Over the years I’ve received many comments from people saying how insignificant some of my tips are.
They say that people need to focus their financial efforts on big-ticket items (like homes, cars, etc.) and the rest can be virtually ignored.
As with most things, I think there’s a balance. Of course you should pay attention to the big expenses in life. But you should also watch little ones too because small expenses can add up.
And with all your expenses I recommend spending in areas important to you and cutting costs elsewhere — a plan I call moderate and selective frugality. Or you can take the option of 10X-ing your favorite expenses and bare bones-ing it the rest of the way. The latter is simply a more pronounced version of the former.
Whichever you choose, this is the balance I think works best for saving to build wealth as well as enjoying your life along the way.
In other areas of finances (and life) small steps can really add up. I have seen time and time again over my lifetime examples of small, often seemingly insignificant steps, adding up over time to make a huge impact. This is why I’m an advocate of making at least a small amount of progress on your goals each day — because they add up over time. (BTW, one place to find time to focus on these small steps is in the morning.)
Today’s post will demonstrate the power of small efforts in your finances. We’re going to talk about what seems like a trivial amount — a small 1% gain — and what a huge difference it can make to your wealth.
We’ll do it in typical E-S-I fashion, showing the impact 1% can have in your earning, saving, and investing.
The Impact of 1% in Your Career
There’s no doubt about it: managing a career for maximum growth can have a huge financial payoff. In fact, the difference between someone working their career and a person who doesn’t can be millions of dollars.
I’ve detailed some scenarios to highlight this difference in Two Huge Reasons Why Your Career Matters. Or if you’d prefer to see the impact using your own numbers, check out my Impact of Career Growth Calculator.
The key to extra millions lies in getting higher than average salary increases. Some people complain that 4%, 5%, or 6% average annual income gains are unrealistic, even though I made 8.16% gains over a 28-year career.
So I’ll humor them and just look at the power of 1% more.
But before we do that, I want to get a commitment from those who doubt. Do you think a person could squeak out just a 1% gain in raises over a career (assuming you would get 3% on average and now move to 4%) by taking the few, simple steps required to make the most of your career?
In other words, let’s say Jim is an average employee and he gets average raises of 3% per year. Sue puts in time and effort at managing her career — exceeding expectations, being likable, networking, proactively managing her career (including asking for raises, moving jobs when needed, etc.), and the like.
Do you think it’s reasonable for Sue to average 4% raises a year? It seems like a no-brainer to me. In fact, her gains will probably be much higher. But today we’re just looking at that extra 1%. And given the effort she’s putting in it, it seems likely she could make it.
What does that 1% do for Sue? Assuming she and Jim both start work at 22, they both work until 65, and they both start at annual salaries of $35,000 a year, here are their results if Jim averages 3% raises and Sue averages 4%:
- Jim ends up making $121k at 65 and makes $3.0 million over the course of his career.
- Sue ends up making $182k at 65 and makes $3.9 million over the course of her career.
In this case, the value of just that extra 1% is $900,000!!!! Almost a million dollars!!!
Sue ends up making 30% more than Jim simply by averaging an extra 1% raise over the course of her career. And this seems entirely reasonable to do this, right? Of course, we’ve already agreed to that! 🙂
How do you get this extra 1%? It’s not that difficult. Follow my career improvement suggestions. These should most certainly get you an extra 1% per year — and will likely result in more.
It’s also worth noting that even though their salaries grew at different rates, both Sue and Jim each earned MILLIONS of dollars over their working careers. In other words, almost any career is worth millions of dollars. That’s why it is your most valuable financial asset. What else do you own that’s worth a few million? Another reason to take care of your career…but I digress.
The Impact of 1% in Your Savings
Now let’s look at the power of saving an extra 1%.
Let’s say Sue wasn’t the career champion noted above, but more of a saving expert.
Here are the financial stats we’ll begin with:
- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 3%
- Starts out saving 10% of income
- Savings earns 7% a year
From here, let’s look at a couple different scenarios.
In the first one, Sue saves 10% per year throughout her working career. Nothing more, nothing less.
Under the above assumptions, she retires at 65 with a nest egg of $1.3 million. Not bad. But it could be more.
