Making minor changes in the amount you invest can dramatically increase your retirement nest egg. Financial experts liken this impact to the butterfly effect, creating significant long-term benefits with just a proverbial flap of the wings. In this guide, we'll explore how small decisions can multiply your financial ROI so you can make the right choices for your future.
Increase Contributions Slowly
You can take a set-it-and-forget-it approach to gradually increase your retirement savings. Most plans let you raise your contributions automatically by a preset percentage each year. You likely won't notice a 1% change in your paycheck, but you will notice the ultimate power of compound interest. You'll earn a return not only on the increased retirement contribution but also on the extra interest it generates. Remember that to make the most of this effect, you'll need to stick with your investments for at least five years.
Estimate Future Returns
The rule of 72 uses a simple metric to illustrate the power of small annual boosts to your investments. To see how long it will take your portfolio to double, look at your average rate of return. If you tend to get 9%, you'll double your money in eight years. With that calculation in mind, you can do the math to see how much more you could earn with a bigger annual contribution. A 200% return within an eight-year period, means $10,000 growth on a $5,000 contribution, or $14,000 growth if you increase your contributions by just $2,000 during that period.