Percentages are the great equalizer, it doesn’t matter how large or small the number, when you convert to a percentage you can compare any financial metric. It doesn’t matter if you have 10K or 10 Million, make 30K a year or 30K a month, let percentages guide your decisions.
The main reason I love percentages is they can make insignificant amounts of money matter. When you start investing, small gains can be misleading, they can deter future investments and just flat out look insignificant.
Who wants to brag about making $10 bucks on a $100 investment? Cool bud, you can barely buy a six pack of good beer – try not to spend it all in one spot…….
There is nothing wrong with starting small – use percentages to compare your investments, savings rate and salary increases against peers or averages.
Here are a few ways I put this into practice:
Purchases Ruled by Percentages
Whenever you think about making a purchase, no matter how small, start thinking about alternatives and compare prices – instead of using price amount as the baseline, use a percentage.
$1.70 vs $1.20 does not seem very significant – but that is a 42% difference in price – you are making a company very happy buying the name brand product over the generic, think of the potential margins!
Don’t expect to see that big of difference on more expensive non commodity goods, but I still look at savings as a percentage when costs increase. 5-10% savings are significant, a good rule of thumb is – if you would take it as a 0% risk investment gain, then why wouldn’t you take it as savings.
Using that rule it is worth pulling out your phone an doing some quick price comparisons and buying elsewhere.
This is my favorite area to use percentages, when you are starting your career your salary will be low and yearly raises can seem insignificant. A 5% raise on $40,000 is only $2,000, if you get paid every other week that is only $76.92 a paycheck (before taxes and 401K contributions).
Lets say you walk with $50 bucks extra every other week – it is not going to significantly change your life, that is a decent dinner and a few drinks in most cities (at best).
Look what happens if you do 5% a year for 10 years.
That is over a $25,000 change, almost $1000 every pay period – a life changing amount of money! I do not think this is an unreasonable example, in fact I think most people could blow this out of the water and do it in half the time (I doubled my salary in under 5 years – check out these posts for some career tips: An Honest Conversation About Salary Expectations, Getting a Raise: Quick Tips, and Early Career Advice For Young Professionals)
I mentioned this earlier, but I think a lot of people get discouraged early because they are not investing enough to make huge gains. This is where I challenge everyone to ignore the amount and focus on maximizing the percentage – it will serve you very well when your balances are more substantial.
Another area to look at is trading costs, when you are just starting out a $10 fee can take significant bites out of your money – make sure you are ready to buy and hold without getting chased out of the market after the first red streak.
You should also be careful when dollar cost averaging by making purchases on regular intervals, if you have to pay a fee for every buy it will add up over time – find a platform that allows consistent investing without significant trading fees on every purchase.
As your income grows, you want to save more – if you set all your investments based on a percentage of your income instead of a set amount it will automatically increase with your salary. The easiest way to do this is through a 401K where you set the percentage with your employer, it is a little more difficult to do with auto-transfers after your paycheck is deposited – but if you can manage it, do it.
For anyone that wants to calculate their savings rate you can find an example here.
When you start earning, saving and investing – always focus on the percentage changes, large amounts of money will come as you grow in each of these areas. When they all work together, Financial Independence will not elude you.
Some products that can help you:
Acorns: Acorns is an automation app that collects and invests your spare change when you make a purchase. I connected Acorns to my checking account and my credit card. If you are interested in trying it, you can use my referral code here (both of us will get $5 in our account)
Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time! (I may be compensated if you use this link)