Ben Todd | Jun 2, 2017 | 1
How To Save Your First $100,000
Many people find it difficult to save a good amount of money. Saving money can be difficult but if you put in a strict plan and set goals you can save a good amount of money over time. This article will explain how you can save your first $100 000 in just 5 years if you make at least $45 000 a year or more. If you make less then $45 000 that is fine you can still follow the steps in the article you will just have less then $100 000, but you will still have a good amount saved.
First, its good to know that the first $100 000 is always the hardest to save, once you have that much saved then it will be a lot easier to save even more money. It will take some sacrifices, but it will be worth it in the end. Your second $100 000 will be a lot easier to save then your first $100,000 and you will see why in this article.
Step 1: Change Your Mind
We live in a society where everybody is always spending money everywhere they go. If they see something they want, they buy it, regardless if they can realistically afford it. People have the mindset that if they can’t afford something they will just put it on their credit card, meaning they’ll end up paying more because of interest. The biggest reason why people can’t save money is because they live beyond their means. Just because the bank approved you for a $300 000 house doesn’t mean you can actually afford it. The same thing applies for people always driving brand new sports cards, living beyond their means.
So the first thing that you should do is adjust your mindset when it comes to buying things. You will have to make some sacrifices, and they do not have to always be major sacrifices. Instead of eating out for lunch every day, bring a lunch and go out for lunch once a week instead. Instead of buying that brand new Mustang, buy one that is 3 years older and more affordable. The key here is you have to live at or below your means. Once you do this you will have a better mindset to allow you to start saving money.
Step 2: Make Financial Goals For Yourself
Set specific goals, and know what they are. It is shown to be more effective to write things down on a paper and keep it at your desk and you will be constantly reminded of your goal. It will sink into your subconscious mind. You could take a paper and write in marker with large letters “my goal is to save $100 000.” Place this on your desk or any place you will see it frequently. This will keep you motivate towards your goal and if you feel your mindset shifting back to living beyond your means, this could bring your mindset back to the right place.
1. Pay Off Credit Card Debt
If you have credit card debt, you must get rid of it rather quickly or else it will really make it a lot more difficult to get saving. If you are saving money but then make large credit card payments, it will take a much longer time to save.
If you have a lot of debt, you can consolidate your debt into one debt load that will have a lower interest rate. You can do this by setting up an appointment with someone at your bank.
Furthermore, you can also switch your highest APR interest credit card to a balance transfer credit card. With a balance transfer credit card you usually pay no interest for a period of time, usually ranging from 6 months to a year. This would give you a lot of time to pay off your credit card debt, without having to pay any interest. Some of the better balance transfer credit cards are the Bank Americard Credit Card and the Chase Slate Credit Card.
2. Create A Budget
After you have paid off all your credit card debt, it is time to get right to it. What you need to do know is to create a very detailed budget. You might be thinking who needs a budget, but believe me you do, it helps keep you on your path to saving that 100 000.
Now you can create the traditional spreadsheet where you input your income in one column, and you expenses in another column, then adding how much you have left after your expenses. (remember to include entertainment expenses )There is nothing wrong with that, but it can be hard to keep track off.
What is recommended is a Personal Finance Management Tool. These tools can link to your credit and debit cards to track your spending, and even categorize them automatically. You can do things such as set spending limits, and when you’ve met or gone over your spending limit you will get a text notification. These programs are usually free with some charging an annual fee. Below are some of the best Personal Finance Management Programs:
- Mint: This program will automatically categorize your purchases, create colourful graphs, and will even send you text notifications. Furthermore, Mint also offers investment tracking, and a goal setting feature that you can use to help save the $100 000.
- You Need A Budget(YNAB): This program also tracks your spending, and it even has tools that will help you get better with budgeting. This program cost $60 however the first 34 days are free.
- Personal Capital: This program also tracks your spending and you can link it to your checking account and credit cards, also this is the best program for investment advice based on your accounts.
If you do not want to use any of the above methods to manage your budget, there are some very useful phone apps you can download such as, Goodbudget Budget Planner, Spending Tracker, and Dollarbird.
