How to Save $100K
One of the most exciting financial milestones is saving your first $100K. At this stage, you’ll start to feel like the day your money works harder than you is on the horizon and you’d be right.
The most effective way to traverse any significant goal is to learn as much as you can from individuals that have done exactly what your trying to achieve.
Here are the five areas that I focused on that allowed me to save my first $100K.
- Take advantage of retirement plans.
- Track your finances.
- Create cash flow.
- Invest your cash flow.
- Stay consistent.
This post will provide the reader with a guide of the necessary actions to save $100K with or without a six-figure income.
Utilize Tax-Advantaged Accounts
The latest data from the Organization of Economic Cooperation and Development (OECD) estimates that the average U.S worker brings home 77.4 cents of every dollar they earn. Where does the rest of the money go? Taxes, of course.
By the way, that estimate doesn’t include:
- State Income Tax
- Local Income Tax
- All other taxes paid on necessary goods and services such as sales tax
So let’s just say 30 cents worth of taxes for every dollar earned.
That 30 cents per dollar is money you couldn’t spend and, more importantly, its money you can’t save towards your goals. Luckily, there are legal ways to avoid the taxman and keep more of your hard-earned dollars working for you.
Specifically, I’m referring to tax-deferred or pre-tax investment accounts. The most common pre-tax accounts are the 401k, 403b, TSP, HSA, and the traditional IRA.
As the name implies, pre-tax accounts allow you to invest your money on a pre-tax basis which means that you’d invest from your gross income instead of your much smaller net income.
For example, let’s say you’d like to save $500. If you save this money on a pre-tax basis, $500 earned is $500 saved, but if you choose to save that money on an after-tax basis, you’d have to earn $715 to save $500 since you’d have to pay the taxman first.
( 715 – 715 * .30) = 500The main idea is to pay less in taxes now so that you can keep more of what you earn.
I can hear a savvy reader saying something to the effect of:
You might be able to contribute on a pre-tax basis, but all of that money isn’t really savings. Your going to have to pay taxes on that money when you withdrawal.
That is a true statement. Or at least, it could be a true statement. The entire truth is that you decide what tax bracket to avoid at contribution and you also decide the conditions of your withdrawal.
The difference between the taxes you would have paid and that taxes you will, consciously, decide to pay is called tax engineering and utilizing this strategy could save you tens of thousands over your life time.
“You must pay taxes. But there’s no law that says you gotta leave a tip.”
Morgan Stanley Advertisement
Let’s go through a quick example.
Let’s say someone earns $50K a year and decides to save $10K a year in a 401k. Let’s say they repeat this process for 5 years. On the sixth year, the person withdrawals the full $50K from the 401k. (This is just a simple example to illustrate tax engineering. A real scenario would be quite different.)
Taxes avoided at contribution:
($10,000 saved per year * .22 tax bracket) * 5 years = ~$11,000Taxes paid on the sixth year assuming no other income:
$50,000 total withdrawal * .135 (effective tax rate) = $6,750Notice that $50,000 of income was deferred, then the same $50,000 of income was realized, but the tax liability dropped by over $4,000. This is the essence of tax engineering. Pay less now, then pay less later.
According to IRS statistics, the average federal income tax paid is over $10K per year per person. If at least some of that money stayed with you, you’d be on track to saving $100K. And if you decide to use your tax-advantaged accounts, you may be able to take advantage of employer matching.
If you have an employer-sponsored retirement plan, such as a 401k, you should consider taking advantage of any contribution matching. Sometimes, your employer will match your contributions on a dollar-for-dollar basis.
For example, if you put in $2K for the year, your employer would put in an additional $2K. There is no reason not to claim this money. Matching limits are typically low (i.e. somewhere between 2%-6% of your pre-tax income). If you contribute on a pre-tax basis, your take-home pay will not decrease by that much, allowing you to balance other financial priorities.
I’d estimate that my employer match made up 17% of my first $100K, and that doesn’t include asset returns. Make sure that you claim all of your financial compensation. Leave nothing on the table.
Track Your Finances
Do you know why watching grass grow is boring? I’d like to think it’s because you can’t see anything happening. Many people struggle with building wealth because it doesn’t feel real.
In my experience, financial planning is like driving a car. You can know where you are and where you want to go, but if you don’t pay attention to the road between here and there, what’s the probability of getting to your destination?
You need to be able to identify with your dreams of financial success. If you can do that, saving money will feel like a reward instead of a sacrifice. There is no better way to do that than to begin tracking your financial life so that you can see yourself moving closer and closer to your goals.
