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Ramit Sethi says making a rule to up your investments by 1% annually takes minutes and can leave you hundreds of thousands of dollars richer. Read on to find out if he’s right.
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If you want to end up rich, there are different paths you can take to get there — some of which are easier than others.
Ramit Sethi, finance expert and author of I Will Teach You to be Rich, believes that there’s one simple move you can make that’s going to leave you with a ton more money for very little effort. Here’s what Sethi recommends.
This investment decision could make all the difference
Recently on Twitter, Sethi recommended making one simple decision that takes minutes and that can increase the amount of your investment account balance substantially. Here’s what it is.
“You can spend the next 15 years fighting to cut back on coffee or you can just create a rule to increase your investment rate by 1% every year,” Sethi said. “The second decision would make you hundreds of thousands of dollars more and take 5 minutes per *year.*”
Sethi is making the point here that many people focus on the wrong things when they try to improve their financial situation. Obsessing over every penny that comes out of your bank account can be stressful and leave you without much enjoyment in your life, and the impact that this will have is limited.
But, as he explains, if you simply commit to increasing your investments by 1% per year, this will make a far bigger difference without you having to spend endless hours worrying about little expenditures.
Is Sethi right?
Sethi is absolutely right that increasing the amount you invest by 1% each year is going to make a huge difference in how much money you find yourself with in your brokerage account.
Say, for example, you’re 30 years old, currently making $40,000, and you’re currently contributing 6% of your salary into a brokerage account earning 10% average annual returns. If you got a 1% raise and upped your contribution to just 7% per year instead of 6%, you would end up with $130,492 more in your brokerage account at age 65 just from making that change.
And that’s just a single 1% increase. If you increase your contribution rate every year, the effects will be even greater thanks to compound growth. The more you invest, the more money you earn in returns, and the more returns can be reinvested to help you grow rich.
The good news is, increasing your savings rate by 1% per year shouldn’t be that hard for most people — especially if you get a raise at your job over time. When you make more money, you can divert it directly into your investment account without ever getting used to the extra income so you won’t have to change your lifestyle to invest more. And even if you don’t get a raise, a 1% increase is minor enough that you can usually absorb it without making dramatic changes to your lifestyle anyway.
Taking this advice is going to be a lot easier than penny-pinching throughout your life, as Sethi says, so give it a try and set this rule for yourself starting now.
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