Over the years I’ve received many comments from people saying how insignificant some of my tips are.

They say that people need to focus their financial efforts on big-ticket items (like homes, cars, etc.) and the rest can be virtually ignored.

As with most things, I think there’s a balance. Of course you should pay attention to the big expenses in life. But you should also watch little ones too because small expenses can add up.

And with all your expenses I recommend spending in areas important to you and cutting costs elsewhere — a plan I call moderate and selective frugality. Or you can take the option of 10X-ing your favorite expenses and bare bones-ing it the rest of the way. The latter is simply a more pronounced version of the former.

Whichever you choose, this is the balance I think works best for saving to build wealth as well as enjoying your life along the way.

In other areas of finances (and life) small steps can really add up. I have seen time and time again over my lifetime examples of small, often seemingly insignificant steps, adding up over time to make a huge impact. This is why I’m an advocate of making at least a small amount of progress on your goals each day — because they add up over time. (BTW, one place to find time to focus on these small steps is in the morning.)

Today’s post will demonstrate the power of small efforts in your finances. We’re going to talk about what seems like a trivial amount — a small 1% gain — and what a huge difference it can make to your wealth.

We’ll do it in typical E-S-I fashion, showing the impact 1% can have in your earning, saving, and investing.

**The Impact of 1% in Your Career**

There’s no doubt about it: managing a career for maximum growth can have a huge financial payoff. In fact, the difference between someone working their career and a person who doesn’t can be millions of dollars.

I’ve detailed some scenarios to highlight this difference in Two Huge Reasons Why Your Career Matters. Or if you’d prefer to see the impact using your own numbers, check out my Impact of Career Growth Calculator.

The key to extra millions lies in getting higher than average salary increases. Some people complain that 4%, 5%, or 6% average annual income gains are unrealistic, even though I made 8.16% gains over a 28-year career.

So I’ll humor them and just look at the power of 1% more.

But before we do that, I want to get a commitment from those who doubt. Do you think a person could squeak out just a 1% gain in raises over a career (assuming you would get 3% on average and now move to 4%) by taking the few, simple steps required to make the most of your career?

In other words, let’s say Jim is an average employee and he gets average raises of 3% per year. Sue puts in time and effort at managing her career — exceeding expectations, being likable, networking, proactively managing her career (including asking for raises, moving jobs when needed, etc.), and the like.

Do you think it’s reasonable for Sue to average 4% raises a year? It seems like a no-brainer to me. In fact, her gains will probably be much higher. But today we’re just looking at that extra 1%. And given the effort she’s putting in it, it seems likely she could make it.

What does that 1% do for Sue? Assuming she and Jim both start work at 22, they both work until 65, and they both start at annual salaries of $35,000 a year, here are their results if Jim averages 3% raises and Sue averages 4%:

- Jim ends up making $121k at 65 and makes $3.0 million over the course of his career.
- Sue ends up making $182k at 65 and makes $3.9 million over the course of her career.

In this case, the value of just that extra 1% is $900,000!!!! Almost a million dollars!!!

Sue ends up making 30% more than Jim simply by averaging an extra 1% raise over the course of her career. And this seems entirely reasonable to do this, right? Of course, we’ve already agreed to that! 🙂

How do you get this extra 1%? It’s not that difficult. Follow my career improvement suggestions. These should most certainly get you an extra 1% per year — and will likely result in more.

It’s also worth noting that even though their salaries grew at different rates, both Sue and Jim each earned MILLIONS of dollars over their working careers. In other words, almost any career is worth millions of dollars. That’s why it is your most valuable financial asset. What else do you own that’s worth a few million? Another reason to take care of your career…but I digress.

**The Impact of 1% in Your Savings**

Now let’s look at the power of saving an extra 1%.

Let’s say Sue wasn’t the career champion noted above, but more of a saving expert.

Here are the financial stats we’ll begin with:

- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 3%
- Starts out saving 10% of income
- Savings earns 7% a year

From here, let’s look at a couple different scenarios.

In the first one, Sue saves 10% per year throughout her working career. Nothing more, nothing less.

Under the above assumptions, she retires at 65 with a nest egg of $1.3 million. Not bad. But it could be more.

Let’s bump that savings rate by 1% and see what happens.

If Sue saves 11% per year, she retires with almost $1.4 million, $100k more for only a fraction more saved.

It’s not life-changing, but why not pocket an extra $100k for doing basically nothing?

And if an extra $100k isn’t worth the effort for you, stay tuned. I have some ideas below to really make your finances sing. 😉

How do you get this extra 1%? I’d suggest you focus on the best ways to save money. Certainly these can help you save at least 1% extra, probably more.

**The Impact of 1% in Your Investments**

Now let’s look at the impact of 1% on investments.

We’ll take the same starting scenario as above with Sue’s finances (saving 10%). But this time, instead of earning 7% on her money, she earns 8%.

