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The 1% Challenge (Should you dare to accept)
Question: by saving $400 per month over the next 20 years, earning 7%, one can accumulate $208,370. How much would you have after 40 years?
Would it be double? More than double? How much more?
We have all seen illustrations like this in financial press articles and other blogs encouraging folks to save more. When we think about these numbers though we focus on how hard it may be to save the $400/month. (For those who are saving more than this, congratulations! But keep reading as this challenge is for you too!) But is it really that hard to save $400/month? Well, of course it depends on your income to a certain extent, but for most of us, it really depends on our spending, or ability to curtail our spending.
Is there an easy solution to begin to change the paradigm of ‘Oh, I have no idea how I’m ever going to save that much?’ Well, easy is the eye of the beholder, but there is a very simple solution to get started: accept the 1% challenge for 2013. Here is how it works: agree right now with yourself (and your spouse or partner if you have one of those) to save 1% more than you are currently saving. It does not matter your current spending level, just agree to save 1% more. Is that really going to put a crimp in your lifestyle? I’m hoping not.
If you are really feeling adventurous, evaluate after three or six months and decide if you can increase your savings rate by another 1%. Continue this process until you get to a point where you are maxing out your retirement contributions. It may take a few years, but that is okay- focus on the 1% for 2013 and then just before 2014, bump things up another 1%.
Answer to the above question: $1,049,925.