The Power of 1%

In James Clear’s book, Atomic Habits, he writes about the importance of 1%. If you make an active effort to get 1% better at something each day, you’ll end up 37x better by the end of the year. Below is a visual of what this looks like in practice. 

What a 1% Improvement Means for Your Investments

Now let’s put an investment spin onto it. 

If you were to invest $100,000 over the course of 1 year making an additional investment contribution of $1,000/month and earning an average rate of return on your investments of 8%, at the end of the first year, you would have a portfolio value of $120,833.

Now let’s assume the same criteria but with a 9% return instead.

With a 9% return, you would have an ending portfolio value after one year of $121,982.08.

A difference of $1,149. 

Not that significant.

Let’s look at another scenario:

In this scenario, let’s again assume an initial investment of $100,000 with $1,000/month of additional contributions being made with a rate of return of 8%, but with an extended period of 30 years instead. 

At the end of 30-years, you would have a portfolio value of $2,593,868, assuming an 8% return.

Pretty awesome, right?

Assuming all the same criteria, let’s say your annual investment return was 1% higher.

Assuming an annual return of 9%, your portfolio value would be $3,317,531.

A difference of more than $700,000!

So, what’s the point?

Well, there’s 2.

1. Making a 1% improvement just once, it’s going to make an impact. Doing it consistently over time will.

2. 
   

3. Compound interest can have a massive impact on the trajectory of your life and your finances.

Making a Change

Once you decide to make a change, it’s often best to work on making incremental changes over time. 

Let’s say you never worked out before and the first day you go to the gym, you try doing a full body workout, squats, deadlifts, bench, the works. The next day you’re going to wake up so sore you’re probably not going back to the gym for a long time (maybe never again).

Let’s instead say you’re a first-time gym goer, but instead take the approach of walking on the treadmill for 10 minutes initially. Then, the next day you go and walk for 11 minutes. The next day you walk for 11 minutes and add one small strength exercise. And so on and so on.

Gradual changes over time:

1. Help you condition yourself to the new normal 

2. Help ensure you’re going to stick with your goals.

How to get 1% better with your finances

Often, I hear some version of this from clients,

This is one of the biggest misconceptions when it comes to financial planning. Not everything needs to be solved at once. Yes, there are things like making sure that you have the right tax withholdings set-up on your paycheck or paying off high-interest credit card debt that may take precedence but no everything needs to be done at once.

Let’s say you commit to making one financial improvement every quarter. Over the course of a year, you’ve taken 4 steps forward towards your financial goals. Maybe it’s increasing your 401(k) contributions, getting a will in place, downloading a budgeting app, or saving an additional $1,000/month to build up your emergency account.

The point is it doesn’t take long for those changes to have a significant impact on your plan. 

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About The Author

Caleb Pepperday, CFP®, ChFC® provides Fee-Only Financial Planning and Investment Management Services for medical professionals. Advanced Practice Planning, LLC is based in Missoula, MT, but works with clients in a virtual capacity nationwide.

As a CERTIFIED FINANCIAL PLANNER™ and fiduciary, Caleb Pepperday works to create financial plans for medical professionals with their best interest in mind. As a Fee-Only financial planner, Caleb Pepperday is only compensated through the investment management or financial planning fees that you pay him directly and never earns a commission.

Caleb Pepperday primarily focuses on helping mid-career and pre-retiree Physician Assistants/Physician Associates retire with confidence.

Disclosures:

The information provided in this article is for educational purposes only and is not intended as financial, legal, or tax advice. No content within should be construed as such. The material presented is based on general financial principles and concepts, and individual financial and tax situations may vary. Readers are strongly encouraged to consult with a qualified financial advisor, tax professional, or legal expert for personalized advice regarding their specific financial, tax, or legal circumstances. Any actions taken based on the information in this article are at the reader’s own discretion and risk. The author and publisher make no representations or warranties regarding the accuracy, applicability, or completeness of the information provided. This article does not endorse or promote any specific financial products, services, or companies. Readers are responsible for conducting their own research and due diligence before making any financial, legal, or tax-related decisions.