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One Percent for the One Percent? Think About Your Future Self Instead
Last November I wrote a post that challenged readers to save an additional one percent of their income for 2013. If you read that post, did you accept the challenge?
I was thinking about the concept of increasing one's saving rate by 1% each year as a way to encourage readers to save more. I wondered whether or not consistently doing this would potentially help one gain entry into the so-called 'top one percent' that we have heard so much about over the past few years. According to some data in the NY Times, the threshold to join the wealthiest one percent of Americans is nearly $8.4M. I suspect that for most readers, no matter how much they save, that level may be a bit of a stretch!
I then thought about the concept of increasing one's saving rate steadily over time like a snowball rolling down a mountain- gaining size and strength. Let's take 40-year old Jane who is currently earning $100,000 and saving 10% of her income. That is $10,000 per year. Now let's assume Jane's income grows by approximately 4% per year (the average wage inflation over the past century) to about $150,000 per year by the time she reaches age 50. Except she decided to increase her savings rate by one percent each year so now Jane is saving 20%. Instead of saving $10,000/year she is now saving $30,000 per year- a 300% increase in her annual savings! Remember, Jane's income only went up by 4%/year or 50% cumulatively over the ten years. And here is the good news: Jane only took one percent each year from her four percent increase- she was still able to consume more and hopefully be in a position to enjoy life while also looking out for the future version of herself.
The concept of devoting a portion of your annual increase towards saving is a very simple yet elegant solution to the issue of saving enough for one's later years. Yet, it is quite hard to do. One of the problems is that we live in the here and now. We treat the future version of ourselves like a stranger. For someone in their 30's or 40's, it is difficult to imagine what we will look like in 30-40 years. Hal E. Hershfield, a professor at NYU, has done ground-breaking research into this issue. He found that participants in his study who were able to interact with a future version of themselves (using immersive virtual reality hardware) were more likely to save for their own future and were more willing to defer current consumption.
So, while it is easy for me to recommend/ask that you commit yourself to saving an additional one percent of your income in 2014, I would encourage you to sit back for just a moment and try to imagine what you will look like 20, 30, or even 40 years from now. Think about what that person will need/want at that time. That person (you!) would appreciate if you thought about them when you are deciding how much you will save in 2014. They will thank you!