Your Money World Should be Ruled by Percentages

By | 2016-06-02

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.

 

Salary increases

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.

  1. $42,000
  2. $44,100
  3. $46,305
  4. $48,620.25
  5. $51,051.26
  6. $53,603.82
  7. $56,284.01
  8. $59,098.21
  9. $62,053.13
  10. $65,155.79

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 ExpectationsGetting a Raise: Quick Tips, and Early Career Advice For Young Professionals)

 

Investing

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.

 

Savings Rate

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.

 

Take Away

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)

29 thoughts on “Your Money World Should be Ruled by Percentages

  1. S
    Sarah @ Couple of Sense

    I do like focusing on % as well and I do agree that this does make things equal. My job is all about numbers so I do look at them often but it’s also in my nature to look at all of the different options to see the data in different ways to tell different stories. In your example at the top a 10% return on investment is great way to look at it if the number is small. But as soon as you are working with larger numbers I find sometimes I’m motivated by the number itself. But that could be just me personally.
    Your focus on staying consistent is so critical and that is the most important thing because as you said the numbers will grow eventually.

    Reply
    1. Apathy Ends Post author

      I can see being motivated by the actual amount after a lot of growth, when the numbers become significant it would be hard to ignore them

      Reply
  2. The Green Swan

    Good points! It makes much more sense to focus on % than $ in many circumstances and can help psychologically as you mention (i.e by not getting disturbed by otherwise relatively nominal returns when investing early).

    Reply
  3. Linda @ Brooklyn Bread

    I love this because I think it is the key to money and life in general – they way you look at things and the way you think about things dictates EVERYTHING. People are never happy because of money – they are happy because of the way they see the world.

    Reply
  4. Z
    ZJ Thorne

    I always focus on percentage change as I’m calculating my change in net worth & when I’m reading my IRA statements. The amounts are currently small, but the changes are going to be great.

    Reply
    1. Apathy Ends Post author

      Small percentage increases over time will build a fortune!

      Reply
  5. FinanceSuperhero

    As Green Swan said, I have always valued percentages because of the psychological boost one can gain from considering them.

    Lately, I have been learning a lot about accounting as I’ve engaged in a new side hustle. At the end of the day, what separates some numbers from others is zeros, commas, and decimal points.

    Reply
    1. Apathy Ends Post author

      A new side hustle! – I hope you share your story after you get into it!

      Reply
  6. Thias @It Pays Dividends

    I am a big believer in percentages just for the reason of comparability. Percentages can make any two people comparable and give a better understanding of how they relate. That is why I focus more on savings rate than trying to hit certain dollar amounts. My savings rate is more relate able to others because that is a number they can shoot to hit as well where my total amount saved may be peanuts to some people or insurmountable to others.

    Reply
  7. Allan Liwanag @ The Practical Saver

    There’s is a great value in looking at percentages versus the dollar figure. I particularly use percentages on my investments especially my retirement investments. Whether the amount is big or not, for me, I get a clearer picture when I use percentages. Many times, I use percentages as motivation. For example, when I first started investing, invested $100 and it increased by 5 dollars after a month. It may only be $5 increase but that’s 5%.

    Reply
  8. M
    Michelle

    Really love this post. I always use percentages to calculate raises and savings rates. I don’t earn a massive salary but do invest 40% of it, so I know I’m better off than everyone who isn’t saving.

    Reply
    1. Apathy Ends Post author

      40% is great! You are doing better than most, by far

      Reply
  9. Level Up Money

    AE – I find using percentages most useful in the personal finance world when dealing with savings and taxes.

    Your savings rate really is the great equalizer when looking at how soon two people can retire regardless of income.

    Calculating how much you pay in tax relative to your income also can help focus efforts on reducing that rate even while your income increases.

    Reply
    1. Apathy Ends Post author

      Taxes is a great application – I have not spent much time trying to reduce our tax bill, but after paying in last year I will be making some adjustments

      Reply
  10. Cathy @MonetizeMyMins

    Percentages are definitely the great equalizer. It helps simplify your approach regardless of how much money is coming in. I think if people took the time to convert different financial choices into percentages, people who handle things differently.

    Reply
    1. Apathy Ends Post author

      Agreed! If you change your viewpoint, your decisions should follow (hopefully for the better)

      Reply
    1. Apathy Ends Post author

      Perfect! It took me a bit but I have my wife thinking the same way

      Reply
  11. Dividendsdownunder

    Great points AE. We all have different financial situations, we’re different ages and different FIRE stages. The best way to motivate us, to compare, to track things, is with percentages.

    Young people should not be deterred by the small amount they can invest, this is the best time to be investing – think of all the compounding!

    Tristan

    Reply
    1. Apathy Ends Post author

      Well said! People should be focused on learning when they are investing small amounts to prepare for the bugger balances

      Reply
  12. Financial Slacker

    I totally agree. That small fee percentage that your advisor charges or that the mutual funds charge may only be a percentage or two, but they add up over time. Plus if you are making 8% and paying 2% that’s 25% of your earnings going toward fees. When you look at it that way, it’s crazy expensive.

    Reply
    1. Apathy Ends Post author

      Those fees can be a killer, even the tiny .5% fees add up over time

      Reply
  13. Rudy

    Hi Agree, percentage give a better perspective in most cases than a simple number, but not always.

    Sometimes percentage can deceive, especially by comparing things.

    Tom meet Gerry and they share the last year investment return.

    Gerry increases his wealth by 20% and Tom only by a 5%. A third party might think Gerry is a better investor or saver, but the omitted data is that Gerry worth is US$ 10,000, instead Tom is US$ 10,000,000.

    Who can argument that Tom is a better investor?

    We can conclude that percentage are useful but by themselves are meanless.

    Reply
  14. MMD

    Good points. I’m all about percentages when it comes to saving and investing. In fact, I often get a lot of gruff when I tell people I have no plans to pay off my low interest loans. If I’m only paying 2 or 3%, but making 5 to 10% off my investments, then I’d say that the investments are the smarter way to go!

    Reply
    1. Apathy Ends Post author

      We have a very low interest car loan that I wont pay any extra money on – we are in saving and investing mode!

      Reply
  15. Ty @ Get Rich Quick'ish

    What a great idea! I shop for groceries with my phone so that I can (1) compare prices to make sure I’m getting a good deal, and (2) to calculate the cost per X (unit, lb, oz, etc) of the item. Very often you’ll find that the less expensive item will actually cost more per unit, making it more expensive – tricky marketers!

    That said, I’ve never once tried to calculate the %difference in prices – I love the idea and can’t wait to try it out. Thanks for the tip!

    Reply
    1. Apathy Ends Post author

      I do the same thing! thankfully they put the price per OZ on most stuff at the grocery store by our house. Saves a lot of time

      Reply

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