Saving the First $100K Is Hardest — Here's How People Actually Get There
The first $100,000 has long been considered a personal finance milestone and not just because it's a nice round number. Until then, most of the heavy lifting comes from your paycheck rather than your investments.
Experts say reaching six figures is a matter of consistently doing a handful of surprisingly boring things well. Find out more below.
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Why the First $100K Feels so Hard
Before you've built meaningful wealth, your income does almost all the work. Bobbi Rebell, certified financial planner (CFP) and certified financial therapist at BadCredit.org, explained that the “magic” of investing comes from compounding. “[It] doesn’t really shift into high gear until the numbers get more substantial,” Rebell added.
So at first, the vast majority of the money is coming from what is likely earned income. "In other words, you have to earn every dollar. The money isn’t doing the work for you yet," she said.
However, once compounding kicks in and you get past the heavy lifting, the quicker your savings compound. If you can save $1,000 a month at a 7% return, “you cross $100,000 in about seven years. Save more and it happens faster,” explained Andrew Latham, CFP, content director at SuperMoney and author of “Be Your Own Financial Planner: A Step-by-Step Guide to Creating Your Own Financial Plan.
Automate Your Savings
The strongest recurring theme across the sources is automation “and a little healthy amnesia,” Latham added. “The people who get there set up an automatic transfer for the day their paycheck lands and then they forget the account exists."
His advice is to automate 20% into low-cost index funds and then leave it alone.
Rebell added that you want to make sure to take that money out of your paycheck before anything else so you never miss it, as “the strongest way to outsmart your own temptation to allocate money to other things."
The Biggest Mistakes That Keep People From 6 Figures
There are some common common pitfalls that keep people from saving more quickly. According to Robert Johnson, chartered financial analyst (CFA) and professor of finance at Creighton University, one is lifestyle creep. “That is, they continue to ratchet up spending to enhance their current lifestyle, neglecting saving for the future," he said.
Another problem is planning to save whatever is left over after they pay their bills, Rebell said.
Lastly, Johnson and Latham both warned against trying to beat or time the market. Johnson called this move “fool’s gold" and said he doesn’t know anyone who has done it “successfully and consistently.” Latham added, "I've watched folks spend six hours researching an ETF to shave 0.03% in fees off a $4,000 balance. That's polishing the rounding error."
Focus Less on Cutting and More on Growing Income
While trimming wasteful spending matters, there's only so much you can cut, Latham said. “Income doesn’t have a ceiling,” on the other hand. If you can negotiate a raise, a side gig or a job switch, he argued this “does far more than any amount of penny-pinching."
Of course, you have to work not to let it be absorbed into lifestyle creep.
Small Milestones Matter
Breaking the journey into smaller wins helps maintain motivation while compounding gradually begins doing more of the work. Rebell suggested that smaller goals can be validating and build “a mindset of success and accomplishment."
Latham recommended the following steps:
Build a $1,000 starter emergency fund so a flat tire doesn't turn into credit card debt.
Wipe out the high-interest debt.
Then get your first $10,000 invested.
By the time you're closing in on $75,000 saved, “momentum is doing real work and $100,00 starts to feel inevitable," he said.
Consistency Is What Builds Wealth
Wealth isn't usually built through perfect stock picks or dramatic financial moves. It's built through decades of boring consistency, which Latham called “the actual superpower.”
"The person who invests $800 a month for 30 years without flinching beats the one who throws in $3,000 whenever they feel like it and then cashes out every time the market gets scary,” Latham said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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