Alison on Money
Conquer savings paralysis by being a 1% superhero
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Is your savings plan a one step forward, two steps back exercise? Do you make tons of excellent resolutions, only to do a financial face-plant when temptation beckons? Or perhaps you get distracted by job, family, life and never manage to keep track so you really don't know where you are.
If you fit into one or more of these scenarios, a rescue by Superhero/ine 1% is in order. Yes, such a character exists - in fact, Marvel Comics has been beating down my door for the rights.
But while I'm waiting on millions in royalties, let's put Superhero/ine 1% to work for you.
Say you earn $50,000 and are saving three per cent of your income ($1,500) annually by contributing to an RRSP, TFSA or a savings account.
Ten per cent is usually the gold standard for savings. But getting to 10 per cent from three is like trying to lose 25 pounds in a couple of weeks. Maybe you can do it, but maintain it? Tougher.
If you stick with the current savings rate and manage a four per cent return over the next 10 years, you'll have just over $18,500 tucked away. I'm also adding in a salary boost of two per cent annually and assuming inflation is three per cent.
Now, take the hand of Superhero/ine 1% and increase your savings rate from three to four per cent annually ($2,000). After 10 years you'd have more than $24,600 squirrelled away. If this money is contributed to an RRSP, the net gain will actually be higher as your taxable income will be reduced.
Here's where Superhero/ine 1% really produces magic. If you can increase your savings by a single percentage point every year you'd have $52,300 in hand.
Granted, at the end of 10 years your savings rate would be 13 per cent of income. To many that's too big a leap. Not only that, you might be saying, "In your dreams!" when looking at my salary increase projection of two per cent annually.
My point is that by increasing your savings a small amount annually or until you reach a specific goal - say 10 per cent of income - you can conquer savings paralysis.
And it's all thanks to Superhero/ine 1%. You can play with your own figures with The New York Times' The 1% more saving calculator. (Visit New York Times website "The 1% more calculator.")