Ryan Frailich, CFP®
1% Course Corrections
Updated: Mar 19, 2021
I was scrolling through twitter (productive, I know) and caught the image above in a tweet from Annie Duke. I started following her after finishing her book, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All of the Facts.” Her book reshaped how I view so many decisions, and I highly recommend reading it. But for now I want to focus on the image above.
Our lives are a collection of 1% course corrections. It’s one of the most challenging things to conquer when talking to people about their money, because most people (me included) want a single decision or event to be what gets them “there.” But in reality, life is a constant series of course corrections where small decisions can lead you much closer, or further, from where you’d ultimately like to end up.
Let’s play this out.
You’re paying $700/month on your student loans. You do this for a decade. You make your last payment the month before your 35th birthday. After you celebrate and do a dance to Dee-1’s “Sallie Mae Back”, what comes next? It’s a chance for a 1% course correction.
You could decide to immediately start saving all of that $700/month.
You could decide to enjoy the relief and let it hit your bank account, to be spent out in the world on whatever strikes your fancy.
You could split the difference in some way, saving some for your future self while giving some to current you.
Where do each of those decisions lead you to down the line?
If you let it hit your bank account, you’re probably a lot happier the first time you see that direct deposit hit. But most research would tell us that happiness fades quickly and now it’s just your new normal. Future you has to find a way to either reign that spending in over time or cover a new $8,400/year in spending. Every year for the rest of your life. Yikes.
You could split it. You direct $350/month towards retirement, while spending the other $350 each month. In 30 years, when you’re 65, this decision leads to you having $237,936 in your retirement account. From one decision.
You could save all of it. Immediately direct all of it to retirement. This is probably unrealistic for most people, and certainly so if you have young kids. But if you did, 30 years later that $700/month could grow to over $475,000. 1% course correction.
This is just one decision in a lifetime of them. It’s why financial planning is a process, not a one-time event. It’s a constantly evolving series of decisions that over time lead to your financial outcomes. Of course luck plays a part too, both good and bad, but when you have an opportunity to course correct just 1%, the outcomes down the line can be staggering.
Note: Financial projections assume a 7% annualized rate of return, 3% inflation, and consistent investment each month for 30 years.
More on this: Why Doesn't More Money Make us Happy?