This Simple Money Move Takes 5 Minutes and Could Make You Hundreds of Thousands

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  • A small annual increase to your investment rate, such as 1% of your income per year, pays off over time.
  • Depending on how much you invest and for how long, you could make hundreds of thousands more this way.
  • To be able to invest more, look for ways to increase your income and be careful how much you spend on your home and car payments.

There are all kinds of ways to save more money, but to be completely honest, a lot of them aren't worth it. Advice about cutting back on small luxuries, like buying coffee at a cafe, is a perfect example. You can only save so much this way, and it will probably make you miserable in the process.

You're much better off focusing on financial decisions that can make a big impact and won't ruin your quality of life. Finance guru Ramit Sethi often recommends one simple money move that can do just that. It isn't difficult, and it could help you accumulate hundreds of thousands more by the time you retire.

Make a small annual increase in how much you invest

Sethi frequently recommends that you "create a rule to increase your investment rate by 1% every year." Your investment rate refers to the percentage of your income that you invest. What Sethi is suggesting is that you bump it up by 1% of your income per year, and he says this could make you hundreds of thousands of dollars.

It may sound like an exaggeration, but the math checks out. When you're investing for decades, these seemingly small changes make a massive impact.

To show just how powerful a 1% annual increase can be, let's look at an example. Let's say you earn $75,000 per year. You invest 5% of that ($3,750 per year). And your portfolio gets an 8% annual return, which is reasonable based on the stock market's average return.

We'll compare two scenarios. In the first, you invest the same amount of money for 35 years. In the second, you increase your contribution by 1% per year for the first six years, until you're contributing 10% of your income. You then maintain that for 29 years. Here's how your results would differ:

Method Contributions Total value
Invest the same amount of money $131,250 $697,883
Increase investment rate from 5% to 10% $251,250 $1,244,975
Data source: Author's calculations.

You're investing over the same amount of time, 35 years, either way. With the second method, you invest $120,000 more. In return, you end up with $547,092 more. Even after subtracting the additional $120,000 you put in, you make $427,092 more.

This only considers how much you'd have if you increased your investment rate from 5% to 10%. If you invested larger amounts, such as starting at 10% and going up to 20% of your income, you'd accumulate even more.

How to increase your investment rate

The main takeaway here is that the more you can increase your investment rate, the more wealth you'll build. That's especially true over long time periods. But even if you're in your 40s or 50s, you can still do well if you invest diligently.

Sethi's advice works because it's not too difficult of an adjustment to make. Increasing your investment rate by 1% per year probably won't affect you much financially. But what if you can't manage it? Or if you want to make an even bigger change? Here are the best ways to be able to invest more.

  • Work hard to increase your income. Look for ways to get a raise at your current job and go job hunting to see if you can get a better salary elsewhere. The most effective way to invest more is to earn more.
  • Take advantage of your company's 401(k) match. If your employer matches your 401(k) contributions up to a certain amount, ask HR how much you need to contribute to max this out.
  • Be careful how much you spend on home and car payments. These are two of the biggest monthly expenses for the average person. Keep them under control, and you'll likely be in good shape financially.
  • Make investing automatic. Many of the best stock brokers let you set up automatic investments. This saves you time and ensures you invest the amount you planned on.

Increasing the amount you invest every year is a smart habit to help you save more toward retirement. How much you choose is up to you, but 1% is a good starting point that will pay off in a big way.

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