Here is another question, where do you get your financial advice from? Do you listen to an expert stock picker on TV or some advice from some other investing guru? Do you listen to advise from friends and family?
Many people share financial advice who have large ordinances. And they get paid for giving this advice. Many of these investment and financial gurus have good advice. Some of them, however, don’t even have a good track record. And they don’t need it, as long as they continue to get viewership.
But what I think many of these advisers don’t mention or at least don’t mention enough, is one of the biggest and best financial tips that everyone can use. That is the incremental approach.
Small incremental steps can lead to great strides.
We were reminded about the power of incremental steps when our guide would say “poli poli” as we climbed up Mt Kilimanjaro. Poli poli is Swahili for slowly slowly. The guides knew that anyone could do this climb as long as they just took it one step at a time, slowly as not to exert yourself. And they were right. This is the same mentality that you need to apply to your finances.
The Incremental Approach
The incremental approach or incrementalism is a method of working towards a goal by making many small incremental steps, instead of making large steps. But many people don’t follow this incremental approach. And some don’t even believe the power of it.
People use incrementalism without even noticing. It is a natural and intuitive way of tackling problems. Even making coffee or getting dresses has incrementalism built-in. Think about it. You take incremental steps to make that coffee and to get dressed.
Why do more people not use this method, at least not consciously, to save and invest? Is it because the time period over which this incrementalism has to perform is too long for us to appreciate.
People love to find the big instant payoffs.
And the investing gurus know about it. It is what sells in the papers and draws internet traffic. Investing in the Facebooks and Amazons of the world. And recently all the stories of people making big money in investing in cryptocurrency like bitcoin. How well are they doing now?
The problem with these stocks is that the average investor, like you and me, gets wind of them everyone else has too. And then it becomes a game of speculators hoping they can sell out of the market to other speculators before all the speculators run out.
This is why many studies show people are not good at picking or timing stocks. Even the pros themselves are not that good at the game.
We can all look out at the world and see bad and good companies. The problem is everyone else can do this too. Everyone knows that Amazon is a great company. It is unlikely that you will ever be the first one to notice. Maybe you notice that a certain carmaker is making bad products (Holden comes to mind in recent years). But you’re not the first to notice it, and this is already priced into the stocks. You don’t have an advantage over the market.
The Power of Incrementalism.
Everyone has the impression that it is impossible to save for retirement. And
this is true if you start at age 50 it becomes even harder. But if you start in your twenties and every year contributes a small amount and invest those savings into an index fund with low fees. Or any other investment vehicle you choose. And you keep at it year in and year out.
This is where the power of incrementalism can help you. Making the impossible task of saving for retirement possible.
This process can accumulate millions of dollars over the years. It is tough to understand how you go from a little bit of money each year to a million dollars. But that is exactly what happens when you work the maths out.
This is not a secret
And this process is not unknown in the personal finance world. In Fact, every personal finance blogger knows this is the key to retirement. And yet, we know that a lot of people who don’t follow these rules.
And not because they don’t have the money or ability to divert money to savings. There are many factors. One reason is that investment can seem to be complicated.
And don’t deaccumulate
Another factor is de-accumulating their profiles. Now and then, an investor might opt to change provider or sell an asset. And in doing so, they may take some money out for a holiday or a new car, rather than rolling over of the money over. And now that spend money that would build the beginning of the snowball that will roll into something enormous has vanished.
Postponing savings comes naturally to people. Everyone knows that they need to save for retirements. It is just easier to spend the money on other things that are more instantaneously rewarding
Who wants to be a millionaire?
The power of incrementalism can make you a millionaire. All it takes is for you saved $100 a week and invested it in an averagely performing investment returning 7% over 40 years you would end up a millionaire! ($1,145,000 to be exact).
The power of incrementalism is one of the powers of KiwiSaver.
It puts all the pieces into place. Once all the pieces are put together, you generally go with the flow. You automatically make small incitements every time you get paid. You can’t de-accumulate easily, and you can’t opt-out. It all seems quite forceful, but you will say thank you at the end of it all.
If all these pieces were not there people generally go off the rails.
It all comes down to one foot in front of the other- and keep moving! Figure it out as you go, and don’t stop moving!
- Small incremental investments accumulate over time to an astonishingly large amount of money.
- Do not de-accumulate your investment portfolio if you ever get the chance.
- Continue to invest incrementally- If you take a break, you are the only one who loses out.
- Follow the 10 Steps Needed To Achieve Financial Independence In NZ
What do you think? Do you use the Incremental approach to your savings and investments?
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