It's easy to feel overwhelmed when you look at the big picture of your financial life. You might think you need to make massive sacrifices right now to secure a comfortable future or pay for a child's education, but that mindset often leads to burnout. The truth is that small, consistent shifts in your habits are far more powerful, and sustainable, than you might realize.
The power of the number one
At Facet, our CFP® professionals see something time and time again. One small number can have a profound effect on a member's financial roadmap, their sense of well-being, and their peace of mind.
In fact, that number is really small. It's the number one.
We call this the 1% challenge. It's a simple concept that can change your life, and we're challenging you to take this journey with us. Here's how it works.
How the 1% challenge impacts your 401(k)
Let's look at a common scenario. Say your employer offers a 401(k) with a default contribution of 3%. If you don't actively enroll or change your settings, your employer will simply invest 3% of your salary into that account for you, likely in a target date fund. They might even match part of that contribution.
For many of us, life happens. We get busy, and we never change that default setting. At the end of 30 years, you will likely have a six-figure balance in your 401(k). That's nice, but it's probably a bit short of a comfortable retirement.
This is where the 1% comes in.
Instead of sticking with that 3% deduction, you bump your contribution by 1% every year when you get your raise. So the next year, you raise your salary deduction to 4%. You keep going until you're contributing 10-15% of your paycheck to your retirement.
The long-term payoff
You likely won't notice much of a difference in your paycheck year over year. In fact, with the tax savings involved, the difference in your take-home pay might not be much at all.
However, at the end of 30 years, the results can be staggering. If you make a decent salary, your investments match historical long-term stock market averages, and your annual raises outpace inflation, this strategy could potentially help you reach a million-dollar portfolio. This is a hypothetical illustration, and actual results will vary.
If your employer matches some of your contribution and you put away enough to max out that match, that's 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. Having a seven-figure amount in your retirement account can provide significant peace of mind.
Using the 1% rule for debt and other goals
The magic of this strategy is that it works for almost anything. You might have large credit card debt to pay off. Or perhaps you have two toddlers who are going to go to college one day. Sure, they will probably be geniuses or incredible athletes and get full scholarships, but it doesn't hurt to have a backup strategy.
By adding an extra 1% to your payment or investment every 3, 6, 9, or 12 months, 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
Why small habits stick better
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." That small change will still make a significant difference over time.
Truly, this works with any habit. You can walk a few more steps each day or cut one soda out of your diet each day. You might turn off the TV and go to bed 15 minutes earlier, and then in a month, knock off another 15 minutes. You could decide to read one more book every six months.
Trust us, it's easier than you think.
The Facet difference
At Facet, we believe your financial roadmap should be as dynamic as your life. We don't just hand you a static document and wish you luck. You’ll work with a CFP® professional who acts as a partner on your journey, helping you identify those small, high-impact opportunities like the 1% challenge, so you can build wealth without sacrificing the life you want to live today.
