Aside from becoming a millionaire, most people dream of saving $100,000. For some reason, the idea of having $100K saved is something that inspires people to get their finances in order.
The only problem is most people don’t know where or how to begin. They have the goal of saving $100,000, but after that, they are lost. They might get caught up in get rich quick schemes or playing the lottery, but neither of these work out most of the time.
So where do you turn? In this free cheat sheet, I’ll outline how to save $100,000 by walking you through the steps to get there. As the old saying goes, the first $100K is the hardest. Which means once you follow these steps and save your first $100,000, the next one should be much easier.
9 Steps For How To Save $100,000
#1. Have The Right Mindset
Your first step has nothing to do with building up your savings. You first need the right mindset. That means you have to stay positive, regardless of what is happening in life.
I have read studies that if you place two people out in the wilderness, one person with all of the survival skills and a negative attitude and someone else with no survival skills and a positive attitude, the one with a positive attitude will survive.
Life can get tough at times. But if you learn to see the positives in everything, you’ll be much happier and much more likely to succeed.
If you doubt yourself from the start, you really have no hope of reaching your goals. Learn to believe in yourself and think positively.
#2. Create Short-Term Goals
The next step towards saving 6 figures is to create short-term goals. It’s likely you are starting with nothing saved. In the first month, you might save $50. You’ll see that $50 compared to the $100,000 goal and lose motivation. The goal just seems too hard to reach.
But if you break your goal down into manageable steps, you can keep yourself motivated and as a result are more likely to succeed.
For example, years ago I was in credit card debt for more than $10,000. I wanted to pay it off but felt like I wasn’t making any progress with my small monthly payments. After a handful of failures, I finally made the change to looking at my debt in small amounts.
Instead of focusing on trying to pay off the entire $10,000, I focused on $2,500. My goal was to get my debt down to $7,500. This was more manageable and kept me motivated.
Once I hit this goal, I celebrated by having a nice dinner out. Then I made a new goal to pay off another $2,500. Once my debt hit $5,000 I celebrated again.
Eventually, this technique helped me pay off my whole debt.
The same idea holds true for saving money as well. You can keep your main goal of saving $100,000 but focus on a smaller amount. Try to save $1,000 this year. When you achieve that, celebrate. Then create another small goal.
I can remember when I first started working and was saving $20 per paycheck into my 401k plan at work. After my second paycheck I saw my $40 and thought I would never be able to retire.
But to my surprise, at the end of that first year, my balance was close to $1,000. That motivated me to try to save a little more. After the second year, thanks to my increased savings and compounding, I had more than $2,000 saved. Close to 15 years later and I’ve easily cleared six figures and continue to save more.
#3. Make Saving Effortless
While it is important to create smaller goals so you stay motivated to save, it is just as important to make saving money effortless. This goes back to my example of saving for retirement. I set up my contribution and did nothing more.
Your best weapon here is to automate your savings as much as you can. The less you have to think about actively saving money, the more money you will be able to save.
Here are a few tricks I use to save the most money.
- Contribute to a 401k plan. When you invest in a 401k plan, money is taken right from your paycheck. You never see the money. It just gets invested for you. By far this is your best option for saving.
- Use technology. If you bank online, you should be able to easily set up an automatic transfer from your checking account to your savings account. Make the amount small so you don’t notice it and let it compound.
- Question purchases. Before I buy anything, I stop and think about it first. Too many times we buy on impulse because advertisers trick us into thinking we need something we really don’t. By stopping for a minute, I am able to avoid many regretful purchases.
I also use 2 apps to help me save money.
The first is Qapital. It rounds up purchases I make to the nearest dollar and transfers the money from my checking account to my savings account. In the few months I’ve been using it, I’ve saved close to $750. You can learn more here and get $5 when you open a free account.
