Why Net Worth Explodes Once You Save $100k
While for many people, saving $100k might seem like a goal that’s a long way off (and that’s ok if it is), it’s important to understand WHY saving that first $100k is so important for your future financial life.
“It’s a b—-, but you gotta do it.I don’t care what you have to do — if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000.” -Charlie Munger
If you don’t know who Charlie Munger is, he was Warren Buffet’s partner for many years. Safe to say he knew what he was talking about! He was right though, once you save that first 100, the power of compounding starts to really take effect, and produce returns that start to make a big difference.
The Hardest Part - The First $100k
Saving your first $100,000 is a major achievement that requires dedication, patience, and strategic financial planning. Here's how you can accelerate your journey toward this significant milestone:
Understand Your Current Financial Situation
Before you can effectively save, you need to have a clear understanding of where you currently stand financially. This means:
Tracking your spending: Use apps or spreadsheets to categorize your expenditures. Knowing where your money goes each month is the first step to identifying potential savings.
Evaluating debts: High-interest debts, like credit card balances, can hinder your saving efforts. Assess your debts and consider strategies such as the debt avalanche or snowball methods to pay them off efficiently.
Set Clear, Achievable Goals
Setting specific, measurable, and realistic goals can significantly enhance your motivation and focus. Break down your $100K target into smaller, more manageable milestones (e.g., save $10,000, $20,000, etc.), and celebrate when you reach each one to keep your motivation high.
Increase Your Income
While cutting costs is crucial, increasing your income can be even more effective in accelerating your savings. Consider the following strategies:
Seek a raise or promotion: If you’ve been at your job for a while and have demonstrated significant value, it might be time to negotiate a higher salary.
Take on additional work: Freelancing, consulting, or part-time jobs can supplement your primary income source. Platforms like Upwork or Freelancer can help you find gigs that match your skills.
Invest in your education: Sometimes, investing in additional certifications or training can lead to better-paying opportunities.
Reduce Expenses
Reducing your monthly expenses is one of the most direct ways to save more. Consider these tactics:
Budgeting: Create a strict budget and stick to it. Prioritize necessities and look for areas where you can cut back, such as dining out, subscriptions, or luxury items.
Downsizing: Evaluate larger expenses like housing or car payments. Moving to a less expensive home or opting for a less expensive car can free up substantial amounts of money.
Cutting recurring costs: Examine your monthly bills—cell phone, internet, cable—and look for cheaper alternatives or negotiate with your providers for better rates.
Automate Your Savings
Automating your savings can help you stick to your goals without having to think about it every month. Set up automatic transfers from your checking account to a savings account right after each payday. This "pay yourself first" approach ensures you save before you even have the chance to spend.
Use Windfalls Wisely
Any unexpected income—such as tax refunds, bonuses, or inheritances—should be directed straight into your savings. While it’s tempting to spend this "extra" money, using it to bolster your savings can significantly shorten the time it takes to reach your $100K goal.
Stay Consistent and Patient
Finally, consistency and patience are key. Saving $100K is not something that happens overnight. Stay committed to your financial habits, continuously look for new saving opportunities, and remain focused on your long-term objectives.
The Power of Compound Interest
Compound interest is often hailed as the eighth wonder of the world, and for good reason. It refers to earning interest on your interest, and over time, this can cause your wealth to grow exponentially. For example, if you invest $100,000 at an annual interest rate of 7%, compounded annually, in 10 years, you would not have $170,000, but approximately $196,715. This exponential growth is what helps individuals transition from saving to wealth-building.
Looking at the chart above, assuming all things are equal, the first $100k takes almost double the amount of time that the third $100k does, assuming an about 5% interest rate, which historically has been quite easy to achieve.
This chart was illuminating to me when I first started to think about saving, because when you’re just starting out, and you’re struggling to save, it’s hard to keep going, but when you think about how much easier it gets in the future, it makes it easier to keep saving, even though it’s hard.
Psychological Benefits of Reaching $100K
Achieving a savings goal of $100K not only strengthens your financial foundation but also boosts your confidence in making future financial decisions. This milestone often shifts one's focus from merely surviving to thriving, enabling a more aggressive pursuit of financial freedom and security. Additionally, this level of savings can significantly enhance your risk tolerance, opening the door to investment opportunities that you may have previously deemed too risky. Knowing that you have the ability to save $100k, combined with the ability to further diversify your portfolio, means you’ve reached a level where it is prudent to take some riskier bets with a small percentage of your portfolio.
It may seem like a small thing, but the sense of achievement and accomplishment when you meet that first big milestone can not be overstated. Knowing that you managed to save this large amount of money will give you the confidence to keep going, and not stop on your saving and investing journey!
What Happens When You Save the First $100,000
Let’s assume that you saved $100,000 and hit the milestone exactly on your 40th birthday. You started saving in your 30’s and are now able to invest $10k every year. The market is doing well, and you’re averaging returns of 8%. By the time you’re 65, you’ll be sitting on $1,415,614… And that’s if you never increase your savings rate or your returns never go up! If you save just 5 more years, that turns out to be $2138,644!
The power of compounding is doing most of the work at this point, and even if you never contributed another penny to the original $100,000, by the time you’re 65, that $100k would be $684,847. Quite a lot more than that original $100k!
Patience, Patience, Patience
In all of this talk about saving, investing, growth, the one thing that is required is patience, and perseverance. While it may not be exciting on a daily basis, the effect that saving will have on the quality of your life can not be overstated. If you don’t have the ability to save even a little bit at the moment, a great first step would be to identify spending habits you have that are holding you back, or luxuries that you can do without.
Another great way to boost your savings is to pick up a side-gig (kind of like this one for me!), which you can use to put towards your savings. Even a few hours doing things like driving Uber, or hourly temp work can boost your savings, and get you to a financially strong place in just a few hours a month.
