Want to change your financial life?
As a CERTIFIED FINANCIAL PLANNER™ professional, there’s something I’ve seen over and over: one small number can have a profound effect on my clients’ financial lives, futures, sense of well-being, and peace of mind.
In fact, that number is really small. It was the number one.
Stick with me and I’ll tell you how what I call the 1% Challenge can change your life. And then I’m going to challenge you to take the 1% Challenge with me.
Here’s how it works.
The 1% challenge and your finances
Let’s say your employer offers a 401(k) plan with a default contribution of 3%. If you don’t actively enroll in the 401(k), your employer will invest 3% of your salary in a 401(k) account for you, probably in a target date fund. Your employer might even match part of that contribution.
You never change anything because, well, life happens. At the end of 30 years you have a six-figure balance in your 401(k). Nice, but probably a bit short of a comfortable retirement.
Or let’s say you have a large credit card debt to pay off. Or two toddlers who are going to go to college one day. (Sure, they’ll probably be geniuses or incredible athletes and get full scholarships, but it never hurts to have a Plan B.)
That’s where the 1% comes in.
How to use the 1% challenge to change your financial life
Instead of sticking with that 3% deduction, you bump your contribution by 1% every year when you get your raise. (Okay, really by one percentage point.) So the next year you raise your salary deduction to 4%, and you keep going until you’re contributing 10-15% of your paycheck to your retirement.
You won’t notice much of a difference in your paycheck year over year. In fact, with the tax savings, the difference might not be much at all.
But at the end of 30 years, if you make a decent salary, your investments match the long-term stock market average, and your annual raises do a little better than inflation, you’ll be a millionaire.
If your employer matches some of your contribution and you put away enough to max out that contribution, even better. That’s free money. Plus, since most employer-sponsored retirement plans deduct money from your paycheck before calculating taxes, your tax savings can be significant.
I guarantee life feels very different when you have a seven-figure amount in your retirement account.
The 1% challenge and everything else
The magic of the 1% strategy is that it works for anything. Add an extra 1% to your payment or investment every 3, 6, 9, or 12 months and you can:
- Pay off student loans faster
- Retire your mortgage sooner
- Get your credit card balance down to zero earlier
- Save more for college
- Achieve virtually any financial goal in less time
Plus, human nature being what it is, small changes are much more likely to stick than large ones. Bumping your loan payment by a bit each month is much easier than saying, “I’m going to double it,” and that small change will make a significant difference.
Truly, this works with any habit. Walk a few more steps each day, or cut one soda out of your diet each day. Turn off the TV and go to bed 15 minutes earlier; in a month knock off another 15 minutes. Read one more book every six months. (Or even one book every six months.)
Trust me, it’s easier than you think. Which is why I’m issuing this challenge.
