Anyone with a background in investments and an understanding of how to save money is familiar with the oft-repeated mantra of saving: Saving the first $100,000 is always the most difficult.
You might wonder why this is a widely held belief; shouldn’t going from $400,000 to $500,000 be just as difficult as going from nothing to $100,000?
No, and the reason is straightforward: the more money you have, the more interest you’ll earn. Even if two accounts have the same annual percentage yield, the larger account will always earn more interest than the smaller one.
Although it won’t eliminate the difference between the two accounts, investing in a compound interest account is one way to earn more interest on a smaller amount of money.
A compound interest rate will reinvest your returns, meaning that all interest earned will be deposited back into your account, and additional interest will be accrued on the larger amount.
You can make a lot more money with compound interest than you could with a simple interest rate.
The formula for calculating compound interest earnings is as follows:
P(1 + r/n) not = A
Amount accumulated is equal to the principal amount multiplied by (1 + (interest rate compounding per period)) (compounding per period x number of periods)
For example, if you have $1,000 in an account with a 3% annual interest rate compounded quarterly, the balance after 10 years can be calculated as:
Amount accumulated = $1,348.35 (1 + (0.03 4)) (4 x 10)
It is clear that the more money you have, the more money you will make. That is why it is critical to start saving as soon as possible and to contribute as much as feasible.
Here are seven ways for saving your first $100,000 to help you expand your savings and take advantage of compound interest.
1. Begin saving while you are young.
It’s never too early to start putting money aside. Your first deposits should ideally be made as soon as you graduate from college and begin working.
Saving money each year — even if it’s only a few thousand dollars — can result in higher savings year after year thanks to compound interest, gradually increasing the amount saved.
You’ll be further advanced in the deposit cycle if you make your initial deposit early.
Start looking into college scholarships and grants when you’re in high school. Because a portion of your tuition will be paid for, it will be easier for you to save during your college years.
According to Forbes, around $100 million in scholarship money goes unclaimed each year, so there must be at least a handful that will apply to you and assist you in saving your first $100,000.
2. Make Your Savings Process More Automated
It’s simpler to stay on track for the long-term goal of saving that first $100,000 when you incorporate little habits into your routine.
One of the simplest ways to save money is to automate the process so you don’t have to think about it — and you don’t have to decide whether to save or spend the money.
Start by setting up a direct deposit or a transfer from your regular checking account to deposit a portion of each paycheck into a savings account. Your bank may already have a program in place to assist you in increasing your savings.
Keep the Change, for example, is a Bank of America initiative that rounds up your purchases to the next dollar and deposits the difference into your savings account.
Even if you don’t think you can save much, your regular donations, no matter how small, will build up over time.
Plus, after a few months of consistently and automatically saving, you’re unlikely to notice the money disappearing from your disposable income.
3. Push it to the limit of Your Individual Retirement Account (IRA)
No matter how young you are, retirement should be high on your priority list; saving and contributing to your retirement account are important financial habits to develop while you’re still young.
You should maximize your tax benefits by contributing as much as possible to your IRA each year.
As an individual taxpayer, you have the option of choosing between a standard IRA and a Roth IRA. Each has advantages, and which one is best for you may depend on your level of financial security.
You can save money in a traditional IRA before taxes are deducted, which means you’ll get a tax break. However, if you take money from a traditional IRA early, you will be charged a penalty.
If you think you’ll need money before you retire, a Roth IRA might be a better option: A Roth IRA’s qualified distributions are tax-free.
You can contribute $6,000 to traditional and Roth IRA accounts, or your taxable pay for the year if you’re 50 or older by the end of the year.
It’s crucial to maximize your IRA contribution since retirement funds run out rapidly, so contributing as much as you can is really helpful.
4. Increase the size of your investments
Getting into the stock market may be daunting at first, but there are numerous apps available today that can make it simple–even for novice investors.
If you’re new to investing, Acorns, for example, is a terrific place to start. Your purchases are rounded up to the nearest dollar, and the difference is deposited into your investing fund. Acorns offer questions to learn about you and your goals before making investments depending on your portfolio and risk tolerance.
There is a small fee to get started, but you should be able to recoup it by increasing your savings.
5. Make Debt a Top Priority
Early in your work, you’re likely to run into some form of debt. When you’re confronted with all of your debt at once, it might be overwhelming.
That’s why you should prioritize some debts over others, and the necessities of life, such as food and housing, should always come first.
If you can’t feed yourself or don’t have a place to live, it will be difficult to hold a job and get out of debt. After you’ve taken care of your top objectives, you may focus on less important obligations like utilities, credit card debt, and student loans.
“In an ideal environment,” Wohlner added, “people aiming to save their first $100,000 would balance this ambition with debt reduction.” “In the case of student loans, there is a set period in which you must begin making payments, and they must become a part of your budget.”
If at all feasible, automating your savings is an excellent idea. Payroll deduction for your company’s 401(k) is a fantastic way to do this.”
6. Try to save as much money as possible
If you want to save money, one of the most important things you can do is quit spending more than you need to. You must reduce your daily costs, develop a budget, and accept sacrifice as a necessary component of saving.
Don’t go out to eat every night. Rather than buying a new car, consider purchasing a used one. If your phone is still functional, don’t upgrade it every year.
Depending on your income, being thrifty may be necessary. A $5 outing may be innocuous, but when you do it every day, it adds up to almost $1,500 per year that could be put toward retirement. You’ll probably have to live below your means if you want to save money.
7. Earn an additional income
Another thing you can do to save money is to earn money outside of your primary job. Take advantage of your hobbies and talents to supplement your income from your regular employment. If you’re particularly skilled at a craft, for example, you could devote an hour a day to creating it and selling it online.
Alternatively, if you’re a talented writer, look into freelance possibilities. Try getting active in the stock market if you’re interested in investing.
You should take advantage of any skills you have. A second job based on a pastime might be a simple and pleasurable method to get closer to the $100,000 mark faster.
The initial $100,000 may be the most difficult to save, but there are options. You can save $100,000 in a handful of years if you live within your means while keeping long-term goals in mind and managing your money wisely.
The most essential thing is to start implementing these seven tactics as soon as possible so you can start saving more and benefit from compounding interest to expand your money.