Personal finance

The Number That Could Transform Your Financial Situation

In my experience as a CERTIFIED FINANCIAL PLANNERTM professional, one small figure may have a significant impact on the financial lives, financial prospects, sense of wellbeing, and peace of mind of my clients.

Actually, that is a very small number. It held the top spot.

Continue reading, and I’ll explain how the “1% Challenge” can transform your life. Then I’ll issue you a challenge to join me in taking the 1% Challenge.

This is how it goes.

You and your finances and the 1% Challenge

Consider a 401(k) plan that your employer offers, with a default contribution of 3%. Your employer will put 3% of your take-home pay into a 401(k) account for you if you don’t actively enroll in one, most likely in a target date fund. Additionally, your company can match a portion of that donation.

Since life happens, you never make any changes. You have a six-figure amount in your 401(k) at the end of 30 years (k). Nice, but maybe not quite enough for a cozy retirement.

Or, let’s assume you need to pay off a sizable credit card bill. or two young children who will eventually attend college. It never hurts to have a Plan B (even if they’ll undoubtedly be geniuses or fantastic athletes and get full scholarships).

The 1% enters the picture here.

How to use the 1% Challenge to your advantage

When you get a raise, you increase your contribution by 1% year rather than maintaining the same 3% deduction. So you increase your salary deduction the following year to 4% (well, really by one percentage point), and you keep going until you’re setting aside 10-15% of your income for retirement.

Your salary won’t change significantly from year to year. In fact, the difference might not even be noticeable given the tax savings.

However, assuming your pay is respectable, your investments are in line with the long-term stock market average, and your annual raises outperform inflation, by the end of 30 years you will have amassed a million dollars.

Even better if your employer matches a portion of your savings and you save enough to take full advantage of that match. That is free cash. Additionally, you could save a lot of money on taxes because most employer-sponsored retirement plans take money from your paycheck prior to calculating taxes.

When you have a seven-figure sum in your retirement account, I can almost promise that life will feel significantly different.

Everything else and the 1% Challenge

The 1% strategy’s brilliance is that it applies to any situation. Every 3, 6, or 12 months, increase your payment or investment by 1% to:

  • Quicker repayment of student loans
  • Pay off your mortgage earlier
  • Reduce your credit card balance as soon as possible
  • Save extra money for college.
  • Almost any financial objective in less time

Additionally, given the nature of human nature, little changes have a much higher chance of sticking than major ones. It’s much simpler to increase your loan payment a little bit each month than to declare that you will double it, and that modest adjustment will have a big impact.

This is effective for any habit, in fact. Increase your daily step count by a few or eliminate one beverage from your diet. Go to bed 15 minutes early and turn off the TV; in a month, cut another 15 minutes. Each six months, read a new book. (Or perhaps just one book every six months.)

It’s simpler than you think, I assure you. I’m presenting this challenge for that reason.

Engage in the 1% Challenge.

Will you take the 1% Challenge with me? Tell me in an email how you’re using the 1% effect to your advantage. Please tell me about it.

Not sure how to organize your finances? We advise speaking with a CFP® Professional at Facet Wealth, who can act as a dependable advisor and give you the knowledge and perspective you require in all areas of your financial life.

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