“The first $100,000 is the hardest to save.”
That’s a common mantra on wealth-building blogs and investor forums.
And well, yes, it is. But it’s not impossible, so long as you’re willing to crunch the numbers and make some sacrifices.
I’ll show you a step-by-step process for saving your first $100,000 in as little as five years (yeah, you heard that right!).
While it won’t be easy, it also doesn’t have to be complicated. Let me show you what I mean.
1. Adjust your mindset
If you want to save $100,000, you’re going to have to think and act differently than most people around you.
Why is that? We overspend. We live beyond our means.
So, before doing anything else, adjust your mindset. By which I mean, sacrifice.
That 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 shouldn’t lease a new one every 30 months.
If you’re already not doing those things, amazing. If you’ve made all the financial sacrifices you can while still letting yourself enjoy life (after all, we’re not total fun-suckers over here!), then jump ahead to step 2. But if you know you can be a bit loose with your bank account, then you need to get tough on yourself.
You have to live beneath your means.
If you are struggling to keep your spending in check, ask yourself why.
Are you hanging out with people who make more than you and can afford to spend more than you? Are you trying to keep up with a lifestyle you can’t afford? Or, do you not make enough money to cover all your bills? (This is a very valid and all-too-common situation for many of us, and one that we’ll address later.)
If you’re not living within your means, you need to get this under control before you can aim 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 your 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.
I’ve used a vision board as a way to establish my money goals and get them down on paper. If you are more analytical and love a good spreadsheet, then build out your money goals in an Excel document.
Ultimately, you just want some sort of documentation that you can refer back to in order to track your progress.
3. Swear off credit card debt
Having debt (credit card debt, student loans) 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.
Once you get rid of this debt, you can then start working towards that big savings account.
In the meantime, try your best not to take on any additional debt. While it can be tempting to continue borrowing money, it isn’t going to get you any closer to your goal.
4. Create a budget
Before you know how much you can set aside, you’ll need to know where you’re spending your money. Then you can create 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.
You could use one of the many free or low-cost tools that will track your spending for you. Note that these resources each have pros and cons, so do some research before committing to one.
You Need A Budget (YNAB), for instance, requires more manual tracking, but it provides you with much more detail on your spending. It all depends on how much time you want to invest in budgeting.
Where to start budgeting
A good place to start with budgeting is to knock off between 20% and 30% of what you typically spend, then set that as your budget amount.
For example, let’s say you find that you spend $400 per month on groceries. You’ll want to shave 20% to 30% off that amount to use as your grocery budget:
$400 – (400 x 0.20) = $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.
Examples of other areas where you may be able to cut your costs to save money include:
- Eliminate subscriptions. Take inventory of your subscription services and cancel any that you don’t use or need. These can include streaming services, memberships, and subscription box services.
- Eat at home. Cook your meals at home instead of eating out or grabbing take-out. This includes making your own lunches and coffee for work.
- Entertain at home. Instead of going out to a bar, invite people over to your place and tell them to BYOB.
- DIY. Instead of going for a blow-out, getting your nails done, or taking your car to a car wash, do it yourself to save more money.
- Take public transit. Save on gas by taking public transit or walking to your destination.
- Downsize. If your rent or mortgage payment is consuming a large portion of your income, consider moving to a smaller place. You can do the same with your car. If you’re a two-car family, ask yourself if you can get by with one car or find something that is more economical.
- Do free things. Look for inexpensive or free ways to entertain yourself. Want to go to a concert? See if you can volunteer to gain free admission. Want to check out a museum? Look online to see if they offer free admission on certain days.
5. Save, save, save
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 $22,500 for the 2023 year.
Figure out whatever percentage of your check you need to take out to add up to $22,500 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:
$22,500 / $40,000 = 56%
So, you’d need to sock away 56% of your gross income to reach this milestone.
Yes, 56% is a lot. Far more than what most Millennials and Gen Zs can afford if they live on their own.
But the good news is you don’t have to max out to save $100,000. Not even close to that, in fact. I’ll show you the math below, but for now, just know that something is better than nothing. If you can max it out, go for it, but don’t think you’re doomed if you can’t right now.
