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:
| 0.10% | 1.10% | |
| 1 | $10,100 | $10,111 |
| 5 | $10,050 | $10,565 |
| 10 | $10,101 | $11,163 |
| 20 | $10,202 | $12,461 |
| 30 | $10,305 | $13,910 |
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.
Bottom Line
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.
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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®.
Indeed. This is what John Bogle refers to as the wonderful magic of compound returns and the powerful tyranny of compound costs.
I’m nothing short of miserly when it comes to my investment costs. 🙂
Pinyo,
Regarding the rate chasing for saving accounts – I couldn’t disagree more. You think the headache of rate chasing, having how many bank accounts open, the tax documents, etc. is worth an extra $166 a year (or $13 bucks a month)?! Not to mention the bank can change their terms at any time.
As far the investment fees, I agree. It may sound counterintuitive but I view them differently
I love compound interest, but my main concern is that rate chasing hasn’t paid off for me in the past. I started an HSBC account. They dropped their rate, so I switched to ING. They dropped their rate, so I switched to Etrade. Now I’m looking at Ally and wondering if after I go through the hassle of changing they’ll drop their rate after a month and I’ll be right back where I was, but with one more account to keep up with. I think I’ll wait for things to stabilize before I go back to my rate chasing ways.
You are very right about improving you credit score to get better rates. A half percent rate difference adds up on a 15 or 30 year mortgage.
When I hear “rate chasing” generally it seems to be applied to frequently moving your savings around to keep it in the online account that has the highest interest rate at any given time. And generally I don’t think its applied to moving from 1% to 2% but more like moving from that Ally account at 2.0% to a Bank of Internet account at 2.06%. I certainly think getting 1% more interest over the long term is worth it. But constantly moving your money around high yield savings accounts to chase a 0.0x% difference every month or week is really… Read more »
Ah! The magic of compound interest! Great post!
1% is awesome, especially when you control your own investments and are able to get it once a week. I dumped my broker long ago and haven’t looked back since. Compound Interest is even sweeter when I am not wasting money paying someone to handle my cash.
yes, sometimes 1% represents a lot! funny we don’t realize that!
Where do you see Ally paying 2%. I’ve been looking but all I see .95% Thank you! Aloha.