Take a look at this really great new tool from the New York Times (click to enlarge):
Like most financial calculators, you enter in your basic information (salary, % saved, salary increase, expected returns and time horizon).
But, this one has the added benefit of showing you how your results would be different if you were to save just 1% more of your salary. It also shows what would happen if you simply increase the percentage of your salary that you save by 1% each year.
This shows not only the power of compound interest but also the benefits of making incremental moves with your finances.
Taking an incremental approach will help by slowly easing you into the saving and investing process. Set a reasonable savings goal at the outset and increase that amount on a periodic basis.
I like to increase how much I save every time I get a raise so I don’t even notice that the money is gone in the first place. This is actually a huge psychological advantage because loss aversion is a big behavioral bias for people to overcome.
Daniel Kahneman showed us in his book, Thinking Fast and Slow, that we get twice as much pain from the feeling of losing money as we do from the enjoyment of winning money. This is one of the biggest reasons people can’t make themselves save enough to achieve their goals. We don’t like to lose out on spending money to our savings and investment accounts.
Financial calculators don’t hold all of the answers because circumstances change and we have to constantly adjust our goals and assumptions base on real world savings rates, salaries, and investment performance.
That doesn’t mean you shouldn’t run the numbers to see how much just 1% more can do for you in the long run. If you plan for the future, make course corrections as you go and save just a little more each and every year you should have a much better chance of seeing actual results.
Here’s the NY Times calculator: The 1% More Savings Calculator
Source:
NY Times
Further Reading:
Trick Yourself Into Saving More
Saving and Investing With Smaller Amounts of Money
Currently reading Thinking Fast, and Slow. Great read so far.
Mark
Good call. Great book filled with tons of useful studies on our cognitive biases. Kahneman is a genius.
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