The second app is Acorns. It is the same idea as Qapital, but instead of putting your rounded up money into a savings account, Acorns invests the money for you. I just started using it and like what I see. My brother-in-law turned me onto it when he told me the app helped him save more than $1,000 in a year. You can learn more about Acorns here and they too will give you $5 when you open an account.
By simply making your saving effortless, you can end up with more than $1,000 a year. But if you want to save even more on your journey to $100K, keep reading.
#4. Create A Budget
The next step is creating a budget. While this doesn’t sound fun, it really isn’t as bad you think. You can get as detailed with a budget as you like. For a while, I budgeted for every single expense I had. Then I modified things to only budget for expenses I had a hard time controlling, like dining out and entertainment.
The key is to find a way to make budgeting work for you. For many, the first step is overcoming the idea that a budget forces you to live a boring life today for a better life tomorrow. If this is you, learn to look at a budget as a tool to help you reach your goals. You can still have fun and enjoy today while working on saving your first $100,000.
The next step is to find a budget that works. There are many options out there. If you want total control, you can go with a spreadsheet budget. This post highlights the best free ones you can choose from.
#5. Avoid Debt
In order to save $100K, you will need to avoid debt. Spending more than you earn is a guaranteed way to owing $100,000 instead of saving $100,000. So your first step is to avoid debt at all costs.
This is because debt costs you a lot of money. If you are paying 18% interest on your debt, by paying your card off in full you are essentially getting an 18% guaranteed return on your money. You won’t find this kind of return anywhere else.
But what if you are in debt? Can you still save $100K? You can still reach your goal, you just need to work on getting rid of your debt.
For starters, you should follow the snowball method. This helps you pay off your smallest debt first so you can then pay more, or snowball, towards your outstanding debt.
But what about finding more money to put towards your debt?
To pay off your debt, find ways to cut monthly expenses, take a second job, or start a side business for additional income. By reducing your expenses or earning more money, you can pay off your debt that much faster.
A simple tool I am a fan of for debt reduction is Qoins. It’s an app that rounds up your purchases and puts the rounded up amount towards your debt. It’s simple, automatic, painless, and it works wonders. You can learn more here.
Finally, another area where debt hurts is on your mortgage. While paying off your house isn’t a requirement to saving your first $100K, it should be on your radar.
This is because, once your mortgage is paid off, the money you were putting towards your monthly mortgage payment can now be saved and invested.
An alternative to paying off your mortgage is to simply refinance it. By getting a lower interest loan, your monthly payment will be less and you can save the difference. Below is a calculator that shows how much you could save each month.
#6. Save On Taxes
Another important step is to keep taxes as low as possible. The good news is you don’t need to be a CPA or study the IRS rules in order to accomplish this. At the end of the day, to reduce your taxes the most you should:
- Contribute as much as you can to your 401(k) plan. Your contributions are taken out of your pay before taxes, making your taxable income lower, meaning less tax paid.
- Contribute to an HSA account if you have a high deductible insurance plan. If not, contribute to an FSA. Both will reduce your tax burden.
- Know the difference between a credit and a deduction. Many people confuse the two. A credit is much more valuable to you than a deduction.
- Invest wisely. Bond interest is taxed at ordinary income rates whereas capital gains and dividends from stocks are taxed at a lower rate. If you hold taxable bonds or bond funds, they should be in your retirement accounts so you don’t have to pay taxes on the income. You can read this detailed post on tax efficient investing to learn more.
- Take advantage of tax-loss harvesting. This is where you sell some holdings at a loss if you have already realized some investments at a gain. You can offset your gains with the losses, eliminating any tax you owe. You can also potentially offset some ordinary income too.
- Give to charity. You should be giving because it is the right thing to do. But you do get the added benefit of writing off your donations. Keep a detailed list of the donations you made throughout the year including money, clothing, time, travel, etc. Here is a great list of reputable charities to consider giving to.
- Pay attention to the law. I know I said you don’t have to study the IRS rulebook, but you should stay on top of new tax laws and changes every year. You never know when something will change that can affect you. Just keep your eye out for news stories and read them. If you don’t understand what it is talking about or if it benefits you, ask your CPA.
