I’ve recently become enamored with the concept of incremental change, and how it impacts our financial lives. The idea resonates with me because it’s so simple: small steps, day in and day out, lead to HUGE change. Huge change (good or bad) comes from the compounding effect of all these little actions.
James Clear talks a lot about this concept of marginal gains in everyday life: dieting, exercise and, really, any habit. So what’s the connection between incremental gains and your financial life? Oftentimes, money gets in the way of those big life goals. Reaching them can seem overwhelming, especially when we layer in the money component. It’s going to take how much to buy that home? I have to save what in order to change my lifestyle?
Incremental Change and Your Financial Life
What if you needed to save $500k for a big life goal. You’d probably feel instantly overwhelmed. The amount seems like so much needs to happen to get there. But what if I said saving $500k over 20 years meant saving $900 or $1,000 a month? Suddenly, $500,000 doesn’t seem so unrealistic, does it? When we’re left to think about how to get to $500k without all the little steps in between, we get overwhelmed, distracted, and, frankly, lost. Herein lies the power of incremental change.
Here’s the other secret: change doesn’t have to happen all at once!
Clear talks about getting to 1% improvement each day. Sticking with the previous example, let’s say that I think I can only save $700 a month, and not $1,000. Challenge yourself: how can we save that extra $300? Break it down even more: an extra $300 a month means saving $10 a day. Now an extra $300 a day seems a lot more doable. You probably spend $10 without thinking twice — think your morning coffee and a bagel with all the schmear, plus another coffee (and maybe another, depending on your day). Over time, that tiny step of saving $10 a day will turn into $500k thanks to incremental change!
How to Create Incremental Change in Your Financial Life?
This is just one example. But the power of incremental change can be implemented all throughout your money life. Take that 2% cost of living adjustment you get at work every year; it may seem small, but what if you dedicated yourself to saving half of that increase? If you make $200,000 and get an additional $4,000 a year, it’s an extra $200 a month in your paycheck. But if you automate ⅔ of that into an investment account, you’ll have $23k in 10 years without putting too much thought into it.
The concept of incremental change can shape even more of your life if you want it to. Are you saving 1% more each month or each year due to investments? It may seem like small potatoes, but the compounding impact will be huge. Earning 1% more by watching expenses or taking a different strategy can also have huge impacts. Applying the strategy of incremental change to things like health insurance, among others, can help build wealth over time.
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Finally, it’s important to remember, especially in your money life, that incremental change is not linear! What’s important is staying on the path, not executing a strategy in a perfectly incremental fashion.
I want you to think of all the little actions that may seem so insignificant in your financial life, and then remember: it’s the sum of all those little actions that add up to the big bucks in the long term. No plan to grow wealth is complete without them.
Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
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