Here are the results:

- Investing 10% for 43 years at 7% yields $1.3 million.
- Investing 10% for 43 years at 8% yields $1.7 million.

Not bad, right? An extra $400k for an extra 1%.

How do you get this extra 1%?

When comes to investing it’s more about not shooting yourself in the foot. I’d personally suggest:

**Not buying individual stocks.**You are not smarter than fund managers who have the time, talent, and resources to make great picks — and even they can’t earn more consistently. This is why most millionaires don’t focus their investing on individual stocks — they have tried them and in the vast majority of cases it turns out to be an investing mistake.**Avoid market timing.**Studies show that most people are their own worst enemies when trying to time the market. They inevitably sell at the bottom of a market and buy at the top. Ugh. It’s better to be in for the long term, taking the punches of the drops but also enjoying the times the market flies high.**Cut expenses.**Investing expenses — and there are a host of them — can kill any gains you might get. We’re talking about the power of 1% extra in this post, but when it comes to investing an extra 1% in costs can KILL your returns over time.

These issues are some of the reasons I invest with index funds. They address all these issues and many more.

If you want more specifics and a deeper review of index fund investing, check out The Simple Path to Wealth and The Bogleheads’ Guide to Investing, two of the best investing books out there IMO.

**Making the Most of an Extra 1%**

So far we’ve looked at an extra 1% from an earning, savings, and investing standpoint — and seen the impact of each individually.

And the results have been pretty impressive for such a small set of incremental changes.

That said, Sue has not made the most of her financial gains in a couple ways.

First, she hasn’t combined their impacts. She’s only done one at a time in our examples.

Second, she hasn’t pushed the power of 1% as much as she could in savings, where doing so could make a massive difference. (And let’s face it, with all the extra money she’s making at work, she can certainly afford to save more.)

Let’s look at the power of 1% turned up a notch and see what would the results be.

As you might imagine, the three factors work together in concert as follows:

- The more Sue earns in her career, the more she can save.
- The more Sue saves, the more she has to compound over time.
- The more Sue earns on her investments, the faster compounding works.

Again, here’s the original scenario:

- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 3%
- Starts out saving 10% of income
- Savings earns 7% a year

As a reminder, these stats gave her $1.3 million saved at the end of 43 years.

Now here’s a ramped-up version of the above:

- 22 years old
- Earns starting salary of $35,000 a year
- Gets average annual pay increases of 4%
- Starts out saving 11% of income and adds 1% per year to this amount (12% in year 2, 13% in year 3, etc.) until it peaks out at 40%
- Savings earns 8% a year

Doing this she ends up with $4.9 million saved at the end of 43 years.

Kinda magical, huh? 😉

The key is that she’s not only making more but as she does, she’s saving an increasing percentage of the pie.

All this from a $35k starting salary, growing her income, increasing her savings rate annually, and time.

It’s the power of 1% in all areas of her financial life and it makes a HUGE difference in her net worth.

See? I told you small things can add up. 😉

**Doing Even More**

The amazing thing is that these results are just the tip of the financial iceberg.

With a bit more pushing, Sue could make the numbers really silly.

How could she improve upon these? A few thoughts:

**Start at a higher salary.**As I detailed in The Difference a High Starting Salary Can Make, negotiating the starting salary of your first job can make hundreds of thousands of dollars difference.**Get higher raises.**Some people may think that 5%+ average raises are things of the past, but I don’t. There will always be more than enough compensation growth for good employees. Sure, average employees may get 3%, but there are people — people TODAY — who are and have been averaging well over 3% for years now — and they will keep doing so for years to come. The difference? They manage their careers intentionally, delivering above average value. This value then gets rewarded in extra pay. This is exactly what millionaires do to grow their incomes at higher rates.**Create a side hustle.**A career isn’t the only way to add extra income — a side hustle is an awesome way to make more money. It’s so powerful that it can get you to financial independence within 10 years.**Start with a higher savings rate.**Nothing says that 11% is the peak starting point for savings. You can begin with a much higher rate from the get-go.**Get matches.**If Sue has a 401k company match, that would add to these numbers.**Keep saving past 40%.**Many early retirees save much more than 40% of their income. Sue could do the same.**Higher returns.**This is possible, so I’ll include it, but I’d say it’s not probable. Some would say the market has returned 10% over the long-term and Dave Ramsey would say 12%, but I feel comfortable with 8%. That said, if she did earn more than 8%, the results would be better.

For kicks, let’s run a scenario to show how crazy things can get. Let’s assume the following:

- Sue’s age — 22 years old
- Starts out earning $40,000 a year. She negotiates well from day 1 and begins higher than she would have without doing it.
- Gets average annual pay increases of 5%. She asks for raises, changes companies, gets promoted, and negotiates more along the way.
- Starts out saving 20% of income and adds 1% per year to this amount (21% in year 2, 22% in year 3, etc.) until it peaks out at 60%
- Gets a company match of 4.5% of her salary (a bit below the national average of 4.7%)
- Adds in a side hustle in year five that earns $10k per year (which she also invests)
- Savings earns 8% a year

Any guesses at how much she ends up with at 65?