Mint is a great tool in this regard, and I’ve used it to track my assets, liabilities, and cash flow. As a result of the above information, Mint can be used for budgeting, debt pay-down and tracking savings.
Personal Capital is also an industry-leading tool with many of the same features. It also has a number of widgets for portfolio management that I use often.
Regardless of what tool you decide to use, its important that you pick a tracker that best serves your financial needs. Once you can see your full financial picture, it will be easier to track your progress and make improvements to your process over time.
Create Cash Flow
Cash flow is likely the most important two word phrase in personal finance. Healthy cash flow, even on a modest income, is a great sign that one day you’ll have all the money you’ll ever need.
Cash flow is simply the difference between cash inflows and cash outflows.
Net Cash Flow = All Income Sources - All Expenditures From the equation, there are only two ways to increase net cash flow. You’d have to increase your income or decrease your expenditures. Which of the two methods should you choose?
The optimal answer would be to explore the possibility of both options. The practical answer is to start with the side that is most approachable given your current circumstances and build momentum.
If you make the choice to go for income, all I can offer is the standard advice and a couple of questions.
Are you as educated as you could be?
I’m not necessarily referring to formal schooling. Consider new skills, trades, certifications and vocations as well.
Do you work as hard as your willing to work?
I’m not a hustle culture zealot, and I don’t subscribe to telling people how hard I think they should work. I am, however, an advocate of people making the most use of their productive hours to accomplish the goals they say are important.
Taking on extra hours could be a good way to get extra points on the board quickly. The side hustle route can be more rewarding, but it will take time to scale meaningfully.
If you tie the work to something your interested in, then it will be much easier to put in those extra hours. (If you decide to go the side hustle route.)
If you make the choice to go for expenditures, you will have all the information you need in short time now that your tracking your expenses. Both of the apps mentioned above itemize all spending by category.
After your app of choice collects a couple months worth of data, I’d take a look at your spending. Are you flabbergasted by anything you see? If that is the case, I’d make a plan to consider how you can moderate spending in that area.
As you work to make progress on this side of the equation, my advice would be to keep the value principle in mind which simply states that you decide what is valuable. Always compare price to value and you’ll never regret a purchase.
“Price is what you pay. Value is what you get.”
Warren Buffet, CEO and Chairman of Berkshire Hathaway
Invest Your Cashflow
The national average interest rate for a savings account in the U.S. currently stands at 0.10%. That means that if you put $100K in such a bank account for an entire year, your profits would be…a whopping $100. If that wasn’t enough, the bank will take your $100K and lend it out to other people in the form of loans, then call it profit!
The U.S dollar has lost +90% percent of its value over the last 70 years, and according to the CPI numbers released Friday (Jun 10th), inflation is at a 40-year high!
Now we have two reasons to not put all our savings with the bank. Not only will the monetary value of our savings fail to grow, but the purchasing power will decrease as well.
If you’ve never invested before, here is how I think you should move forward if you have apprehension. People are most afraid of the things they don’t understand, so the best way to overcome this fear is to self-educate.
For this reason, your first investment should be in yourself. That is not a cliché or some abstract metaphor. I mean to dedicate time to learning about money through books, courses, blogs, and of course this publication. The better you understand your investments, the more confident you’ll be holding your assets through good and bad times.
During your research, you’ll discover plenty of advanced strategies people implement regarding portfolio management and the type of investments they buy. Still, none of that is vital at this point. Plain old low-cost index funds worked very well for me here.
I’d recommend the most common ETFs in the space to get started, which would be VTI ( Vanguard All Market Cap U.S) and VXUS (Vanguard All World — ex. U.S). If your looking to invest after-tax savings these investments can be brought in a brokerage account.
These investments have returned a 5-figure sum to me towards that $100K, and they will likely do the same for you over time, assuming historical returns. Check out more ETFs on Vanguard’s website.
“To be prepared is half the victory”
Miguel de Cervantes, Spanish Writer
For the record, paying off high-interest debt also qualifies as an investment. You might not be making money, but you are increasing your future cash flow, which will allow you to invest more into assets later on. This should be done first if the debt interest rate is higher than your expected asset returns.
Start Now and Stay Consistent
As you’ve likely noticed by now, none of the financial advice is this post is truly revolutionary or ground-breaking. In that fact, lies the secret to saving $100K.
The secret is that there is no secret. You just have to stick with sound financial practices long enough to see your efforts turn into something substantial.
Do the best you can, continue to make incremental improvements and watch how your wealth will grow.
“Success is the sum of small efforts — repeated day in and day out”
Robert Collier, American Author
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
