Alison's Money Rule

Superhero 1%

Posted April 3, 2012
Originally Published March 20, 2012

Wealth will be in your future just by increasing savings by a small percentage annually.

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 Superheroine 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 Superheroine 1% to work for you. 

Say you earn $50,000 and are saving three percent of your income ($1500) annually by contributing to an RRSP, TFSA or a savings account.  Ten percent is usually the gold standard for savings.  But getting to 10 percent 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 4 percent return over the next 10 years you’ll have just over $18,500 tucked away.  I’m also adding in a salary boost of 2 percent annually and assuming inflation is 3 per cent.

Now, take the hand of Superheroine 1% and increase your savings rate from three to four percent annually ($2,000).   After ten 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 Superheroine 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 percent 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 2 percent 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 Superheroine 1%.   You can play with your own figures with The New York Times’ The 1% more calculator.  (You can play with your own figures at www.nytimes.com and search for “The 1% more calculator.”)

Sidebar:  2.3% of gross income (or 4.9% of after-tax income) is the average Canadian savings rate.

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