Let’s bump that savings rate by 1% and see what happens.
If Sue saves 11% per year, she retires with almost $1.4 million, $100k more for only a fraction more saved.
It’s not life-changing, but why not pocket an extra $100k for doing basically nothing?
And if an extra $100k isn’t worth the effort for you, stay tuned. I have some ideas below to really make your finances sing. 😉
How do you get this extra 1%? I’d suggest you focus on the best ways to save money. Certainly these can help you save at least 1% extra, probably more.
The Impact of 1% in Your Investments
Now let’s look at the impact of 1% on investments.
We’ll take the same starting scenario as above with Sue’s finances (saving 10%). But this time, instead of earning 7% on her money, she earns 8%.
Here are the results:
- Investing 10% for 43 years at 7% yields $1.3 million.
- Investing 10% for 43 years at 8% yields $1.7 million.
Not bad, right? An extra $400k for an extra 1%.
How do you get this extra 1%?
When comes to investing it’s more about not shooting yourself in the foot. I’d personally suggest:
- Not buying individual stocks. You are not smarter than fund managers who have the time, talent, and resources to make great picks — and even they can’t earn more consistently. This is why most millionaires don’t focus their investing on individual stocks — they have tried them and in the vast majority of cases it turns out to be an investing mistake.
- Avoid market timing. Studies show that most people are their own worst enemies when trying to time the market. They inevitably sell at the bottom of a market and buy at the top. Ugh. It’s better to be in for the long term, taking the punches of the drops but also enjoying the times the market flies high.
- Cut expenses. Investing expenses — and there are a host of them — can kill any gains you might get. We’re talking about the power of 1% extra in this post, but when it comes to investing an extra 1% in costs can KILL your returns over time.
These issues are some of the reasons I invest with index funds. They address all these issues and many more.
If you want more specifics and a deeper review of index fund investing, check out The Simple Path to Wealth and The Bogleheads’ Guide to Investing, two of the best investing books out there IMO.
Making the Most of an Extra 1%
So far we’ve looked at an extra 1% from an earning, savings, and investing standpoint — and seen the impact of each individually.
And the results have been pretty impressive for such a small set of incremental changes.
That said, Sue has not made the most of her financial gains in a couple ways.
First, she hasn’t combined their impacts. She’s only done one at a time in our examples.
Second, she hasn’t pushed the power of 1% as much as she could in savings, where doing so could make a massive difference. (And let’s face it, with all the extra money she’s making at work, she can certainly afford to save more.)
Let’s look at the power of 1% turned up a notch and see what would the results be.
As you might imagine, the three factors work together in concert as follows:
- The more Sue earns in her career, the more she can save.
- The more Sue saves, the more she has to compound over time.
- The more Sue earns on her investments, the faster compounding works.
Again, here’s the original scenario:
- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 3%
- Starts out saving 10% of income
- Savings earns 7% a year
As a reminder, these stats gave her $1.3 million saved at the end of 43 years.
Now here’s a ramped-up version of the above:
- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 4%
- Starts out saving 11% of income and adds 1% per year to this amount (12% in year 2, 13% in year 3, etc.) until it peaks out at 40%
- Savings earns 8% a year
Doing this she ends up with $4.9 million saved at the end of 43 years.
Kinda magical, huh? 😉
The key is that she’s not only making more but as she does, she’s saving an increasing percentage of the pie.
All this from a $35k starting salary, growing her income, increasing her savings rate annually, and time.
It’s the power of 1% in all areas of her financial life and it makes a HUGE difference in her net worth.
See? I told you small things can add up. 😉
Doing Even More
The amazing thing is that these results are just the tip of the financial iceberg.
With a bit more pushing, Sue could make the numbers really silly.
How could she improve upon these? A few thoughts:
- Start at a higher salary. As I detailed in The Difference a High Starting Salary Can Make, negotiating the starting salary of your first job can make hundreds of thousands of dollars difference.