But be sure you don’t go over $22,500 in personal contributions, or you may get hit with penalties. (Your total contribution maximum — of your and your employer’s contributions — is either $66,000 or 100% of your salary, whichever’s less.)
After you’ve maxed out your 401(k), you’ll want to set up a Roth IRA.
In 2023, the maximum contribution for a Roth IRA is $6,500 per year for those under 50.
Also, this is after-tax money, so you’ll have to include that in your budget.
To set up a Roth IRA, you can use a robo-advisor such as Wealthfront. If you want to make things as simple as possible, you can choose from one of their existing investment portfolios, or you can create your own from scratch.
Wealthfront is designed for young professionals, anyone from passive investors who want expert digital guidance, to people who want to be smarter with money. Investment management is automated with tried-and-true algorithms but strategic—and tuned in to your individual risk level.
Low fees, free planning guides, and multiple tax perks make Wealthfront worth a look.
- Automated management
- Tax-loss harvesting
- Ability to customize portfolios
- No fractional shares of ETFs in automated accounts
- No human advisors
When creating your own portfolio you can add the investments that you feel most passionate about including socially responsible investments, technology ETFs, and healthcare ETFs.
How does this add up to $100,000?
Using MU30’s simple long-term investment calculator, you can see that by maxing out both of these accounts ($29,000 a year or $2,416 a month) at an average 8% return, you’ll have well over $100,000 in five years.
And the reality is you don’t actually have to contribute that much. Even just half of that ($1,208) per month will get you over $100,000 in six years, assuming an 8% return (the current average return rate for both 401(k)s and Roth IRAs is between 8% and 10%).
6. Keep saving (even if it isn’t as much as you planned)
At this point, you might be thinking it’s not realistic to be able to save even close to $29,000 per year. But as we pointed out above, that shouldn’t stop you from trying. Even just half of that will still get you close to $100,000 in five years.
Even if you still 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. Remember, in order to save more money, you may need to think differently than you have been so far.
7. Make more money
If you don’t have a large salary but want to expedite your savings, look for ways to make more money.
There are two sides to the coin when it comes to saving:
- One side is about budgeting and cutting costs. It’s about sacrificing in the short term to achieve your long-term goal.
- The other side focuses on making more money. If you bring in more cash each month, then you can save more money and reach your goal of saving $100,000 faster.
There are a few ways you bring in additional income:
- Ask for a raise. If you’ve been at your job for a while and you’re performing well, then consider asking for a raise. This can be anxiety-inducing, but if you can muster up the courage to ask, it can be a quick way to make more money without having to find another job.
- Start a side hustle. If you don’t already have a side hustle, you might want to get one. While we’re not necessarily advocates of hustle culture, there’s no denying that a side hustle can help you reach your financial goals faster.
- Sell your stuff. If you have more things than you have money, consider selling your stuff. Use sites like Etsy, eBay, and Craigslist to sell off some of the things that you don’t use or need in order to put more cash in your pocket.
Of course, once you start making more money be sure to funnel it into your savings. Without a strict plan for your new money, it can be easy to get caught in lifestyle creep. This is when you gradually begin to spend more money as your income increases.
8. Make sure your emergency fund is well-funded
To prevent an unexpected expense or an emergency situation from completely derailing your $100,000 savings goals, it’s important that you have an emergency fund.
I know it seems counterintuitive to put savings into an emergency fund when you are trying to reach your other money goal, but trust me, it’s worth it.
An emergency fund is money that is put aside to cover your essential expenses (rent, food, utilities) should you need it.
For example, let’s say you lose your job and have no emergency fund to fall back on. If you can’t find a job fast enough, you might be forced to dip into your retirement savings and investments in order to make ends meet.
With an adequate emergency fund, you won’t need to use your retirement savings to survive, and as soon as you find another job, you can continue on with your $100,000 goal.
9. Don’t worry about balances fluctuating (or even tanking)
The balances in your account will fluctuate over time. 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.
While saving $100,000 seems daunting, it’s not impossible if you put your mind (and your money) to it. You do have the ability to save more money than you may think, and even retire early. You just have to want it and be willing to do what it takes to get there.