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02/12/2020

The one number that can change your financial life

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The one number that can change your financial life

By Brent Weiss

Brent Weiss, Head Planner and Co-Founder

When I worked as a CERTIFIED FINANCIAL PLANNER™ (CFP®), I realized something: one small number could have a profound effect on my clients’ financial lives, their financial futures, and their sense of well-being and peace of mind.

In fact, that number was really small. It was the number one.

Bear with me here. I’m going to tell you why what I call the 1% Pledge can change your life. And then I’m going to challenge you to take the 1% Pledge with me.

The formula is really simple:

Small Changes + Time = Big Results

Here’s how it works.

If Retirement is Your Main Goal

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 choose an investment for you, deduct 3% of your gross salary, and invest it in that choice. (Often that’s 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 you may or may not feel like you can relax when it comes to money.

Or let’s say you have a large credit card debt you’d like 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.

Make 1% Work For You

Instead of sticking with that 3% deduction every year for your retirement, you make one small change. Every year, when you get a raise, you bump your deduction by 1%. (Okay, really by one percentage point.) So in year two you raise your salary deduction to 4%, the following year bump it to 5%, and you keep going. Eventually, you bring your deduction up to 10-15% of your salary.

Now, you won’t notice much of a difference in your paycheck year over year. In fact, once you figure in the tax savings, the difference might not be much at all.

But at the end of 30 years, guess what? 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’re 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.

But if retirement isn’t your No. 1 goal right now, 1% is just as powerful in other areas of your financial life.

If Your Main Financial Goal is Something Besides Retirement

The magic of the 1% strategy is that it works for anything. By making small, incremental, regular increases, you can pay off student loans faster, retire your mortgage sooner, get your credit card balance down to zero earlier, save more for college, whatever your financial goals are.

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.”

Add a few bucks beyond the minimum when paying off credit card debt and you can knock months, or possibly years, off the time it takes you to achieve a zero balance. (And pat yourself on the back when that happens. You deserve it.)

The same thing happens when you pay extra towards the principal for your mortgage, or add a bit more to your monthly investment in that college fund. You’ll barely feel it each month, but give it some time and you’ll be amazed.

Scientists will tell you that small changes in your habits are more likely to stick, and will result in big changes. Money habits are no different.

Truly, this works with any habit. Vow to walk a few more steps each day, or cut one soda out of your diet. 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.

Take the 1% Pledge

Will you join me in taking the 1% pledge? Please email me with how you’re putting the power of 1% to work for you. I’d love to hear it.

Not sure how to set your financial priorities? We recommend talking to a CFP® Professional, who can serve as a trusted guide and provide you with the expertise and insight you deserve in all facets of your financial life.

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