Your landlords send you a letter informing you that rent is going up $50 per month. Do you move? Probably not. Instead, you suck it up and curse them under your breath.
Over time, we adjust to gradual price increases but only because they come in baby steps. When I was a kid, I remember $2.50 Tuesdays at the movies. Today, you can pay almost $20 for a single adult admission. Had the jump been instantaneous from $2.50 to $20, I would have stopped going to the movies. But because it took place over time, I saw Skyfall multiple times.
Baby steps. They don’t sound like much but they can be key to your financial success .
When I was a financial adviser, I would ask clients if they wanted to increase their automatic monthly contributions by $10, or 10 per cent, or whatever, every New Year. After getting used to the initial drain on their cash flow when setting up the original contribution, a small subsequent increase was no big deal.
But consider this: Two investors contribute $1,200 per year to a portfolio that grows at 5 per cent per year for 20 years, except one increases his contributions by 5 per cent every January 1st. By doing so, he ends up with more than 50 per cent more money ($63,679.14 vs $41,663.10).
That first 5 per cent increase is only an extra $5 per month. The 5 per cent increase in year 20 is only an extra $12.03 per month.
Turns out, those baby steps really add up.
This doesn’t apply exclusively to investing. Many people are too frustrated with the markets to invest, but they could apply the same principle to paying off their mortgage. Or saving up for a vacation. And with just over 360 days until Christmas 2013, inflation alone would dictate an increase in the cost of presents next year versus this year.
As the New Year begins, think of the various ways you could increase your financial position with various baby steps. You won’t feel it much, if at all, today, but the difference over the long haul could make you curse yourself under your breath for not doing it.