1% doesn’t seem like a big deal.
Out of a dollar, it is a penny that you probably walk by on the street and don’t even think of picking up.
A 1% price increase at the grocery store doesn’t stop you from bringing anything home.
$10 on a $1,000 purchase, not going to raise any eyebrows.
Sales tax in Minnesota is 6.5 times that and is blindly accepted as part of the purchase.
But, if I recommended someone saves 1% more of their paycheck instead of spending it, there is significant resistance to change. What gives?
What can a 1% Improvement do?
For years, we have been incrementally increasing our savings rate by 1% and I am convinced it’s the best way to change your money habits. We have 1%’ed all the way to a 40% savings rate, and while it took awhile to get there, I wouldn’t alter our strategy at all.
There is a Money Math Nerd Alert for everything beyond this point
1% on an average salary
Looking at a fairly average salary of $50,000 a year, 1% is $500.
That is not a small amount of money, especially if you are in debt or living paycheck to paycheck. Heck, If you walked into my house today and said hand me $500 I wouldn’t be able to do it without looking at our checking account depending on the time of the month.
That 1% increase can be spread over 26 paychecks – making it $19.23 every two weeks. That sounds way easier to deal with, an almost unnoticeable amount when you earn over $1,900 every pay period. Under $10 per week.
Awhile back I started using an App called Acorns. It rounds all of your purchases up to the next dollar and invests them into the market automatically. This sounds like an affiliate pitch, it’s not (although it is a cool app), I am telling you this because every single week at least $15 has been moved out of our checking account without me even thinking about it. We have never over-drafted our account or missed a single penny that app has taken.
That $19.23 every two weeks can do one amazing thing:
Give you multiple YEARS of Retirement if you spend $50,000 a year
That small sum of money can compound to $135,000 in 40 years at an 8% return.
You put in $20,000 spread out over 40 years…….or 1,040 paychecks…..or 2,080 weeks….. and get $135,000 back for your tiny sacrifice and next to zero effort.
Would you buy a few years worth of retirement for $10/week?
What would 1% do to our Financial Independence timeline?
OOooooh! OOooooh! OOoooooh!
I whined about How long it was going to take us to reach Financial Independence a few weeks ago so let’s see what 1% can do for us!
From my How long will it take us to reach Financial Independence post we figured out that it will take 11 years and 9 months to reach FI saving 40% of our income. If we bump that up to 41%…
Boom 2 months earlier! The impact isn’t as crazy due to the shorter timeline. But that also serves as a good lesson for the younger crowd. Time is your buddy, take advantage of it. This situation would be really concerning if we were 60 and not 30.
Guess we are going to need a few 1% iterations to drop that date below 10 years. I did increase Mrs. AE’s 401K allocation 1% after starting this post!
Why I love the Incremental Attack on Money
Saving isn’t easy
Although the principle of getting rich is pretty simple, actually putting it into action takes effort and sacrifice.
Imagine if I walked into your house and said starting today I am going to take 10% more of your income. I would freak out and rightfully so. Trying to make huge adjustments in one shot are scary as hell. AND they rarely work long term.
The 1% method allows you to adjust over time and see the impact of every percentage point. As your savings rate ramps up, you can feel where it starts getting difficult to maintain the increase. That forces decision points in your spending and hones in your habits.
Money is intimidating
Staring at a huge sum of money (*cough* Retirement *cough*) when you haven’t started saving anything is the equivalent of a 65-year-old smoker with one leg standing at the bottom of Mount Everest. You either aren’t going to start or quit after a few weeks when it appears like your progress is stagnant.
Instead of staring at one HUGE goal, break it up into smaller, more attainable short-term goals. Increasing your 401K withholding by a small amount on a specific interval is a great example.
Gives you time to learn
Building off the last point, money, and everything that comes along with it can be a really confusing topic to absorb in a short amount of time. So many different terms and investing lingo to learn. Almost to a point that certain people want you to be confused/scared to put your own money on the line without paying for help.
Slowly increasing your savings gives you time to learn and understand investing strategies without having a lot of money in the game. I wasn’t an expert when I started throwing money into a 401K and that is 100% ok.
Invest now, and alter the investments, allocations, and funds as you learn instead of dropping a ton of cash into an investment that isn’t right for you.
Where can the 1% come from?
Anywhere really. Maybe you pick up a few hours of overtime. Cut out a few expenses. Maybe make a big change and do more than 1% and really ramp the savings up.
Personally, we have been using increases in our salary to make the incremental improvements. We also had a set of yearly goals to increase or 401K by 1% each quarter by cutting our spending.
Honestly, most people could take the 1% right off the top without making any changes and wouldn’t even notice the missing money.
Can you do 1% better? Do you set small, short-term goals to work towards a bigger one?