We Broke Our Savings
At its core, saving money is about shifting work from today to the future. When we save, our goal is to consume that value later—whether on groceries, healthcare, or travel—so that we don’t have to keep working indefinitely. Put simply, assuming no inflation, investments, or other financial factors, we spend 30–50 years of our working lives stockpiling cash so that one day, we can spend it when we aren’t earning it. Let me be very clear: you save money to convert extra work today into less work tomorrow.
From an economic perspective, saving is the process of moving our excess production—the value we create but do not immediately consume—from the moment of its creation to a point in the future. Historically, this could have meant farming extra land to feed an additional child, ensuring that when you grew old and weary, there would be extra hands to work on the land. From this self-interested perspective, raising an extra child was effectively an early form of a "retirement plan."
It Takes a Village
Now, let’s scale this idea up while staying in a small agricultural economy. For simplicity, assume each villager produces enough food to feed 1.2 people annually, meaning a 10-person village produces 12 units of food. With this surplus, the village develops two key economic functions:
Insurance
Each villager agrees to contribute 0.1 food units to a community pool at the start of the growing season. If someone's crops fail due to fire, pests, or illness, they can draw from this reserve to avoid starvation. Collectively, the village saves 1 unit of food each season for this safety net.
Investment
After eating and setting aside the insurance pool, the village still has 1 unit of surplus food. Instead of letting it spoil, they send a representative to a nearby trading city to find something of value in exchange.
In the market, the representative sees various goods but eventually meets a blacksmith offering a plow and scythe. The blacksmith explains that these tools will allow a single person to farm twice as much land. Excited, the villager trades the food for the equipment and returns home.
The next season, the tools prove their worth, doubling the villager’s productivity. The village now produces 13.2 food units. After eating and contributing to insurance, the village now has 2.2 food units to reinvest in more tools. Heck, might as well throw a party and buy a barrel of wine as well!
This cycle of investment and growth has driven human progress for millennia. With the rise of financial systems, we shifted from investing in extra farmhands and new tools to investing in pensions and retirement accounts. But along the way, we broke this cycle of investment.
The Shift from Real Investment to Financialization
For centuries, savings fueled tangible improvements— funding schools, building homes, or financing local businesses. But today, instead of using excess production to strengthen communities, we funnel our savings into massive financial institutions. Rather than lowering costs and improving daily life, we passively invest—increasingly through conglomerate-centric index funds— investing with the hope of innovation, better economies of scale, and most importantly seeing the stock chart to go up.
We shifted from an economic system of savings based on tangible savings and productive local investment to one that centralizes resources and decision-making in massive institutions. Instead of using our excess production to lower costs, strengthen local economies, and improve our daily lives, we have funneled our savings into passive investments— bid-up by global investors to the point of speculation—that pass allocation decisions to professional investors and CEOs leading to a concentration of economic growth in major urban centers. Furthermore, with a focus on percentage gains rather than real productivity, these professional investors have tended to seek rents and create short-sighted gains, at the expense of long-term economic growth.
The Problem with Outsourcing Our Investments
At a fundamental level, savings should enable future productivity and prosperity. But today, thanks to tax-advantaged investing in 401(k)s, IRAs, 529s, and HSAs (well over $27 Trillion by some estimates) , much of what we consider "investment" is only a bet on the growth of a few massive companies in the United States, making these investment speculative at best and financial engineering at worst.
Here’s how we got it wrong:
The Power of Passive Investment: Millions of people now invest their savings into index funds, which buy shares of the largest publicly traded companies. While this provides diversification, it also means that our collective wealth is being used to strengthen corporations that have little or no connection to our local communities. The result? Capital flows into companies that prioritize global supply chains, rent-seeking, financial engineering, and automation rather than local business development and job creation.
Rural Communities Are Funding Urban Growth: Many US towns are ‘dying out’ as the younger generations leave home in hopes of high-paying jobs, leaving their parents to age in place and fragmenting multi-generational family structures. For those who live in a small town or rural area and invest in the S&P 500, the money is effectively being used to create jobs and infrastructure in major financial hubs—New York, Florida, California, Texas, and other economic centers. Meanwhile, your own community struggles with job losses, population decline, and rising costs of living. By directing savings into these massive corporations, rural America is, in effect, making a bet on innovation and urbanization rather than their own community’s future prosperity.
Capital Consolidation and Institutional Control: The biggest players in the market—BlackRock, Vanguard, and State Street—now control trillions of dollars in assets and wield enormous influence over corporate governance. These institutions, which oversee most index fund investments, prioritize shareholder returns over community well-being. Their strategies often favor stock buybacks, executive compensation, and short-term gains rather than productive investments that could directly benefit individuals and local economies.
The Lost Art of Local Investment: In previous generations, wealth accumulation was directly tied to community development. People built housing, started businesses, and invested in local industries that created lasting prosperity. Today, those with extra savings are encouraged to passively park their money in financial markets rather than reinvesting in their own communities. This leads to a paradox: while national stock markets reach all-time highs, many local economies are stagnating or declining.
