Updated: May 6
One of the most difficult tasks you’ll ever accomplish is saving your first $100,000. It also happens to be one of the most important financial milestones in your life.
There are four necessary steps you’ll need to take to save your first $100,000
Calculate your current net worth
Choose a savings & investing strategy
Calculate how much you need to save each month
Put your savings on automatic
In this article, I will review each of the necessary steps to saving your first $100,000. I will also go into detail on why it is simultaneously so difficult and so important to save your first $100,000.
Why saving your first $100,000 is an important milestone
Saving your first $100,000 is so important because it is the point where compound returns become significant enough to begin building a wealth snowball.
To understand what I mean, let's consider how your wealth will compound under two different scenarios.
Scenario 1: you start with $10,000 invested.
Scenario 2: you start with $100,000 invested.
In both scenario's we will assume you are saving $500 per month and earn an average of 6% annual return on your investments. Let's take a look at your final balances saving the same amount of money after 10 years.
Your expected balance would be $100,543.
10% ($10,000) came from your initial principal.
60% ($60,000) came from your additional savings.
30% ($30,543) Came from compound returns.
Your expected balance would be $264,289.
37% ($100,000) came from your initial principal
23% ($60,000) came from your additional savings.
40% ($104,289) Came from compound returns.
Here is an easier way to visualise those numbers.
An even easier way to understand the snowballing effect of investment returns once you cross the $100,000 threshold mark consider how your annual savings would compare to your annual investment returns under scenarios 1 and 2.
Here is scenario 1: Starting with $10,000.
In year one your annual savings would be $6,000 and the investment return on your existing principal would be $600.
In year 10, your annual savings would still be $6,000 while your return on existing principal would be $5,3331. A significant improvement but your savings are still doing the heavy lifting.
Here is scenario 2: Starting with $100,000.
In year one your annual savings would be $6,000 and the investment return on your existing principal would also be $6,000. Right off the bat, your investment returns are working as hard as you are.
In year 10, your annual savings would still be $6,000 while your return on existing principal would be $14,585. You now would have reached a point where your money is working more than twice as hard as you you are.
Why saving $100,000 is so difficult
Reaching the $100,000 milestone is so difficult for the same reason that it is so important; Since you don't have enough saved to generate significant investment returns you have to save nearly every penny to cross the $100,000 threshold.
In fact, you probably have to save more than $100,000 if you are starting from a point where you are carrying a lot of debt.
Here is a summary of why saving my first $100,000 was such a difficult
When I finished grad school, I had $50,000 in debt.
To save $100,000 and pay off my debt, required me to save $150,000.
This was largely accomplished early in my working career where my income was significantly lower than it is now.
Here is why it was so easy to go from $100,000 to $200,000.
I am starting during a point in my career where I have no debt and a higher income which means I can more easily afford to save.
On my journey from $100,000 to $200,000 my investments increased by roughly 30% or $30,000.
That means to save my second $100,000, required me to save only $70,000.
That is why I refer to the $100,000 threshold as the point where wealth begins to snowball.
When you start from scratch the snowball is tiny.
As you do the hard work of building your savings, the snowball begins to gain traction.
Once you pass the $100,000 mark your money is working hard for you and the snowball begins to turn into an avalanche.
How to save your first $100,000
Like most things in personal finance, saving your first $100,000 is both difficult and simple. It's difficult because, as we discussed, you need to do all the heavy lifting.
It's simple because you simply need to follow a four-step process.
Calculate your current net worth.
Choose a savings & investing strategy.
Calculate how much you need to save each month.
Put your savings on automatic.
Let's dive into each step
1. Calculate your current net worth
To build a plan to save $100,000 you need to know exactly where your starting point is.
Someone with $50,000 already saved will have a much different savings plan than someone who is $50,000 in debt.
Your net worth is simply equal to all of your assets minus all of your liabilities.
For the sake of simple math, let's assume you are starting from a net worth of $0.
2. Choose a savings and investing strategy
To grow your net worth beyond where it is today you are going to rely on two factors
How much you save and invest.
The return on your savings and investments