- Get higher raises. Some people may think that 5%+ average raises are things of the past, but I don’t. There will always be more than enough compensation growth for good employees. Sure, average employees may get 3%, but there are people — people TODAY — who are and have been averaging well over 3% for years now — and they will keep doing so for years to come. The difference? They manage their careers intentionally, delivering above average value. This value then gets rewarded in extra pay. This is exactly what millionaires do to grow their incomes at higher rates.
- Create a side hustle. A career isn’t the only way to add extra income — a side hustle is an awesome way to make more money. It’s so powerful that it can get you to financial independence within 10 years.
- Start with a higher savings rate. Nothing says that 11% is the peak starting point for savings. You can begin with a much higher rate from the get-go.
- Get matches. If Sue has a 401k company match, that would add to these numbers.
- Keep saving past 40%. Many early retirees save much more than 40% of their income. Sue could do the same.
- Higher returns. This is possible, so I’ll include it, but I’d say it’s not probable. Some would say the market has returned 10% over the long-term and Dave Ramsey would say 12%, but I feel comfortable with 8%. That said, if she did earn more than 8%, the results would be better.
For kicks, let’s run a scenario to show how crazy things can get. Let’s assume the following:
- Sue’s age — 22 years old
- Starts out earning $40,000 a year. She negotiates well from day 1 and begins higher than she would have without doing it.
- Gets average annual pay increases of 5%. She asks for raises, changes companies, gets promoted, and negotiates more along the way.
- Starts out saving 20% of income and adds 1% per year to this amount (21% in year 2, 22% in year 3, etc.) until it peaks out at 60%
- Gets a company match of 4.5% of her salary (a bit below the national average of 4.7%)
- Adds in a side hustle in year five that earns $10k per year (which she also invests)
- Savings earns 8% a year
Any guesses at how much she ends up with at 65?
Almost $13 million…
I know, it’s wild…and it doesn’t even represent the top of what can happen (there is still room for improvement). But the numbers are so over the top that pushing them more almost transports us to the Twilight Zone.
In the end, this is a powerful demonstration of what can be accomplished financially with simple but powerful moves over time.
By the way, she hits the following milestones:
- $1 million 19 years in
- $2 million 25 years in
- $3 million 29 years in
- $4 million 31 years in
- $5 million 34 years in (rounding carries this to three years instead of two)
- $6 million at 35 years
So she’s financially independent well before 65.
How My Life Compares
Now you might think that these results are unachievable. They aren’t. How do I know? Because they illustrate a lot of steps I’ve taken to grow my net worth over time. I certainly haven’t been perfect and as such have left a lot of money on the table. That said, here are some of the moves I made (and my results) compared to our assumptions above (listed in parentheses):
- Sue started earning/saving at 22. I didn’t get out of grad school until 24 and then took several years to begin saving and meaningful amount. This was a HUGE mistake. (my results were worse than above)
- I started with a higher out-of-college salary thanks to getting an MBA. In fact, my first salary was over twice what I would have earned with just my undergrad degree. (better than above)
- In addition to my income, my wife worked for several years during the first part of our marriage, adding even more income to the family. (better than above)
- My annual salary increases averaged 8.16% during my 28-year career (better than above)
- Sue started saving 20% at the get-go. Even once I started saving, I wasn’t near 20% for some time. Again, a HUGE mistake. (worse than above)
- Once I got the saving fever, I ramped up much faster than an additional 1% a year (better than above) but only averaged a 36% savings rate during my 28 years (worse than average).
- I did have 401k matching funds, but they were not as lucrative as Sue’s. (worse than above)
- In addition to my career earnings, I had substantial side income for several years with both side hustles and real estate. (better than above)
- My investment returns have been near 8% over the long term. (even)
In the end, my analysis is that I did better than Sue on earning, worse on saving, and we were about even on investing.
31 years after I started working my net worth is just above $4 million, so we took different paths but ended up in the same place.
This simply shows that there are different ways to skin the cat. If you’re better at one thing it can make up for a lack in another and still help you get to where you want to be.
Well Good for You, Mr. Smarty Pants
As I re-read the points above, they feel a bit too much “here’s how great I am” in tone. It’s a bit (or maybe more than a bit) braggadocios. That’s unfortunate, because I don’t mean them that way. I simply want to honestly share the facts because I want to show you:
- There’s real power in these numbers. Just a bit extra can have real, meaningful benefits for your finances.
