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