Do the best you can until you know better. Then when you know better, do better.— Maya Angelou
Regarding money, a lot of people like to tinker. They move their savings from one account to another, then maybe put it in a cash ISA, then maybe move it to a stocks and shares ISA in pursuit of a higher interest rate. Then move it to a different ISA provider, then move it to the latest internet bank offering a better interest rate with only a £2 a month fee. And on and on it goes. People love tinkering. And if they are investing, it’s even worse. They sell this stock and buy that stock. They move from stocks to bonds and back again. Then they move their money to currency trading, then peer to peer, then to crypto currency. Back and forth, around and around. This broker and then that broker. All the while picking up expensive transaction fees.
What people really should tinker with is their contributions. They should pick a good returning cash ISA, if they are building their emergency fund, and then stick with it, until their interest rate term changes. If they are investing in the stock market they should pick a low fee stocks and shares ISA with a provider like Vanguard, and then invest in an index fund with great diversification. After that the only tinkering they should be doing is with their savings rate.
If they are saving 10% of their net salary each month, they should then tinker with the savings rate and increase it, on a regular basis. Maybe three months after saving 10% of their net salary they then increase it to 11% or 12%, or be bold and go to 20% or 30% or 50%+. And they should rinse and repeat this often. Your savings rate is one of the most important things you can control in your journey to becoming financially independent.
If you get a pay rise then this should be a mandatory step for increasing your savings rate. You should increase your savings rate by the amount of pay rise you received. This is because you’ve been happily living off your salary before the pay rise, so you’ll continue to live off the same salary as before and bank the increase each month.
This approach should also happen when tinkering with your workplace pension. You should nudge that up regularly as well, and especially after a pay rise.
So rather than trying to be Gordon Gecko and selling high and buying low, as the majority of the smartest people in the world of investing fail to do this, so why should you be any different? You should instead tinker with your contributions and keep increasing them, even by 1%, and it will make a hell of a difference.
To close, allow this example of a 1% difference.
Let’s say as a net salary you earned £1,000.
So a 10% savings rate would be £100. Invest that £100 a month in the stock market and get a 7% return over 40 years and the amount would be: £247,154.20.
Now 11% is £110. Only £10 more a month. Maybe the cost of a pint of beer and a glass wine. Do the same calculation above and the total is £271,869.62.
The difference is a whopping £24,715.42! Just for an extra 1% increase.
Let’s look at an extra 10%. So our savings rate is £20% or £200 a month. Same calculations, and the total is: £494,308.40!
Tinker with your contributions, leave everything else alone. You will increase your wealth and minimise fees.