When we talk about finance and reaching financial freedom, we usually don’t talk about 1% returns. In fact, in purely financial terms, 1% returns are pretty bad. I mean, they’re better than the negative returns we are seeing daily as I write this post in 2022. But still, we aim higher.
But I think this is because we all tend to focus only on financial returns in the pure, numerical sense.
For example, my first rental property continues to give us 20+% returns in terms of cash flow. (It’s actually higher when taking into account the other 4 ways that real estate investing makes you money.) And this is fantastic. But it gives the wrong impression.
Becoming wealthy is not about the big, eye-catching returns. It’s actually about the small 1% returns that nobody will ever notice.
If I see two investors make an annual return on their investments of, let’s say, 15%, I actually can’t tell you much about how wealthy they will be. But, let me study their 1% habits, or lack thereof. And I’d bet you a Bitcoin that I can predict their future wealth with scary accuracy…
Why the 1% returns matter more
If you get 1% better each day for one year, you end up 37.78x better than when you started.
If you get 1% worse each day for a year, you end up 0.03x of your previous self.
That’s a huge difference from just a little return. From such a little return that we most often ignore them or write them off.
My story is a story of 1% returns
I’ve very openly shared my financial comeback story. In fact, the whole 1% idea played a huge role in why I started this blog in the first place.
I was starting from the very bottom. I was going to write “starting from scratch,” but that’s not even true. Really, I wasn’t starting from 0. I was starting from the negative. My initial net worth upon learning what net worth was and checking mine was >$-500,000.
So, I stopped digging deeper and started climbing out, 1% at a time.
That was about 2.5 years ago at the time of this writing. And I sometimes worry that a new reader will see where I started and where things are now and draw the wrong conclusion.
While I am not at financial freedom, my financial well-being both objectively and subjectively are much, much improved compared to the beginning. I worry this will seem like some miraculous occurrence or stroke of luck or magic breakthrough moment. But it’s not.
It’s the result of 1% returns put in every day. Over years. And letting that compound. The effects were barely visible to start. But now they continue to get grow bigger and bigger.
Every 1% return that I share here represents a strategy that I actually employed and, in fact, still employ today.
If you employ them as well, I can guarantee that you will be as or likely more successful than I have been in working towards financial well-being as a physician.
5 undeniable ways that 1% returns will make you wealthy
Let’s get going!
1. Increase your financial knowledge by 1% each day
This was the first thing that I did when Selenid and I committed to improving our financial situation.
As doctors, personal finance can seem overly complex. But this is just because we lack education. So, the first step is to educate ourselves. But our time is limited so this seems overwhelming.
Well, the good news is that you don’t need to be a financial expert by tomorrow. In fact, there’s no time limit at all. So, create a plan of 1% gains in knowledge.
Here are the 2 best ways to do this:
- Pick a personal finance book. My recommendations for the best ones to start with are The Millionaire Next Door and The Psychology of Money. Read 1% of the book each night before bed. I’d say the average personal finance book is about 200 pages. So, read 2 pages a night. That’s pretty easy. That’ll easily allow you to read one personal finance book each year.
- Pick a personal finance blog. Read one post each day. That’s it. It should probably take an average of 5 minutes a day. (I think this is the average read time for my posts.)
Do these things and you will improve your actionable financial knowledge drastically and barely even notice it!
2. Increase your savings rate by 1%
You may know the general rule of thumb recommendation to save 20% of your gross (pre-tax) income for retirement.
For someone just learning about this “rule,” the idea of creating a savings rate of 20% can seem downright daunting. Especially when your current savings rate is 0% or negative, like mine was when I started.
But no one says you have to go from 0% to 20% in one month. Challenge yourself to save 1% of your income the first month you run your budget. Then try to increase your savings rate by 1% each subsequent month.
What Do You Need to Include in Your Savings Rate?
I’m willing to bet that you barely notice these 1% increments. And before you know it you will have a healthy savings rate of 20% or more to put towards your financial freedom.
This is especially a great strategy for residents who make much less money and in reality don’t have “room” for a 20% savings rate in most cases. Just start at 1% and grow from there until you can.
