Build a Bigger Nestegg Through "Investment Creep"

by Michael on Oct 15, 2012 · 4 comments

Photo of a Golden Nest Egg

Lifestyle creep is a popular personal finance boogeyman, and for good reason. If you’re not careful, your expenses will increase in lockstep with your income and you’ll never get ahead.

But did you realize that you can use the same principles to supercharge your retirement (or other) savings? It’s really quite easy.

Here’s how it works… Let’s say that your currently saving (and investing) 5% of your salary for retirement. It should really be more than that and you know it, but you just can’t seem to find the money in your budget.

For now, I’ll ignore the fact that you probably could find more money for saving and/or investing in your budget if you really tried. Instead, I’ll tell you the secret to growing your contributions painlessly over time:

Whenever you get a raise, split it between you and future you. So if you get a 3% raise, bump your savings rate from 5% to 6.5% and let the rest flow into your budget.

Running the numbers

Let’s say that you’re earning $50,000/year and saving a measly $2,500 (5%) of that for the future. When you get that 3% raise, you’re now earning $51,500/yr and your new 6.5% savings rate would mean that you’re now saving just under $3,350/yr.

But look at that… Your “spendable” dollars (ignoring taxes for simplicity) have still increased by $650. Not bad, huh?

Now let’s say you get another 3% raise the next year. You’re now making just over $53k/yr and your new 8% savings rate would mean that you’re saving just under $4,250/yr. And yet your “spendable” dollars have increased by another $650 or so.

Now let’s say that business is good and you’re uber-productive, resulting in a 5% salary bump. Your new salary is just shy of $55,700/yr and your new savings is 10.5%, resulting in retirement savings of just under $5,850 for the year. But still, your “spendable” dollars are now roughly $2,350 higher than at the start.

Note that you can achieve something similar based on dollars amounts instead of percentages — e.g., split that first raise $750/$750 between you and future you, and so on. However, you’ll get further faster if you base it on percentages.

And yes, I’m aware of the problems of the problems associated with taking the percentage scenario to the extreme. Your spendable income will eventually start heading south as your percentage toward saving continues to grow. Taken to the extreme, you’ll eventually reach 100% for future you with nothing left for today.

Given the above, it should be obvious that this isn’t meant to be a firm rule that you’re expected to follow forevermore. Rather, it’s meant to jump start your savings and get you into the habit of investing without gutting your current lifestyle.

While the numbers will vary with the specifics of your situation, the larger point still stands. You’ll never miss that money if you don’t give yourself a chance to get used to it in the first place. And over time, this sort of thing will make a huge difference in future you’s standard of living.

To increase your odds of success with this strategy, I would highly recommend automating your investments. That way you just have to tweak your 401(k), IRA, or whatever contributions when you get a raise and then let nature take its course.

Investment creep. Give it a try. You have nothing to lose and a lot to gain.

1 DON October 26, 2012 at 9:15 pm

QUESTION? Asking for a little help.
Where do you put your savings so that it is SAFE, NO RISK, but that it is growing consistently 4 to 5%, that is still liquid so you can use it if you need it. Preferably the growth should be tax free. Please help me out on this friends or who ever.

2 Jerry A November 6, 2012 at 5:29 pm

I have done my own “investment creep” plan for many years, increasing more into my savings every time my pay went up. I save money in a 401k-type plan at work as well as a Roth IRA through Vanguard. I am on track for a comfortable though not extravagant retirement. I still live comfortably right now, with a vacation or other extravagance, though below my means. Don’t forget to put some money into an emergency fund, as well as a “I know that bill is coming” account (for property taxes, insurance, etc.).

Don, you are asking for something that is not realistic. If anyone tells you they have a sure-fire plan for no risk investing at 4-5%, hold on to your (closed) wallet and run away from them. If you want liquidity and safety, then you will get very low yield… that’s the trade-off for the liquidity and safety. No risk = no return (though high risk does not guarantee high return, unfortunately). There is no such thing as free money, but that’s what you’re asking for. If you want a retirement fund, then you need to think long term with a very low cost, balanced, diversified index mutual fund portfolio of stocks and bonds into which you invest your money for the long run.

In any case, don’t market time, don’t move in and out in large amounts, and don’t look for hot tips. That’s not investing, that’s speculation a.k.a. gambling.

This is better advice than you will get in an expensive investment seminar from a guy in a fancy suit. Never forget that a broker’s fast car, fancy suit, and plush office comes out of your funds. If you need advice, then get it from a fee-only (not fee-based, but fee-ONLY) financial planner who is a fiduciary, guaranteeing your best interests, not a stock broker’s “free” plan that hides commissions and kick-backs.

3 DON November 7, 2012 at 6:21 am

Thanks sooo much for your response Jerry A. I have some questions for you. I trust that you do not find these to personal. Jerry, what is your age? How much money do you have saved now? How much will you have saved when you are ready to retire?
You see Jerry I sounded much like you prior to 2008 and then all (60%) of my savings vanished. And so now I seek for a vehicle that is SAFE! I can’t afford to lose any more.
I have found such a vehicle recently that does pay me that 4% and with NO risk involved and I have control and liquidity of my money. My major regret now is that I did not know about this 40 years ago. I challenge you to read ‘FINANCIAL INDEPENDENCE IN THE 21ST CENTURY’ BY Dwayne and Suzanne Burnell, when you have finished the book let me know what you think. Their’s is the financial plan that I have discovered and implemented in my own financial life now. I am eager to hear from you again in the near future.

4 Mike Swenson March 6, 2013 at 9:52 pm

Great article – that is something that I have tried to do since I entered the “working world” out of college 8 years ago. Once you get in the habit of doing it, it makes it so much easier going forward. We do the same with year-end bonuses. Usually we try and put half of that to paying down debt or put it in some other sort of investment. Automated saving is the way to go – you’re less likely to spend extra when you don’t see the extra money to begin with 🙂

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