What truly drives wealth accumulation?
Many individuals may believe that maximizing investment returns is the key to building wealth, and indeed, many financial institutions promote higher returns to attract investors.
However, for those just beginning their investment journey, consistent savings play a more significant role in driving wealth growth than returns do in the early stages.
This naturally raises the question: At what point do investment returns become the primary contributor to overall wealth? Understanding the transition from savings-driven growth to return-driven growth is essential for crafting a robust and effective investment strategy.
In this project, we assume that an investor (with or without initial wealth) invests a fixed percentage (contribution rate) of their salary to build their retirement savings.
For illustration purpose, the investment return is assumed to be constant (investment return).
The salary is assumed to grow exponentially (income growth).
The growth of the wealth is attributed into two parts: new savings, and return on the account value.
For a significant period, savings remains the primary driver of wealth growth before investment returns eventually become the dominant force.
This underscores the importance of cultivating strong saving habits, particularly when building a robust retirement fund.