Almost $13 million…

I know, it’s wild…and it doesn’t even represent the top of what can happen (there is still room for improvement). But the numbers are so over the top that pushing them more almost transports us to the Twilight Zone.

In the end, this is a powerful demonstration of what can be accomplished financially with simple but powerful moves over time.

By the way, she hits the following milestones:

- $1 million 19 years in
- $2 million 25 years in
- $3 million 29 years in
- $4 million 31 years in
- $5 million 34 years in (rounding carries this to three years instead of two)
- $6 million at 35 years

So she’s financially independent well before 65.

**How My Life Compares**

Now you might think that these results are unachievable. They aren’t. How do I know? Because they illustrate a lot of steps I’ve taken to grow my net worth over time. I certainly haven’t been perfect and as such have left a lot of money on the table. That said, here are some of the moves I made (and my results) compared to our assumptions above (listed in parentheses):

- Sue started earning/saving at 22. I didn’t get out of grad school until 24 and then took several years to begin saving and meaningful amount. This was a HUGE mistake. (my results were worse than above)
- I started with a higher out-of-college salary thanks to getting an MBA. In fact, my first salary was over twice what I would have earned with just my undergrad degree. (better than above)
- In addition to my income, my wife worked for several years during the first part of our marriage, adding even more income to the family. (better than above)
- My annual salary increases averaged 8.16% during my 28-year career (better than above)
- Sue started saving 20% at the get-go. Even once I started saving, I wasn’t near 20% for some time. Again, a HUGE mistake. (worse than above)
- Once I got the saving fever, I ramped up much faster than an additional 1% a year (better than above) but only averaged a 36% savings rate during my 28 years (worse than average).
- I did have 401k matching funds, but they were not as lucrative as Sue’s. (worse than above)
- In addition to my career earnings, I had substantial side income for several years with both side hustles and real estate. (better than above)
- My investment returns have been near 8% over the long term. (even)

In the end, my analysis is that I did better than Sue on earning, worse on saving, and we were about even on investing.

31 years after I started working my net worth is just above $4 million, so we took different paths but ended up in the same place.

This simply shows that there are different ways to skin the cat. If you’re better at one thing it can make up for a lack in another and still help you get to where you want to be.

**Well Good for You, Mr. Smarty Pants**

As I re-read the points above, they feel a bit too much “here’s how great I am” in tone. It’s a bit (or maybe more than a bit) braggadocios. That’s unfortunate, because I don’t mean them that way. I simply want to honestly share the facts because I want to show you:

- There’s real power in these numbers. Just a bit extra can have real, meaningful benefits for your finances.
- This is not theory. It’s not some mathematical formula that’s good on paper but impractical in real life. I’ve lived it, so I know it can work.
- There’s room for upside. I didn’t do it all right by a long ways. I made mistakes, mistakes, mistakes. This is good news in two ways. First, you don’t have to be perfect to end up wealthy. Second, if you can avoid the bad mistakes I made, you can become very wealthy over time even if your other gains aren’t as high as mine.

So please forgive me if my personal story gets in the way of the numbers. Hopefully it doesn’t. Hopefully my story illustrates that the principles above work.

Let’s also not forget that I lacked one of the biggest advantages of all: time. I lost a lot of time trying to figure all this stuff out. If you’re a younger person today and reading this, you have a HUGE advantage over me in that you have more time.

Which leads me to note…

**Don’t Fret if You’re Older**

I want to address the people who think it’s too late for them. You may be 20 years into a career and think this post is not for you — that it only holds true for those at the beginning of their careers/lives. I have a couple thoughts for you:

- If you start taking the steps above now, no matter where you are in your finances, you will ultimately be better off than you would be without doing anything.
- Sure, an extra 1% over 40 years is better than an extra 1% over 20 years. But an extra 1% over 20 years is better than nothing extra over 20 years. 🙂

Even if you’re older and have messed up your finances so far, there’s still hope for you. You don’t need 40+ years to become wealthy. If you really set your mind to it and apply the principles above, you can have substantial wealth in 20 years — or even 15. So don’t say “it’s too late for me” if you’re 40 or 45 or even 50.

And for those of you older than 50 and in financial trouble, if you put the above principles into action now, you’ll be much better off at retirement than you would be if you keep on doing what you’ve been doing up to this point.

The moral of this story: **these principles will make your finances better at retirement whether you are 25 or 55.**

That said, if you know a young person who’s open to learning, you may want to send them the link to this post. It could change their lives in an amazing way.

Now I’d like to hear from others who have done something similar (or better) than what I’ve detailed above.

What’s worked for you? What would you have done differently?

And for those of you working your way to wealth, what’s working for you these days?

The post The Difference 1% Makes appeared first on ESI Money.