The Consequences of Outsourcing Investment
By funneling nearly all personal savings into massive institutions, we have created an economic system that prioritizes financialization over real tangible wealth creation which has lead to:
Local Economic Decay: Rural and small-town economies shrink as capital and talent are continuously siphoned away to major cities.
Housing Affordability Crisis: Instead of using savings to build more housing (not just have our own home increase in value…) and lower living costs in our own communities, we rely on centralized financial markets that contribute to asset inflation and housing shortages. Local labor (bars, restaurants, haircuts, shops, and local industry) is a direct function of housing costs - higher housing costs means industry is less cost-competitive and services become more expensive. For example, it is more expensive to hire a framer to build a house, if the framer is paying high rent due to high house prices…
Loss of Economic Self-Determination: Individuals have far less control over how their savings are used, as investment decisions are increasingly made by large institutions that prioritize corporate profits over community needs.
Rebuilding a Local Savings & Investment System
If we want to fix the broken savings model, we need to return to a system where savings directly improve our daily lives. This means focusing on investments that lower costs, create local jobs, and increase economic resilience. Here’s how:
Invest in Local Housing & Infrastructure: Instead of buying index funds, consider using savings to build rental properties, renovate homes, or improve local infrastructure. This not only increases housing availability but also generates stable, tangible returns.
Support Local Businesses & Cooperatives: Rather than passively investing in distant corporations, channel capital into small businesses, worker cooperatives, and regional enterprises that contribute to long-term community wealth.
Decentralize Investment Power: We need to move away from a system where a handful of global institutions control a vast majority of investment decisions. This could mean exploring alternative finance models like community investment funds, direct lending to local entrepreneurs, or regional banking cooperatives that prioritize local economic growth.
Shift Savings Toward Productivity, Not Speculation: The goal of investment should be to make life better—lower costs, improve efficiency, and create prosperity. Instead of chasing financial returns in abstract markets, we should focus on investments that have direct, visible benefits in our daily lives.
Conclusion: Choosing the Future We Want
In conclusion, while there is undeniable value of large corporations in driving economic progress, the financialization of our savings has distorted the fundamental purpose of investment. The concentration of capital in financial institutions and the passive flow of capital into global corporations has not only undermined local economies but has also diverted the true purpose of savings—enhancing future productivity and community prosperity.
Our ancestors saved and invested to secure their own futures and the prosperity of their communities; they built homes, developed their community, and passed down real, tangible wealth. Today, we have replaced that system with passive financialization, ceding control of our economic future to distant institutions that care little for our well-being.
As investors, we can support the critical role that large firms play in generating returns and fostering innovation, while simultaneously focusing on the need for a return to more locally-focused investment strategies. By shifting our focus back to investments that build tangible, sustainable value in our own communities, we can create a more balanced economic system—one that supports both the growth of globally competitive enterprises and the resilience of local economies, ultimately ensuring long-term prosperity for all.
If we continue down the current path of financialization, we risk finding ourselves in a world where our savings do not serve us—where the returns on our labor are siphoned into a financial system that benefits the few at the expense of the many; where real resources become scarce as financial returns are plentiful and inflationary.
But we have a choice. We can reclaim our economic power by reinvesting in what truly matters: our homes, our communities, and our futures. This approach not only redefines what it means to save, but also champions a future where investment serves the needs of the many, not just the few. The question is, will we make the choice to reclaim our economic future and reinvest in what matters most?
To Salary or not to Salary?
In this article I analyze how much should you pay yourself, what makes projects worth your time, and how to consistently grow your business through a thoughtful investing template.
For most entrepreneurs, myself included, the aspiration behind starting a business is the freedom to live your life on your terms, rather than clocking-in and clocking-out everyday for 30-50 years. It’s an admirable goal - the American Dream by many standards - but at the end of the day everybody needs a paycheck to put food on the table.
In this article I analyze how much should you pay yourself, what makes projects worth your time, and how to consistently grow your business through a thoughtful investing template.
To Salary or not to Salary?
Everybody has a choice when they receive a paycheck: how much do I spend and how much do I put aside in savings? This first part is different for everyone but I like to think about it as a “Consumption level” - or “how much cash do I need each year to maintain the lifestyle that I am comfortable with?” Keep that consumption level concept in mind but let’s briefly hit on my favorite part Savings!
Saving IS Investing
For the savings people put aside, there’s always a good reason like saving for:
An emergency like losing your income, a health issue, or a leaky pipe
Large life events like a buying a house, having a kid, or retirement
A special occasion like a vacation
There’s a few choices with what to do with these savings:
Hold it in Cash - A little flavorless compared to the other options but often ideal for needs within the next 1-3 years given the stable value.
Side note: Even though inflation has been relatively high the past couple of years, cash is still the most liquid form of savings since it’s the only one you can spend!
Make Investments - Investments are a form of turning your extra savings (plus some patience!) into income down the road. This comes in a lot of forms: it could be buying a property, investing in a small business, or buying stocks and bonds. Depending on the investment, this is best for spending needs in more than 3 years. Bonds and lending money are also investments, which means buying your own debt is also an investment!
