Saving Money Incrementally: It Isn't A Sexy Strategy - But It Works

Written by Ben Carlson

...Incrementalism is no fun because you don’t get to see immediate results but, in many domains, it’s the best way to see lasting results. Saving money is a perfect example of this. [Words: 437] 

Increasing the amount you save each year by a small sum will seem pointless in the short-run because it’s difficult to see the results over shorter time frames but over longer time frames, incremental steps can have a much larger impact.

Take a look at the following example which shows the difference in ending balances from various savings rates on a $100,000 household income (assuming a 6% annual return):

(Click on image to enlarge)

Simply saving 1% more of your income per year can lead to a much larger balance down the line. Each minor step up leads to an even larger increase in the ending balance after a decade of saving.

Another incremental step that can add even more value to a savings plan is to increase your savings rate each year as opposed to keeping it static.

The following chart shows the same beginning savings rates (along with the same assumptions for returns and salary) but this time the savings amount is increased each year by just 2% (so if you start out saving 10% or $10,000 the next year you would save 10.2% or $10,200 and so on):

(Click on image to enlarge)

You can see an even bigger jump in the ending balances from these small increases over time. In the early years, you won’t see much progress from these small changes but over longer periods the results begin to accrue on top of one another until we’re talking about real money.

My colleague Josh Brown likes to talk about the virtues of cumulative advantages that can come from finding a number of slight edges to succeed with your investments. Things like:

• Rebalancing
• Keeping your portfolio turnover in check
• Using a consistent process
• Keeping costs low
• Efficient buying and selling
• Implementing an intelligent asset allocation
• Sticking with a patient approach
• Tax awareness in your behavior

Individually these ideas may not always add up to much, especially over the short-run. It’s when they’re all combined over longer time frames they can compound in your favor and really add to your bottom line.

People like to look for shortcuts or lottery-ticket strategies that could make their life easier. It’s much easier to focus on what’s right in front of us at this moment, but you can often see beneficial results over the long-term through incremental gains and slight edges. It’s not a sexy strategy but it can work for those who are patient enough to see it through.