The ONE Best Move Financial Move

Carla Fried

It’s not every day in personal-finance-land that you come across a small adjustment to your investing strategy that can pay off big-time. That’s why I am such a fan of a ridiculously simple strategy I am going to call One Percentage Point More.

Okay, not exactly a barnburner of a name, but stick with me here for sec. What I am referring to is pushing yourself to increase your savings this year by one percentage point. So if you are socking away 10 percent in your company 401(k) plan, bump it up to 11 percent.

We both know that the difference in your take-home pay is going to border on the imperceptible; it won’t necessitate a huge life-style change. Yet the payoff is in fact huge.

Here’s an example I ginned up: You make $75,000 a year, you already have $100,000 saved up and you save 10 percent of your gross salary each year.

I’m going with a conservative assumption that your salary will increase at an average 3 percent rate each year. (Conservative, because, well, you rock and so too will your career.) One more assumption: You’ve got your money invested in a well-diversified portfolio of stocks and bonds that will deliver a 6 percent annualized return.

Drum roll time. If you keep socking away 10 percent of your salary each and every year, you will have more than $550,000 in 20 years. Not bad, eh?

But if right now you commit to a one-time, one-percentage point boost in your savings rate - that will give you nearly $600,000 in 20 years.

Now the grand finale. If you commit to increasing your savings rate by one percentage point each and every year you will have close to $750,000 in 20 years. That’s 36 percent more than what you would have if you just keep saving at your current rate. There’s a great calculator at the New York Times website that will show you the payoff from saving one percentage point more.

As I mentioned, siphoning off one percentage point more of your salary for long-term savings isn’t likely to send your monthly budget into disarray. It’s a really small tweak that has a huge payoff.

And in 2011 Uncle Sam is giving you a great assist. As you may have already noticed, if you typically pay into the Social Security program—it’s the FICA deduction on your pay stub-the amount you owe this year is lower. For 2011, the employee contribution rate has been reduced by 2 percentage points. A-ha. That’s two times as much as you need to set your One Percentage Point More strategy in motion. You can boost your savings this year and thanks to the Social Security payroll tax break, you still won’t see a dip in your take-home pay relative to 2010. For future years, how about making the commitment that at least one percentage point of every raise gets earmarked for your long-term savings? So if you get the 3 percent raise, vow to use 1 percentage point of it for savings. The other 2 percent is yours to spend (or save) as you desire.