- This is not theory. It’s not some mathematical formula that’s good on paper but impractical in real life. I’ve lived it, so I know it can work.
- There’s room for upside. I didn’t do it all right by a long ways. I made mistakes, mistakes, mistakes. This is good news in two ways. First, you don’t have to be perfect to end up wealthy. Second, if you can avoid the bad mistakes I made, you can become very wealthy over time even if your other gains aren’t as high as mine.
So please forgive me if my personal story gets in the way of the numbers. Hopefully it doesn’t. Hopefully my story illustrates that the principles above work.
Let’s also not forget that I lacked one of the biggest advantages of all: time. I lost a lot of time trying to figure all this stuff out. If you’re a younger person today and reading this, you have a HUGE advantage over me in that you have more time.
Which leads me to note…
Don’t Fret if You’re Older
I want to address the people who think it’s too late for them. You may be 20 years into a career and think this post is not for you — that it only holds true for those at the beginning of their careers/lives. I have a couple thoughts for you:
- If you start taking the steps above now, no matter where you are in your finances, you will ultimately be better off than you would be without doing anything.
- Sure, an extra 1% over 40 years is better than an extra 1% over 20 years. But an extra 1% over 20 years is better than nothing extra over 20 years. 🙂
Even if you’re older and have messed up your finances so far, there’s still hope for you. You don’t need 40+ years to become wealthy. If you really set your mind to it and apply the principles above, you can have substantial wealth in 20 years — or even 15. So don’t say “it’s too late for me” if you’re 40 or 45 or even 50.
And for those of you older than 50 and in financial trouble, if you put the above principles into action now, you’ll be much better off at retirement than you would be if you keep on doing what you’ve been doing up to this point.
The moral of this story: these principles will make your finances better at retirement whether you are 25 or 55.
That said, if you know a young person who’s open to learning, you may want to send them the link to this post. It could change their lives in an amazing way.
Now I’d like to hear from others who have done something similar (or better) than what I’ve detailed above.
What’s worked for you? What would you have done differently?
And for those of you working your way to wealth, what’s working for you these days?
Dave @ Accidental FIRE says
Great post dude. As you said the little things do indeed matter but it’s all a balance. I just started a graphic design side hustle two years ago and this year I’m on target to make $9,000. Now in talking to all the amazing entrepreneurs at FINCON who are killing it in their endeavors, $9k a year on a business is chump-change. Some even looked at me as if to say “that’s it?”
But I just ran that in a calculator and assuming it never even grows (which it will) if I make $9k a year for the next 15 years and get 7% on the money in the market by investing all of it I’ll have $266,823!! So a quarter of a million dollars for a side hustle that to some seems like beer money. It all adds up.
So true! And most there would have KILLED to be earning $9k per year. 😉
Great seeing you!
You cannot defeat the logic of math and you have proven that there are many ways to propel you on your path to wealth.
I am one of those late starters, having a negative net worth at age 40 thanks to my divorce. I didn’t really keep great records but I do know my net worth was at one point -$800k a few years before the divorce.
My saving grace was my salary and savings rate. Both were high enough that I truly made up for lost time and climbed my way quickly out of debt and into a similar net worth as yours in about 6-7 years after my divorce (I have charted my networth over time once I did start keeping records and the slope is incredible).
Mr. Hobo Millionaire says
Some amount of positive progress every day makes all the difference over a lifetime. It doesn’t matter what it is that you’re making progress on. It compounds. And negative results/progress compounds, too.
Ellen Mitchell says
So much truth in this post.
Unfortunately in the service field, healthcare-specifically, nursing- there is not much growth in income after the first ten years. I have been “topped out” for about 8 years, so have not had a raise since 2011. Occasionally, I get a bonus if others are getting an across the board raise, but that is sporadic.
All is not lost though! There are the intrinsics that keep me from leaving (good schedule, love what I do, great co-workers, a chance to help others) And, my pay is well above average for this area so there’s no need to job hop. I learned early on to live on less than I make. I also quickly realized as I started working on my masters that I would actually take a cut in pay if I went for the job it prepared me for. No thank you!