Then, when you do become an attending with a huge income jump, you’ll have developed this habit and be ready to create a more sizable savings rate.
3. Invest 1% of your savings
Sometimes I speak with physicians whose issue is that they have trouble creating a savings rate. That is the major limit on their planning for financial freedom. For them, the above advice is most apt.
However, sometimes I speak with doctors who are amazing savers. Some even better than me. But when I ask how they invest their money, they tell me that it is all in a savings account or money market fund. Often, they tell me they are scared to invest because it seems risky and are waiting for “the right time.”
Unfortunately, both of these issues are equally dangerous.
So, for the latter group, my recommendation is to invest 1% of your savings rate into the market every day. Of course, you can increase the amount to 10% every week or something like that as you wish.
The strategy here though is exposure and habituation, similar to that used in OCD therapy. You are scared to invest because it feels risky. But in fact, not investing is the most risky thing you are doing for your future.
It will seem dangerous the first few times. But hey, if you lose 1% of your money, no big deal. But ultimately, you will see that your world does not implode, that the overall long term trend of the stock market is up, and that investing is not that scary.
4. Create 1% of your clinical income in side gigs
Side gigs tend to seem like things that “other” physicians do. They seem foreign and scare. Plus, you wonder, “What makes me so special that I can create a side gig or that someone cares about my opinion?” That answer to those questions are the same: Who cares! Go for it!
Establishing a side gig has a number of powerful effects on physicians:
- Builds another stream of income so you are not solely dependent on your clinical income
- Evokes a sense of empowerment as you experience success in a new field
- Widens your network of contacts within the healthcare world
- Creates new opportunities for more side gigs that you may never have imagined
I can say all of this because I experienced all of these emotions before starting a side gig. I also experienced all of these benefits after starting!
So, I challenge you to build a side gig(s) that earns at least 1% of your clinical income.
For the average physician making $200,000, this would amount to making $2,000 in your first year. This is hardly a life changing amount. But remember, 1% returns often seem this way at the beginning. Keep building and who knows, your side gigs may eventually exceed your clinical income.
5. Use the 1% margins of your day
This is just an overall great productivity rule that I follow. We all have small slices of the day they are a waste. I’m not talking about the hour that you relax and catch up with your partner before bed. Or the time spent for personal self care or playing with any kids. That’s not a waste. That’s important.
I’m talking about the 30 minutes here that you zone out on your phone. Or the 15 minutes there that you spend deciding whether to watch TV or do some work, but end up doing neither.
In all, maybe this adds up to 1% of your whole day. I say you need to start using that 1%!
There are a couple different ways to take this
First, you can use this time to do the first thing on this list. That is, improve your financial education. You can easily read a blog post or 2 pages in a book during this 1%.
But I more like to think of this in terms of investing. I want my money to be working for me all the time. Even during this 1% of the day that I may be wasting. Then it doesn’t feel like such a waste.
Investments create passive income. Income is money you make while you sleep. Or while you’re working your day job. That’s the point. You make it 24/7.
For instance, our rental properties pay us via cash flow, equity pay down, tax benefits, and more every second of every day.
I also invest in the margins of my life using Acorns to invest all of my extra change. By the time I retire, this will be hundreds of thousands of dollars. In fact, you can start investing with Acorns here and they will give you $5 free.
Don’t be distracted, it’s the 1% returns that make the difference
Tell me your financial 1% habits and I can tell you if you will reach financial freedom. It’s that simple. But it’s obviously not easy or else everyone would do it.
7 Financial Habits of Highly Successful Physicians
The main issue as I noted above is the iceberg effect. We see a financially free physician and think it just happened or they got lucky or they come from wealth. And while rarely that may be true, it’s much more likely that we are just not seeing the 1% returns that built their financial mountain.
So focus on your 1% returns and the financial freedom will take care of itself!
You can start building your financial 1% habits by reviewing my daily financial routine, learning how good habits are built, and reviewing the financial formula for success that you need to base your habits on!
What do you think? What are your 1% return habits? How have they influenced your financial well-being? Let me know in the comments below!