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Oct. 19, 2019, 3:42 p.m. EDT

How adding 1% to your saving, earning and investing can change your life

Small changes can make a big difference in your net worth

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By John ESI Money

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• 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% a 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. Kind of magical, right? She’s not only making more, but as she does, she’s saving an increasing percentage of the pie. All this from a $35,000 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.

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.  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. These workers 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 401(k) 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 one 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% a 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 a year (which she also invests).

• Savings earns 8% a year.

Any guesses at how much she ends up with at 65?

Almost $13 million. 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 in 19 years

• $2 million in 25 years

• $3 million in 29 years

• $4 million in 31 years

• $5 million in 34 years (rounding carries this to three years instead of two)

• $6 million in 35 years

So she’s  financially independent  well before 65.

Don’t fret if you’re older

You may be 20 years into a career and think this advice is not for you — that it only holds true for those at the beginning of their careers. 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.

This column originally appeared on ESI Money. It was republished with permission .

John writes ESI Money, a blog about achieving financial independence through earning, saving, and investing (ESI). He’s an early-50s retiree who achieved financial independence, shares what’s worked for him, and details how others can implement those successes in their lives. He’s also the owner of Rockstar Finance, a site which curates personal finance articles.

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