If you earn at least $45,000 a year, you could potentially save your first $100k in just 5 years. Here’s how.
The first $100,000 is the hardest to save.
That’s a common mantra on wealth-building blogs and investor forums.
In fact, saving your first $100,000 can be quite simple. If you’re willing to make some sacrifices early on, you’ll have that kind of money (or more) in no time.
In this article, I’ll show you a step-by-step process for saving your first $100,000 in as little as five years. While it won’t be easy, it also doesn’t have to be complicated. Let me show you what I mean.
Steps 1 through 3: Before you start
1. Adjust your mindset
If you want to save $100,000, you’re going to have to think and act different than most people around you. There’s a reason that almost 50 percent of Americans have nothing saved for retirement.
Why is that? We overspend. We live beyond our means.
So before doing anything else, adjust your mindset.
This means sacrifice. It doesn’t mean you can never drink a grande mocha again, but it means you can’t buy Starbucks twice a day, every day. It doesn’t mean you can’t own a car, but it means you probably can’t lease a new BMW every 30 months. You have to live beneath your means.
2. Establish your money goals
‘Would you tell me, please, which way I ought to go from here?’
‘That depends a good deal on where you want to get to,’ said the Cat.
‘I don’t much care where’ said Alice.
‘Then it doesn’t matter which way you go,’ said the Cat
–Alice’s Adventures in Wonderland
Once you’ve decided you want to live a frugal life, the next step is to set up money goals. The point is to plan a vision of where you want to go.
There are plenty of ways you can get creative with this, but my favorite way is to visualize my goals. Many people do this with paying off debt, but it works just as well with savings goals. For example,Map Your Progress creates images to color in as you reach milestones for your goals.
3. Swear off credit card debt
Having debt is going to throw a wrench in your plan to save $100,000. Before you start saving your first $100,000, you need to get rid of your high-interest debt.
Follow this guide we’ve put together on how to pay off your debt. When you get rid of your credit card debt, you can start working toward that big savings account.
Steps 4 and 5: Time to save
4. Create a budget
Before you know how much you can set aside, you’ll need to know where you’re spending your money and then a rough plan for how to reduce your spending and increase your saving.
Yes, we’re talking about the dreaded budget. But there are ways to make budgeting easier. For example, check out Money Under 30’s simple ‘no more budgets’ method.
You could also use one of the many free or low-cost tools that will track your spending for you. Here are some of our favorites.
These resources have different pros and cons, so do some research before committing to one. For example, You Need A Budget (YNAB) requires more manual tracking, but it provides you much more detail on your spending. It all depends on how much time you want to invest in budgeting.
A good place to start with budgeting is to knock off between 20 and 30 percent of what you typically spend, then set that as your budget amount. For instance, let’s say you find that you spend $400 per month on groceries. You’ll want to shave 20-30 percent off of that amount to use as your grocery budget, like so:
$400 – (400 x .20) = $320
So you would start with a grocery budget of $320 and see how you do. Look at your budget categories each month and try to cut them even further.
5. Save, save, save
401(k)
By now you’ve figured out the first steps and you’ve created a budget. Now it’s time to start saving that $100,000!
To do this (especially in five years) you’ll have to be aggressive with your saving. Remember when I said “adjust your mindset”? Well, this is it.
For starters, look into your company’s 401(k) plan. If they have one, sign up now. You can contribute up to $18,000 per year.
Figure out whatever percentage of your check you need to take out to add up to $18,000 by the end of the year. Then take that percentage out of every paycheck.
For example, let’s say you make $40,000 per year:
$18,000 / $40,000 = 45 percent
So you’ll need to sock away 45% of your gross income to reach this milestone. This doesn’t take into consideration company matches, so you might not have to contribute that much to hit $18,000 in totalcontributions. But be sure you don’t go over $18,000 in personal contributions, though, or you may get hit with penalties. (Your total contribution maximum–of your and your employer’s contributions–is either $53,000 or 100 percent of your salary, whichever’s less.)
And yes, 45 percent does sound like a lot. Maybe you can’t do that right away. But if everyone was doing it, more than half of Americans would have more than $0.00 in their retirement savings. How will you separate yourself from the pack?
Roth IRA
After you’ve maxed out your 401(k), you’ll want to set up a Roth IRA. Roth IRAs have a ton of benefits, too. In 2015 and 2016, the maximum contribution for a Roth IRA is $5,500 per year. Also, this is after-tax money, so you’ll have to include that in your budget.
How does this add up to $100,000?
Using our simple longterm investment calculator, you can see that by maxing out both of these accounts ($23,500 a year or $1,958 a month) at an average 5 percent return, you’ll have over $100,000 in five years.
Steps 6-7: Checking in
6. Is this realistic?
At this point you might be thinking it’s not realistic to be able to save close to $24,000 per year. And it might not be for you. But that shouldn’t stop you from trying.
If you can’t afford to put away that much money in savings, start somewhere. Put away as much as you can afford. It might take you longer to reach your goal, but it’s better to have some savings than no savings.
I will still challenge you to think outside of the box, though. Think differently than others. Just do a Google search for “early retirement” and you’ll find hundreds, if not thousands, of bloggers sharing their stories of how they’ve saved 50 percent or more of their income. It is possible, you just have towant it and be willing to sacrifice other things.
7. Don’t worry about balances fluctuating (or even tanking)
Let’s face it, most of us aren’t going to retire in 5 years. But I’m writing this to show you that it’s completely possible to save a bunch of money in a short amount of time.
That said, the balances in your account will fluctuate. They may even tank when the stock market dips.
The thing you need to remember is that this is normal. You’re going to see ebbs and flows in the market—that’s just how it goes.
This shouldn’t stop you from being aggressive with your savings goals. It also shouldn’t stop you from putting your money into the stock market altogether.
To see returns on your money, you’ll have to take on some risk. And if you start early when you’re young, you’ll have some time before you retire. This will allow you to take on more risk.
Conclusion
While saving $100,000 seems daunting, it’s not difficult if you put your mind (and your money) to it. If you’re interested in getting started, look into some of the investment brokers we recommendopening an account with. Also, spend some time reading through our articles on saving money andinvesting to build your knowledge base and comfort level.
Remember, you have the ability to save tremendous amounts of money and retire early. You just have to want it and be willing to do what it takes to get there.