I got some specific training that is part of my side hustle—beyond my regular shifts I come in extra and provide required recertification for nurses throughout the year. Plus there is almost always extra shifts available which help build the nest egg.
Sometimes you have to realize that the side hustle is right under your nose. I never called it that before, but now I feel I’ve been following ESI my whole life!
Victoria Berger says
You are spot-on in regards to nursing. I have been a nurse for about 19 years and I am “topped out” in my current position. So many people think they are going to make “a lot” of money in health care only to be disappointed when the check comes in. On the whole most of us do make at least average, if not above average, for where we live.
Sounds like you have really found your niche. Keep up the good work!
And yes–there are almost always extra shifts available…
Ellen Mitchell says
Thanks! Yeah, in the 80’s I didn’t get into nursing for the money, that’s for sure! I rode a nice wave of pay increases in the 90’s and early 00’s but basically it’s been flat since then.
ESI is a great concept for anyone, regardless of their chosen field. Realistically, job growth does not necessarily equate to salary growth in service fields, esp. female dominated teaching and nursing. It’s a choice each person makes when they remain on the frontline instead of getting the higher ed degree for admin. or clinical practice. And even in those instances of getting an advanced degree, we’re starting to see some saturation where job placement is difficult and nurses are hanging on to their bedside jobs.
My vast business experience is that salaries do top out…It is best to get to a high salary as soon as possible by working hard and creating long term value, and you will be rewarded. But once one gets to say age 55, salaries flatten and people get one time cash bonus, but no increases. It is very rare for a business person to continue major salary increases past age 55.
That is an awesome story!
As you were talking about your salary topping out I started to think “a side hustle would work here” — then come to find out you already had it covered! 😉
“No brag, just fact.” – Will Sonnett
ESI, we readers are fortunate that you choose to share your story. Those ‘termites’ that attack the story or your motivation have nothing to offer of value. Your life is quite successful by a lot of measures (i.e. family, spirit, health, etc.) and your work life and net worth are just the ones that have an obvious metric.
Don’t ever hide your light under a bushel basket, ESI, let it shine!:-)
Thanks! Appreciate that!
The truth is evident enough . . . I personally dispute virtually none of the facts as presented. The friction, or rub perhaps, is the leading emphasis on E, which is simply not an option available to most, much less all. It’s been equally proven time and again that one can rock the other angles, basically overcompensating in regard to S and I, with what they actually have. That’s it. You simply can’t please everybody, nor they you. My takeaway is, stick around for consideration of the meat and potatoes, then the occasional alternate angles found here, for balance and contrast, even disputation. Other angles or points of illumination can be found elsewhere, then make your own light for heaven’s sake, instead of naysaying every messenger. No martyrs, no saints, just a sea of information and a choice among various ships. But who said you have to sail for eternity on one alone? ESI looks down the nose at MMM, MMM at Sethi and Ramsey, Orman at the FIRE community in general . . . I’ve learned from all, but ultimately make my own decisions, thank you.
I even learned something from that fiery gasbag, Jim Cramer . . . first pf book, I do believe. A lot of hoopla, questionable meat, but he did make it perfectly clear, hold your nose and go for the match regarding an otherwise stinky 401(k), basically never turn away free money. WORD, buddy, now go find that volume knob!
This is excellent and a great example for people starting off as it can seem pretty hopeless when you are making 40K getting a raise of $1,400 (4%) on how you can ever achieve FIRE and for many years I went for the home-run investments (some lost everything) as I couldn’t see the path doing so and steady but ultimate I was fortunate to land in a lucrative career, my saving % was always very high regardless of wealth and I had learned my investment lessons (the hard way) so as the numbers got bigger was able to follow a lot of what you recommend above. It is to bad they don’t do a better job of teaching this in high-school (or college) as the above article with all the links (many of which I have read over the years) is filled with so much great info.