#7. Generate Additional Income
I touched on this point above when talking about debt, but I need to go into greater detail on making more money so you can save $100,000.
When you make more money, either from earning a raise at your job or by doing something on the side, it makes it a lot easier to save more money. And when you save more money, your savings compound and grow faster.
With the proliferation of the internet, you can do all sorts of things to generate additional income. Just figure out what you enjoy doing and then see if there is a way to earn an income from it. When you do this, your “work” never feels like work at all.
#8. Invest Your Money
In order to reach your goal of saving $100K, you’ll need to invest in the stock market. While you won’t lose principal when you put your money into a savings account, your money will take a long time to grow there. You can see just how long in the chart below.
Because of this, you need to start investing. And you can do this without much risk. The solution is to invest in a portfolio that is made up of 60% equities and 40% bonds. This allocation will help you take advantage of a rising stock market and help protect you when it is falling.
Understand that you will still potentially lose money when the market drops, but less than if you were in a more aggressive portfolio.
Now that you have an allocation set up, where do you invest? I recommend you look into Wealthsimple. They are a robo-advisor that will take care of everything for you. You simply open an account and set up a monthly transfer. They do the rest.
The best part is, for the first year, your first $5,000 are invested for free! You can learn more here.
#9. Keep Costs Low
Investing your money in the stock market is a great way to help you reach $100,000 in savings. But one area of investing that many overlook is the annual cost of investing.
This is because you never get a bill in the mail for the management fees of your mutual funds or exchange traded funds. As a result, many investors are paying much more in fees than they need to.
Being aware of what you get charged in expenses for mutual funds and ETF’s is a must. There is no point in paying high management fees when you can get funds that suit your needs for a fraction of the cost. That is one of the things you can control when you invest. After all, paying fees is like being charged twice:
- You first pay the fee that the investment charges
- You lose out on the opportunity of that money growing for you
Here is what I mean by this. Let’s say you have an investment that charges you 1% and another that charges you 0.50% with $1,000 invested. At the end of the year, with a 1% fee, you paid $10 in fees. With a 0.50% fee, you paid $5 in fees. This is the first charge.
Had you only invested in the fund that charges you 0.50%, you would have $5 more in your account. While this $5 might not seem like a lot, it becomes huge when you take into account the real value of your account and time. This is the second charge.
Over the lifetime of investing, you are paying over $75,000 in investment fees! This shouldn’t cause you to rethink investing in the stock market. It’s just a good way of letting you know to pay attention to fees.
If you have no idea how much you pay in fees and want to know, you should sign up for a free account with Personal Capital. They have a great tool that looks at your investments and tells you exactly how much you are paying in fees each year. It was truly an eye-opening experience for me.
How Your Savings Grow In Time
Saving your first $100K will take time. But how long exactly? Let’s assume you can save $1,000 a year, which you can easily do just using the apps I noted above. That is $83 per month. Here is how long it will take you to save $100K based on various accounts.
As you can see, putting your money into the stock market is the fastest way to saving $100K.
But what if you use one of the apps I recommended to save $1,000 a year and you are able to save an additional $125 each month on top of that? How long would it take you to save your first $100,000?
As you can see, by saving an extra $125 per month, you drastically reduce the time it will take you to have $100,000 in savings.
The point is, the more you can save, the sooner you can reach your goal of $100,000. So make every attempt to save as much as you possibly can.
You can save $100,000. You just have to have a plan and put in the work. This post took care of the first part for you. You now know the steps involved in saving $100K. All you have to do is to start taking action.
I know taking the first step might feel overwhelming now, seeing how far you have to go, but it can be done. There are many people out there who have saved $100,000. Just take things slow and start saving.
From there, look for ways to save additional money and possibly earn even more from side hustles. Doing that will ensure you saving your first $100K as fast as possible.