On occasions when I discuss interest rates or investment expenses, I get comments saying the effort you put in to raise or lower your interest rate is not worth it. I will prove that this minor tweak is worth the effort by showing you how much 1% can help or hurt you in the long run. One percent may not seems like much, but given enough time, 1% is much bigger than you imagine.
Earning 1% More For Your Savings
Many of us are saving money in a traditional savings account that pays about 0.1% in 2019, according to the FDIC. Let’s assume you have $10,000 in savings, and your bank pays a generous 1.10% APY. Here is the difference in how your money will grow:
The calculation made using Compound Interest Calculator at Investor.gov
On the other hand, if you put $10,000 in CIT Bank, which currently pays 2.30%, you would have $10,233 after the 1st year and $19,937 after 30 years!
Now, let’s assume you add $500 a month, you will have $193,031.49 at the end of 30 years at 0.1% interest vs. $227,161.18 at 1.1% Personally, I think the extra $34,000 is not a bad price to pay for being a rate chaser.
Reducing Your Investment Expenses By 1%
One of the most important factors I consider when investing in the stock market are the expenses I incur. Why? The expenses as a percentage of overall portfolio value, or expense ratio, is the only guarantee performance you will get in the stock market.
What does that mean? Consider two mutual funds, one with an expense ratio of 1.20% and another with 0.20%. There is no guarantee that the more expensive fund will outperform the cheaper fund; however, you are guaranteed to do 1% better with the lower-cost fund.
Assuming both funds have an average return of 9% per year before expenses:
- Fund A with 1.20% expense ratio will have an approximate return of 7.80% and
- Fund B, with a 0.20% expense ratio, will have 8.80%.
After 30 years at 9% average annual return, a $500 a month investment in Fund A would grow to approximately $825,000, and money in Fund B would grow to approximately $1 million!
The Extra One Percent Challenge
The idea is not limited to just your investment expenses and savings interest rate. You can apply this to anything in your life. Is there anything you can make just One Extra Percent better?
Here are a few things you can do:
- Contribute 1% more to your 401(k) and other investments.
- Switch to an investment broker that charges lower trading fees.
- Transfer your credit card balance to a lower interest rate credit cards.
- Refinance your home mortgage.
- Lower your expenses by 1% from each category.
- Improve your credit score.
- Ask for a pay raise, or ask for overtime.
- Increase your income by doing a side hustle.
Don’t ignore little things because they do add up over time. Apply the Extra One Percent principle to all aspects of your life to improve your finances today.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.