Clements, Merriman, Burns . . . lot of great voices, always some controversy. Pluralism 101. I’ve even got a very special book by Tony Robbins, Xmas gift from the gf, dominantly titled ‘MONEY: Master the Game’! Apparently it’s loaded with, yeah, some degree of horsesh*t and self-promotional ties, which I always thought was a given anywhere, but then . . . a series of interviews. I’ve been savoring over it for a long while, as it lies unread on the shelf, fully knowing I’ll eventually get more out of it than most. Black comedy masterpiece with tiny gems interspersed? Or a massive horsesh*t wheelbarrow . . . to be realistic, probably both and more. We’ll see.
Great post, I totally agree with the approach.
However, the math major in me has to point out:
– the person getting a 4% raise is getting 33% more than the person getting 3% (assuming same salary)
– increasing your 401k match from 10% to 11% is a 10% increase, not 1%
The 1% is a great way to simplify but the real impact is much more than just 1% in actual dollars.
Good way to get people hooked on the concept though.
Ken Williams says
Most investors argue that low cost index funds are the way to go, as opposed to investing in individual stocks. I understand that approach from the perspective that, as individuals, it’s highly likely we will underperform the market as a whole (as it’s often cited that the pros also usually underperform the market as a whole). I have two concerns (questions in my mind?) with this approach. The first is the assumption that in buying individual stocks is that you will not be adequately diversified (of course you’ll never be as diversified as the broad market funds). I’d argue you can get a reasonable diversification if you build a portfolio of 50+ individual stocks (arguable, but I think it would be close enough if you pay attention to the industries you are investing in) that you build up over time. The second one is the associated fees. Even low-cost index funds come at a cost. For example, a $1,000,000 portfolio in a low-cost index fund of 0.3% will still have an annual cost of $3,000. If you built up your own portfolio (I’d suggest dividend aristocrats) and utilize the dividend reinvestment option (DRIP), that comes at a cost of $0/year. While there would be an initial cost (trading fee) for each stock acquired, it’s a small, one-time fee (say $10/trade) that doesn’t repeat. If you are a long-term investor (say a 40 year time horizon), wouldn’t you be better off (by a long shot) having invested in individual stocks (and gained proper diversification) and saved the annual fees from the index funds?
I think most studies will show that most investors are terrible at picking individual stocks and thus lose much more than the (very low) costs of index funds…unless you want to buy the whole S&P 500 of stocks, change weights as they move up and down, etc. — which is an unreasonable option.
My 401(k) fund has a .19 expense ratio, for instance, S&P 500 . . . no complaints. I’m at 16% with a 5% dollar-to-dollar match. Hope to boost it 1% a year going forward.
Vanguard’ll give you an expense ratio of .04%. Your cost to let the index play with your million just dropped to $400. The “low cost index” cited above is actually pretty costly. 😁
Agreed . . . my .19 comes courtesy of Merrill Lynch! So notorious . . . the 5% match sweetens that further, but everything else they’re offering in that 401(k) is really expensive crap, easily 1.2, 1.4 and higher for volatility and then moderate to low performance. No thanks. So 100% into that one index fund, no rebalancing or further fees, another sweet spot. Outside of that, my Vanguard brokerage fund is almost twice that ratio, about .34, which seems high in this relatively lofty territory, but then it’s not a pure index fund–more international and some bond coverage, for instance, and something like balance. I’m personally comfortable with 100% equities via index funds at all times, but this seems about right, an interesting experiment, and between the two, no current complaints. All of this obviously miles ahead of all that heavily loaded, actively-managed bullcrap lurking around, otherwise flying blind with open acceptance of pre-packaged portfolios most 401(k)s offer i.e. total dog crap, or even worse, no investing or saving going on whatsoever i.e. no 401(k) or pension or emergency reserves, the plague of so many Americans. And I’d rather shoot myself in the foot than handpick stocks, managing hundreds or more, quarter to quarter, but that’s just me. Keep it simple, and stay in. That’s the way.
As we speak, some old-timer in a commercial hawking actively-managed ETFs . . . as if WE’RE the dumbsh*ts for not leaping with joy! Good luck with that noise, children.
Frogdancer Jones says
Thanks for this post, ESI.
I’m sending it to my sons.
The oldest is an accountant working at a very small firm – the others are still at uni.