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

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

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:

YEARBOY BALANCEGROWTH (4%)EOY BALANCE YEARBOY BALANCEGROWTH (5%)EOY BALANCE YEARBOY BALANCEGROWTH (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.

YEARSPENDING (3%)YEARSPENDING (4%)
1$50,0001$50,000
2$51,5002$52,000
3$53,0453$54,080
4$54,6364$56,243
5$56,2755$58,493
6$57,9646$60,833
7$59,7037$63,266
8$61,4948$65,797
9$63,3399$68,428
10$65,23910$71,166
11$67,19611$74,012
12$69,21212$76,973
13$71,28813$80,052
14$73,42714$83,254
15$75,62915$86,584
16$77,89816$90,047
17$80,23517$93,649
18$82,64218$97,395
19$85,12219$101,291
20$87,67520$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
BalanceInterest RateMonthly PaymentInterest PaidTotal PaymentsTime to Payoff
Credit card #1$5,000.0015%$200.00$2,179.62$7,179.62123 months
Credit card #2$5,000.0016%$200.00$2,396.65$7,396.65126 months
Totals$10,000.0015.5%$400.00$4,576.27$14,576.2710 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
Term30 years
Interest rate4%
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
Term30 years
Interest rate5%
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!

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By | 2013-09-26T14:54:25+00:00 October 19th, 2012|Personal Finance|3 Comments

About the Author:

Evan is the owner of My Journey to Millions which was started to track his journey from a broke debt ridden law school graduate to building a positive balance. Need more Evan? Follow him on Twitter, Contact him or get new posts directly to your email

3 Comments

  1. Lance October 19, 2012 at 7:20 pm - Reply

    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!

  2. W October 21, 2012 at 1:59 pm - Reply

    One percent can certainly make a big difference. That’s why for financial purposes rates (and the differences between rates) are usually discussed in “basis points” 100ths of a percent.

  3. Dylann Andre October 22, 2012 at 2:17 am - Reply

    Wow, haven’t thought about it that way. I was okay with a 5% increase, until I read this. Thanks for sharing.

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