The Power of 1%
Caleb Pepperday, CFP?, ChFC?
Financial Planner for Physician Assistants/Associates | PA-C Spouse
In James Clear’s book, Atomic Habits, he writes about the importance of 1%. If you make an active effort to get 1% better at something each day, you’ll end up 37x better by the end of the year. Below is a visual of what this looks like in practice.
What a 1% Improvement Means for Your Investments
Now let’s put an investment spin onto it. ?
If you were to invest $100,000 over the course of 1 year making an additional investment contribution of $1,000/month and earning an average rate of return on your investments of 8%, at the end of the first year, you would have a portfolio value of $120,833.
Now let’s assume the same criteria but with a 9% return instead.
With a 9% return, you would have an ending portfolio value after one year of $121,982.08.
A difference of $1,149.
Not that significant.
Let’s look at another scenario:
In this scenario, let’s again assume an initial investment of $100,000 with $1,000/month of additional contributions being made with a rate of return of 8%, but with an extended period of 30 years instead.
At the end of 30-years, you would have a portfolio value of $2,593,868, assuming an 8% return.
Pretty awesome, right?
Assuming all the same criteria, let’s say your annual investment return was 1% higher.
Assuming an annual return of 9%, your portfolio value would be $3,317,531.
A difference of more than $700,000!
So, what’s the point?
Well, there’s 2.
Making a Change
Once you decide to make a change, it’s often best to work on making incremental changes over time.
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Let’s say you never worked out before and the first day you go to the gym, you try doing a full body workout, squats, deadlifts, bench, the works. The next day you’re going to wake up so sore you’re probably not going back to the gym for a long time (maybe never again).
Let’s instead say you’re a first-time gym goer, but instead take the approach of walking on the treadmill for 10 minutes initially. Then, the next day you go and walk for 11 minutes. The next day you walk for 11 minutes and add one small strength exercise. And so on and so on.
Gradual changes over time:
How to get 1% better with your finances
Often, I hear some version of this from clients,
“I’ve known for a few years now that I’ve needed some help with my finances but felt overwhelmed with what all I needed to do, so I just didn’t.”
This is one of the biggest misconceptions when it comes to financial planning. Not everything needs to be solved at once. Yes, there are things like making sure that you have the right tax withholdings set-up on your paycheck or paying off high-interest credit card debt that may take precedence but no everything needs to be done at once.
Let’s say you commit to making one financial improvement every quarter. Over the course of a year, you’ve taken 4 steps forward towards your financial goals. Maybe it’s increasing your 401(k) contributions, getting a will in place, downloading a budgeting app, or saving an additional $1,000/month to build up your emergency account.
The point is it doesn’t take long for those changes to have a significant impact on your plan. ?
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The information provided in this article is for educational purposes only. It is not intended as financial advice, and no content within should be construed as such. The content is based on general financial principles and concepts, and individual financial situations may vary.
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