It is a common statement in corporate finance that companies should invest in positive NPV, or net present value, projects to maximize shareholder wealth. Can this sort of approach make sense from an individual investor’s perspective? This idea came to mind because I came across some quotes about savings that on the face of it seem contradictory.

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. – Cullen Roche, Pragmatic Capitalism

The only way to build wealth is to have a gap between your ego and your income. Getting rich has little to do with your income and everything to do with your savings rate. And your savings rate is just the difference between your ego and your income. Keep the former in check and you should be fine over time. – Morgan Housel, Motley Fool

You’re not going to get rich buying stocks. Put the money into reading, writing, learning, starting your own business. Investing in yourself is by far the best investment you can make. – James Altucher, Twitter

It’s not a top call or a trading tactic you can implement right now to hedge out your portfolio, but saving more money is still one of the best ways to reduce your risk in the markets. Bubble or no bubble, saving more money provides a margin of safety against the possibility of lower market returns in the future. – Ben Carlson, A Wealth of Common Sense

On the face of it these quotes seem to be odds with one another. On one hand we are supposed to be investing in our own human capital. On the other hand we need to be saving more to offset future market (and life) risks. I would argue there really is no contradiction between these two schools of thought.

If we think about our overall portfolio as some combination of human and financial capital it makes perfect sense that we would emphasize different kinds of investments at different times. Early in our careers it makes sense to invest in ourselves because we have a lifetime to generate some return on that investment. A common example would be formal education but this extends to our careers as well. In this lecture Paul Graham talks about the importance of “just learning” in whatever form or fashion it occurs.

However at some point we all need to become net savers. There are any number of life experiences that require a ready source of funds. This isn’t limited to retirement but also personal milestones along the way. The important thing about living below your means to generate savings is that it provides us a cushion. As Bob Seawright in a ThinkAdvisor post writes:

Things rarely turn out the way we expect. We never have everything covered. Life happens. Act accordingly. You have been warned.

Maybe the above quotes didn’t strike me as contradictory is because I wrote some very similar things in my book a couple of years ago. Two of the takeaways from Chapter 12 talk about these very issues:

  • Savings is the best investment. A focus on reducing expenses makes generating high, but uncertain returns on your investments less critical. The so-called “sharing economy” is making it easier for consumers to have experiences without the cost of ownership.
  • For many the best investment may not be a financial one but an investment in the things in our lives that that cannot be quantified.

We shouldn’t manage our lives the way one would manage a corporation. There are far too many factors that cannot (and should not) be quantified. However being more conscious about the trade-offs we make in ways small (and large) can make navigating our financial lives more intentional and authentic.

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