What Does 1% Look Like for Investing? Inflation? Debt?

People often think that 1% is not a lot when it comes to spending, investing, inflation, debt, income and home purchases, but it is through the wonder of compounding interest that 1% becomes a lot comparatively.

What Does a 1% Increase in your Investment Return Look Like Each Year?

One Percent may not seem like a lot, but look at the differences:

YEAR BOY BALANCE GROWTH (4%) EOY BALANCE   YEAR BOY BALANCE GROWTH (5%) EOY BALANCE   YEAR BOY BALANCE GROWTH (6%) EOY BALANCE
1 $50,000 $2,000 $52,000   1 $50,000 $2,500 $52,500   1 $50,000 $3,000 $53,000
2 $52,000 $2,080 $54,080   2 $52,500 $2,625 $55,125   2 $53,000 $3,180 $56,180
3 $54,080 $2,163 $56,243   3 $55,125 $2,756 $57,881   3 $56,180 $3,371 $59,551
4 $56,243 $2,250 $58,493   4 $57,881 $2,894 $60,775   4 $59,551 $3,573 $63,124
5 $58,493 $2,340 $60,833   5 $60,775 $3,039 $63,814   5 $63,124 $3,787 $66,911
6 $60,833 $2,433 $63,266   6 $63,814 $3,191 $67,005   6 $66,911 $4,015 $70,926
7 $63,266 $2,531 $65,797   7 $67,005 $3,350 $70,355   7 $70,926 $4,256 $75,182
8 $65,797 $2,632 $68,428   8 $70,355 $3,518 $73,873   8 $75,182 $4,511 $79,692
9 $68,428 $2,737 $71,166   9 $73,873 $3,694 $77,566   9 $79,692 $4,782 $84,474
10 $71,166 $2,847 $74,012   10 $77,566 $3,878 $81,445   10 $84,474 $5,068 $89,542
11 $74,012 $2,960 $76,973   11 $81,445 $4,072 $85,517   11 $89,542 $5,373 $94,915
12 $76,973 $3,079 $80,052   12 $85,517 $4,276 $89,793   12 $94,915 $5,695 $100,610
13 $80,052 $3,202 $83,254   13 $89,793 $4,490 $94,282   13 $100,610 $6,037 $106,646
14 $83,254 $3,330 $86,584   14 $94,282 $4,714 $98,997   14 $106,646 $6,399 $113,045
15 $86,584 $3,463 $90,047   15 $98,997 $4,950 $103,946   15 $113,045 $6,783 $119,828
16 $90,047 $3,602 $93,649   16 $103,946 $5,197 $109,144   16 $119,828 $7,190 $127,018
17 $93,649 $3,746 $97,395   17 $109,144 $5,457 $114,601   17 $127,018 $7,621 $134,639
18 $97,395 $3,896 $101,291   18 $114,601 $5,730 $120,331   18 $134,639 $8,078 $142,717
19 $101,291 $4,052 $105,342   19 $120,331 $6,017 $126,348   19 $142,717 $8,563 $151,280
20 $105,342 $4,214 $109,556   20 $126,348 $6,317 $132,665   20 $151,280 $9,077 $160,357

Go ahead and ask yourself what kind of fees are you paying?

What does a 1% Increase in Lifestyle Inflation Look Like Each Year Over Historical Inflation?

Lets say your monthly nut has you spending $50,000 a year and historical inflation is 3% (we can argue what that 3% even means but we are going to ignore that argument for now) what if your spending increased by 4% instead of 3%? for the next 20 years.

YEAR SPENDING (3%) YEAR SPENDING (4%)
1 $50,000 1 $50,000
2 $51,500 2 $52,000
3 $53,045 3 $54,080
4 $54,636 4 $56,243
5 $56,275 5 $58,493
6 $57,964 6 $60,833
7 $59,703 7 $63,266
8 $61,494 8 $65,797
9 $63,339 9 $68,428
10 $65,239 10 $71,166
11 $67,196 11 $74,012
12 $69,212 12 $76,973
13 $71,288 13 $80,052
14 $73,427 14 $83,254
15 $75,629 15 $86,584
16 $77,898 16 $90,047
17 $80,235 17 $93,649
18 $82,642 18 $97,395
19 $85,122 19 $101,291
20 $87,675 20 $105,342

 

What Does a 1% Increase in your Credit Card Interest or Home Mortgage Look like?

Credit Card Interest 15% vs 16%

For example, lets say you have 2 Credit Cards each with a $5K balance and Each you have to pay a minimum of 4% on:

Debt Summary
Balance Interest Rate Monthly Payment Interest Paid Total Payments Time to Payoff
Credit card #1 $5,000.00 15% $200.00 $2,179.62 $7,179.62 123 months
Credit card #2 $5,000.00 16% $200.00 $2,396.65 $7,396.65 126 months
Totals $10,000.00 15.5% $400.00 $4,576.27 $14,576.27 10 years and 6 months

 

That 1% equals an extra 3 months of debt pay off at the minimum payments and a few hundred dollars in interest payments!

What if your Home Mortgage was Higher by 1%

Yes, we are at historic lows but even a 1% Change will hurt

4% 30 Year Mortgage $400,000

Mortgage Summary
Loan amount $400,000.00
Term 30 years
Interest rate 4%
Monthly payment (PI) $1,909.66
Total principal and interest payments $687,478.42
Total interest $287,478.42

Versus 5% 30 Year Mortgage $400,000

Mortgage Summary
Loan amount $400,000.00
Term 30 years
Interest rate 5%
Monthly payment (PI) $2,147.29
Total principal and interest payments $773,021.33
Total interest $373,021.33

 

Next time someone says 1% isn’t a lot ask them for a check for $90,000!

3 Responses to What Does 1% Look Like for Investing? Inflation? Debt?

  1. One percent definitely adds up over time as it compounds. That is why I invest in LOW COST mutual funds. I’d rather keep the fee money in my balance and let it grow!

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