Here is a video published by Canadian finance expert Preet Banerjee that discusses the impact simply increasing your annual contributions by 5% per year can have to your savings.
How small increases to your savings can make a big difference to your nest egg.
You’ve probably seen examples of how saving regularly can yield impressive results over time, for example if you saved $100 per month into a portfolio earning 5% per year starting at age 18 and until you turn 65, you would end up with around $225,000. But here’s a simple tip that can yield big results.
Increase your automatic contributions every new year!
Let’s see what happened to our 18 year old’s retirement portfolio if they only increase their annual contribution by 5% every January 1st. After saving $100 per month when they were 18, they would increase their savings by5% when they were 19, 5% of $100 is simply $5 so their new contribution increases to $105 per month. In year 3 when they turned 20 they increase this again by 5%. 5% of $105 is $5.25 adding this to $105 gives us a new monthly contribution a $110.25.
If they were able to continue with the annual contributions their nest egg at age 65 would increase from around $225,000 to just over $550,000. Now annual 5% increases are painless at the beginning but can become a bit more substantial after 40 years. The take-home message is that you may want to consider increasing your savings rate whenever you can buy as much as you can and the beginning of every new year is a great time to do just that your nest egg will thank you later.