Pay down Debt - I like to say “buying your own debt” as a bit of a joke, but it’s true: when you pay down debt you are choosing, adjusted for the risk, that you're getting a guaranteed return equal to the interest rate on the debt. For example, if you have debt at a 7% interest rate, paying it off is like making an investment that gives you a guaranteed 7% return. Not too bad!
Small Business Owners as Investors
For Owner-Operators, like the clients I work with, there’s a unique investment opportunity that most normal people don’t have access to - Private Equity.
I know, I know, your thinking: Duncan isn’t Private Equity, just a bunch of Ivy League dudes in vests moving around money for rich people?
And my response is… Well, you’re not totally wrong… BUT the way you invest as a business owner that is in the same way they do it - YOU put your savings into the equity of a private company! That’s right you’ve been doing PE all along (sleepless nights of a Wall Street analyst included…) Private Equity investors look at a company as an asset, similar to a stock or a bond, but with a much more complex system behind it.
When I’m working with my clients, we first think about how they want to live their life. Once we establish the type of work they want to be doing, we can take a step back from the business and also think about the company as a complex system. This allows us to diagram out their current role in the business and start to think about:
What are the Core Competencies of the operator and also the business?
Which non-core areas can be hired internally or outsourced all together?
What investments can we make to expand the Core Competencies?
Back-of-the-napkin Business System Diagram created with a client
How much to pay yourself?
Spoiler Alert! The amount you should pay yourself is your Consumption Level (CL). However, this needs to be separated out into Minimum CL and Desired CL:
Minimum CL: You have money to feel comfortable while being frugal to creating savings for investment.
Desired CL: You have money to be at the ideal level of comfort for you and your family.
Once you have these figures, we can use some trusty math:
Desired CL / Desired hours of work = Golden Rate
Minimum CL / Acceptable hours of work = Minimum Rate
These equations, while simple, gives us a framework for how much we are targeting to pay you, the Golden Rate, as an input to judge potential investments in the business. The minimum rate allows us to analyze investments that are worth your time and being thoughtful about the sweat equity that goes into the returns on investment.
Making Investments to Increase Income
Going back to our discussion about business as a complex system, we can now start thinking about the projects that we can invest into to increase your hourly pay to the Golden rate. When working with clients, this is where we begin diving into the operations and data to build a deep understanding of the business to build a shopping list of opportunities.
Shopping list in hand, we can model each project opportunity as its own investment; looking at the additional revenue/reduced expenses, CapEx, operating expenses, and labor costs (using the minimum rate for your hours). After thinking through the capital outlay and risks, we come up with a compound rate of return on each of the projects, aka an “Internal Rate of Return", or IRR. We now execute each project in order of highest risk-adjusted IRR first.
A great example of a the #1 project with one of my clients was a tooling investment to launch a new product. After questioning our assumptions and judging the risks, we estimated the IRR to be above 25% over the next three years . This meant that for every $1,000 invested into the project, we were expecting a $1,953 in return over the next 3 years, or a 95% cash-on-cash return.
From here, we repeat the cycle using savings to make good investments and increase the company’s income. Each time increasing the income savings of the business until the company’s income plus your salary exceeds the Desired CL at your desired level of hours in the business.
Side Note: As the desired hours of work approaches zero, then the golden rate would exponentially approach to infinity. At this point, we steadily replace your least enjoyable roles in each project with the cost of an employee. The logical conclusion is eventually hiring a CEO to manage everything on your behalf!
Cash is KEY
A key input into this compounding investment engine is having the cash to execute on these opportunities. That could mean saving the cash in the business by paying yourself the minimum rate for longer and/or, particularly if it would take to long to save for, taking outside investment!
When to take Outside Investment
My rule of thumb on outside investment is to look at the duration and risk of the opportunity and then find matching investors while thinking about the cashflow dynamics and “cost of capital”, or interest rate, in the context of the larger business.
Always raise debt before equity if possible. The cost of capital for debt is anywhere from 7-12%+ so it shouldn’t be a consideration unless the return on the project is modest (10-15%+) and the timeline to self-finance is too long.
Personally I don’t think outside equity makes much sense until we start looking at projects well above a 20% return, and even then its important to put that in the context of the larger business and structure the equity in a way that shares the reward without giving up the kingdom.
I’ll plan to write a more in depth article on Debt, Equity, and the Capital Stack in the coming months.
To Salary or Not to Salary?
After reading this article, I hope you agree that there isn’t a simple answer to this question. It’s nuanced based on your lifestyle, risk tolerance, and business opportunities. Savings are an important consideration when thinking about salary particularly if you are looking to continue to grow the business and your earning potential. In summary, if you are looking at the profits each quarter, make sure you cover your minimum lifestyle first and make an active decision with the remainder to determine if you prefer to live a nicer lifestyle in the short-term or continue to push towards your long-term goals!
If you enjoyed this article, please consider subscribing to my newsletter!