When it comes to building wealth, saving the first $100K is the hardest.
There are two primary reasons for this:
- We have to do most of the heavy lifting
- We have to remain consistent and disciplined
However, I find it more helpful to break down and visualize the math in order to understand why this is.
Additionally, I thought it’d be fun to also take a look at:
- The Math Behind Saving The First $1,000,000
- How Long Would It Take The Average American To Save Their First 100K?
- My Journey To Saving My First $100K
- 3 Habits To Help Save The First $100K
Let’s dive in!
The Math Behind Saving The First $100K
Let’s make the following assumptions:
- We are able to save and invest $10K / year
- We are able to earn 7% interest annually
Using the time value of money, we can calculate how long it would take us to save the first $100K:
Under these assumptions, saving the first $100K would take 7.84 years.
If this seems like a long time, that’s because it is.
All else being equal, saving the first $100K will always take the longest amount of time.
But why is that the case?
To answer that question, let’s take a look at the same visualization. Except this time, we will color the balance in order to see our principal contributions (what we save) vs. interest earned:
We can now clearly see that the majority of the first $100K comes from pure savings.
In other words, we are doing the majority of the heavy lifting.
More specifically, principal contributions made up around ~75% of the first $100K saved:
However, I’m happy to report that it won’t be like that forever 🙂
Take another look at the above visualization. As we continue to save and invest, the overall investment balance becomes comprised less of principal contributions and more of interest earned.
Translation: Saving the next $100K and beyond will take A LOT less effort.
How much less effort? Let’s take a look.
The Math Behind Saving The First $1,000,000
Leveraging the same assumptions from before, let’s see how long it would take in order to save each additional $100K up to $1M:
As time progresses, the width between each $100K increment continues to get smaller and smaller.
Similar to before, this exponential decrease in time can be better understood by coloring the investment balance in order to see the principal vs. interest earned:
Look at all that yellow!
What we are seeing is compound interest at work.
In other words, our principal contributions are earning interest, which is also earning interest, which is also earning interest… etc. Given enough time, compound interest will eventually be responsible for the majority of any investment portfolio’s growth.
In this specific example, that precise point is at the 18 year mark:
How Long Would It Take The Average American To Save Their First 100K ?
Using publicly available data, we can generate a model that may be more reflective of how long it might take the average American to save their first $100K.
As a result, this model will leverage the following assumptions:
- 2021 Median Household Income: $70,784
- Source: U.S. Census Bureau
- 2022 Average Savings Rate (Jan – Nov): 3.2%
- Source: U.S. Federal Reserve
- 50/50 Portfolio (Equity/Fixed Income) Average Rate of Return: 8.29%
- Source: Vanguard
Under these assumptions, it would take the average American 19.3 years to save $100K:
Relative to our previous model, despite using a higher rate of return, it would take the average American 147% longer to save their first $100K.
The limiting factor in this case is the yearly savings amount.
In this model, the annual savings is equivalent to $2,265 (much less than our previous model’s 10K / year assumption). As a result, it will take more time for the account balance to hit a point where compound interest begins to work it’s magic.
However, it’s important to remember that everybody is in a different financial situation.
If you want to test different assumptions on how many years it would potentially take to save your first $100K, you can use a Future Value Calculator or reference the handy table that I created below:
My Journey To Saving My First $100K
I don’t normally share real numbers.
However, I thought it would be helpful to showcase how fast one can save their first $100K when grinding towards financial independence.
Below is what my journey to the first $100K looked like:
Furthermore, here is what saving my next $100K looked like:
3 Strategies To Help Save The First $100K
Below are 3 strategies that I have personally implemented in order to save my first $100K (and what I’m still doing today).
1. Establishing Good Financial Habits
Saving the first $100K is all about consistency and discipline.
Because it takes a substantial amount of savings before compound interest begins kicking in, we have to do the majority of the heavy lifting upfront. There is no way around it.
As a result, it’s important to establish good financial habits early on that facilitate building wealth.
One of the most impactful habits that I implemented was automating my investing.
What this looked like for me was setting up my 401(k) to automatically deduct a % of my paycheck and invest that amount in several low cost mutual funds. This took me a total of 15 minutes to do and was a huge reason on how I was able to save my first $100K as fast as I did.
Some additional beneficial financial habits that also helped me included:
- Avoiding debt at all costs
- Always paying off my credit card in full
- Having an emergency fund (so I didn’t have to adjust 401(k) deductions for extra cash)
If you are just starting out in your financial journey, I wrote about some of my favorite personal finance books that can also help provide a solid foundation of personal finance knowledge.
2. Increasing our Income
One of the most effective ways to saving our first $100K is by increasing our income.
That is because we can only cut our expenses by so much before we might feel money dysmorphic.
Since entering Corporate America in 2016, I have managed to earn 15% raises every year (on average). No – I don’t work in sales, I’m just a vanilla project manager.
Here is what I did to earn those raises:
- Learn hard and valuable skills
- Don’t be afraid to move around in your company
- Adjust performance: work smarter, not harder
- Learn how to communicate effectively
- Remember that you are your own best advocate
For more information on how I actually implemented those specific strategies, I go into a lot more detail in my post “My Strategy for 15% Yearly Raises: 5 Actionable Tips.”
Another effective strategy is choosing a high-paying job that doesn’t require a college degree.
3. Decreasing our Expenses (Especially the Big Ones)
To be honest, I’m not a huge fan of when people say “decrease your expenses”
Because usually the advice is something along the lines of “cut out avocado toast & lattes, that’s how you get rich!”
Spoiler Alert: It’s not.
Instead, we should focus our energy on decreasing the line items that make up the majority of our expenses. Fun Fact: housing, transportation and food make up 63.5% of the average American household’s spending.
When I was first starting out on my own, I rented a 900 sqft 1 bed 1 bathroom condo. This resulted in me paying $800 – $1000 less than what other “luxury” condos/apartments in my area were going for.
At the end of the day, when it comes to decreasing our expenses, we need to cut the expenses where the bulk of our money is going in order to make a real difference. Otherwise, we are just being penny-wise and pound foolish.
Final Thoughts
While saving the first $100K is not an easy thing to do, it is fundamentally necessary in order to start building real wealth.
However, don’t just take my word for it.
When Charlie Munger, Warren Buffet’s right-hand man, was once asked about his best advice for creating wealth, his response was:
“The first $100,000 is a b*tch, but you gotta do it.”
Thank you for reading! 🙂
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