Paycheck Chronicles

Use 1% To Turn The Tide

A sale can make even the most financially disciplined go weak in the knees. I’ve been there, seen it and lived it. Usually, it’s got be a pretty significant sale to tempt the most cautious. Something like half off or, depending how disciplined you are, perhaps even more. Certainly, a 1% discount is not going to be very enticing? However, 1% can be a pretty big deal.

How big? I decided to dig in and explore that question. Surprisingly, that miniscule 1% can have a huge impact over time. A lot more robust benefit than would come as the result of a more eye-catching retail sale. Consider how these seemingly small changes could make a big difference in your financial life.

Increase Your Thrift Savings Plan Contribution by 1% Per Year

If you’re already enrolled, bump up what you’re putting in. If you’re not, sign up now. A simple commitment to increase your contribution each year could result in hundreds of thousands of dollars when you retire. For example, let’s say that Jane, an E-6, has a $15,000 TSP balance and contributes 3% per paycheck. If she committed to raising her contribution 1% per year for her remaining 14 years in the military, the results would be dramatic. With a hypothetical return of 7%, she’d have an extra $300,000 in retirement savings at age 60. Now I’ve got your attention! If you’re really looking to make a difference, don’t stop at a 1%. Use every promotion or pay increase to save and invest more.

Cut Your Expenses At 1%

To save more, you’ll have to earn more or spend less. With a $50,000 income, a 1% cut is a mere $500 a year. That’s about $40 per month of belt-tightening. That’s manageable, right? Figure out things you can cut out or cut back on and start using that money to pay off debt, build savings or pad your TSP or other long-term investments.

Watch Your Investment Fees and Expenses

Expenses definitely matter — especially if you’re paying more than you should. One reason I’m a fan of the TSP: It has dirt-cheap expenses that are hard to match. Lower fees and expenses mean more money in your pocket compared to saving through other programs. Let’s say you set up an IRA and have $250 a month to invest for 30 years. You’re looking at two investments, each expected to earn a gross return of 8%. One investment has a 1.5% expense ratio and the other 0.5%. That 1% difference would take more than $50,000 out of your pocket. That’s a big deal!

Say No to $30,000

Signing up for the Career Status Bonus and the accompanying REDUX retirement plan is a great example of how 1% packs a powerful punch. Among other differences, CSB/REDUX locks you in to a 1% lower inflation adjustment to your military retirement over your lifetime. That’s like a $30,000 loan that ends up costing you a solid six figures—and you pay it back over your entire lifetime. Not good. Thankfully, this option goes away with the arrival of BRS next year.

No, I’m not saying you can’t ever jump at a big price cut, but you should turn the power of 1% to your advantage.

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