Regardless which method you use to budget, it all comes down to your available spending money after all expenses are paid. The key to saving money is not to use all of your available spending money each month. For example, just because you have $500 left over, with a week to go in the month does not mean that you can have to spent $500 that week. Like we talked about at the beginning of the article you have to live below your means.
Step 3: Start Saving Money
Alright, you’ve paid off your credit card debt, created a budget, now it is time for the fun part, saving the money. This is the hardest part as you have to be aggressive when it comes to saving and really practice living below your means.
You will be using a 401 K to save and accumulate your money. A 401 K is a retirement savings plan which is offered through your employer. A set amount from your pay check is invested into your 401 K and no taxes are paid until the money is taken out. You can contribute up to $18 000 per year. Also, your employer might match your contributions to your 410 K. Sign up for your companies 401 K if you do not already have one.
How to Use 401 K to Save $100 000
The first thing you have to do is figure out is how much you have to take out of your paycheque to add up to $18 000 by the end of the year. We are using $18 000 since that is the maximum amount you cant contribute per year. For example if you make $55 000 per year you would divide that figure by 18 000. 18 000/55000 = 33%. So you would have to contribute 33% of your gross income to your 401 K each year to reach your goal.
Keep in mind the $18 000 does not take into account your employer’s contributions to your 401 K. If your employer contributes to your 401 K you won’t have to contribute $18 000, it just has to be a total of 18 000. For example if your employer contributes $5000 per year, you will only have to contribute $13 000 of your own money. Be sure not to go over the $18 000 limit in personal contributions as you will get hit with a penalty.
401 K Growth
In order to maximize the potential on your 401 K, you should be investing the money in your 401 K. For this article, we used a 5% return on investment, however that number can actually be higher then 5% if your investments thrive, and if the markets had a good year. It is advised to speak to a financial advisor to help decide how to invest the money in your 401K. It is very important to diversify your investments to minimize risk. Also keep in mind if you choose not to invest the balance in mutual funds or stocks you will not earn a 5% rate of return each year, it would most likely be 2-3%. This is fine, however keep in mind it will take you longer then 5 years to reach your goal.
Now that you have your 401 K going ahead full steam with maximum contributions you know have to open a Roth IRA. A Roth IRA is an individual retirement account that allows the individual to contribute after tax income to the IRA. The maximum contribution to your IRA per year is $5500. Any earning and withdrawals after the age of 59.5 are tax free.
Roth IRA Growth
Your Roth ITA can grow over time accumulating through interest. Each year your contributions will earn interest. Even years you don’t contribute, your Roth IRA can still increase because of interest. The power of compound interest is the key that can really allow your IRA to grow over the years. As mentioned with the 401K we assumed a 5% rate of return on investment, this figure can be higher or lower depending on how you invest the money. Speak to a financial advisor for instruction on how to invest your money.
So How Do You Save $100,000?
You might be wondering how all this ads up to $100 000, well you can see for yourself by using a long term investment calculator. You can use this investment calculator to input the
figures and see what your final result would be after 5 years. Your total amount of money contributed to the 401K and the Roth IRA per year ads up to $23 500. (18 000 to 401K, 5500 to Roth IRA) Contributing $23 500 per year with an average of 5% return on investment, you will have over $100 000 in five years. You can choose to invest your money in stocks, bonds, GIC”s, mutual funds, with each having different levels of risk and rate of return.
Can I Do This?
You might be thinking it will be awfully difficult to save $23 500 per year. Large purchases might come up that limit how much you can contribute such as a vehicle purchase, or a down payment on a house. Do not get discouraged, it is fine if it will take you an extra year or so to reach your goal. Also the balances in your 401 K and Roth IRA might fluctuate because of the markets, do not sell your investments if your balances drop, the market always has cycles and always goes back up. In order to see a good rate of return on your investments you will have to take on some risk, so the earlier you start the more time you will have for your investments to go increase in case they fall.
Remember, the key to saving is to live at or below your means, pay off debt first, stick to your budget, contribute a chunk of your yearly income, and invest your money and you will see your savings grow quickly.