There is a secret sauce to building wealth effectively over time: There is magic in frequent small increments.
OK, that’s not very helpful – what do I mean by that? Well, I’m going back to being intentional. Let’s say you set up a pension payment of £100 per month and you feel great about yourself. It’s slightly painful each month to make the payment, but it goes out as soon as you get paid, so you don’t think about it. After a month or two, you don’t even notice.
Fast-forward ten years and you’re still paying £100pm into your pension, despite earning 3x what you did back then – that’s no good! What you should do instead is set a date in your calendar three months after setting up the pension and increase the payment to £110 per month, just £10 more. I guarantee you won’t feel it, and yet there’s now an extra £120 a year going in.
Three months later, increase the payment to £125pm. Rinse and repeat. Keep doing this until your eyes start watering. At the point it remains painful, that’s about the right level you need to be saving at. As soon as it gets comfortable and you stop thinking about it, that’s when you need to step it up. If you get a pay rise, or a bonus, or you change jobs for more money, take stock and reset the level of your savings.
This is compounding in action. You’re pushing the snowball a little bit harder and further whenever you increment your payments, and that will literally pay dividends in the future. You will increase the level of your wealth multiples of times compared with setting and forgetting.
To be clear:
You SHOULD set and forget your investment choices, perhaps just rebalancing once a year I you hold multiple funds.
You SHOULD NOT set and forget the level of your savings payments – those should be reviewed regularly.
Remember, you can always dial things back if things are tight for a period – pension and ISA providers are very flexible like that, and most of the management is done online anyway; you just log in and dial things up or down. Frequent small increments are POWERFUL. Here’s a 30-year example:
You put £100 per month into an investment for 30 years and it grows by 6% per year. At the end of the term you’ll have £100,562. If you increase your payment by £10 per month once per year, so there’s an extra £120 going in each year, you’ll double your eventual pot to £204,565.
Increase by £10pm every three months, and you’ll end up with £375,654. Increase by 10% each year rather than by £10pm, and you’ll end up with £372,247. Obviously, you’ll have put more money away, but that means there is more in the pot to compound. Regular increments for the win. Set a date in your diary now and make the increase.
Stay Focused
Finally, as we come to the end of this blog series, I want to add that staying the course takes effort. It’s easy to take your foot off the gas and coast along, never incrementing your savings rate, never checking your funds are still in the right place. You’re looking for the perfect balance between not obsessing about your money which often leads to inertia and decision fatigue, and staying just interested enough to keep on top of things.
It’s easy to be distracted, too. Our Facebook feeds are filled with shiny new things to buy. Our Instagram feeds are full of enticing holiday destinations. And Alan down the pub is crowing about how he made 20% in a weekend using some trading site he found online.
Building wealth is both boring and exhilarating. The process of investing should be boring. The results, and what it makes possible, is the exciting part.
Don’t let your head get turned by fad investments. Stick to mainstream, passive multi-asset funs in a pension and an ISA. If you really do want to try other stuff, stick to a tiny proportion of your total wealth, so that if it goes south, you’re not shipwrecked.
Find like-minded people and share stories. It’s never been easier to do that thanks to the internet. Start to dream about what money might make possible for you. Remember, it’s never an ending itself, it’s there to serve your life goals.
Whether that’s early retirement, working part-time and travelling half the year, or spending more time with your kids. Whatever a successful life means to you, money can help make it possible, so be excited about that, rather than the money itself.
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