there’s a balance. I didn’t always get it right myself.

Sometimes I was too tight.

It’s also true there are certain experiences that are best had when you’re young. But I’d argue most of these are at the cheaper end of the spectrum, anyway.

Backpacking across Asia staying in youth hostels and scrounging street food with your buddies?

That’s probably worth putting money aside for in your 20s as a one-off experience. It won’t be the same when you’re much older and more easily able to afford it. (Assuming you even have the freedom to go).

But a lavish weekend on a whim in New York, staying at the trendiest hotels, and populating your Instagram account with all your fine dining?

That’s a hard no from me if you’re under-40 and not a Murdoch heir.

Remember, young people are already rich. You don’t need to spend much to play to your strengths.

Ways to start your snowball rolling

Struggling to get going? Here’s a few things we wrote earlier that might help:

• Conjure big savings without sacrificing your quality of life.
• How to stick to your savings goals.
• Simple savings tips to help you on the way.
• 101 ways to save money.

Saving is far more important than investing for the first few years of your journey, and if I was whisked back to my late-20s I’d do almost everything the same again.

Even when your snowball isn’t growing much on its own, it’s fun that you can make it noticeably bigger just by chucking more money at it.

As we’ve discussed, eventually your portfolio takes on a life of its own. Then how it grows is more down to the markets than anything you can control. Your financial future is mostly about your investment returns, not your income or savings.

I’ll look at passing this crucial crossover point in a future post. (Subscribe to ensure you see it.)

The not-so-abominable snowball

My best advice would be to enjoy the journey to getting your own snowball going as best you can.

Unless you get a kickstart from an inheritance, a big bonus, or the Bank of Mum and Dad, then the first £10,000 – outside of any pseudo-compulsory workplace pension – is probably the hardest.

Not just in terms of the cash. Also in the mentality shift that says your money is not all there for spending.

The first £100,000 is no walk in the park either. Especially if you’re trying to save a house deposit at the same time.

But after £100,000 you start going places.

A return of 10% is £10,000 extra in a year gathered up by your snowball.

Of course sometimes you’ll do a lot worse, but some years far better too.

Median full-time earnings in the UK are £35,000. So a portfolio that bolts-on £10,000 in a year is a very valuable asset.

With ups and downs, it will only get better from there.

It’s hard to believe it when you start and everything is about cutting and saving, but it’s actually fun watching your portfolio grow.

Stay with this journey, and you’ll find the impulse to spend money on material tat falls away too – even as your ability to splash the cash grows out of all proportion.

That’s not to say you shouldn’t spend any money, especially once you’re on-track or have achieved your goals. None of us is taking anything with us when the clock runs out.

But just having a decent financial buffer at your back – and building the habit of living well whatever The Jones’ are doing – is pleasurable in its own right.

Getting there will probably be one of the biggest achievements of your life. Try to savour the journey!

And start your snowball rolling.

1. Literally: “Remember you must die.” [↩]