Hitting the $100K Net Worth at 25 This is the best piece of advice I've ever heard about building high net worth. It came from a millionaire I looked up to as a kid, and it has stuck with me ever since. I was worried that I'd never have enough money to afford the things (*click) that I'd always dreamed about having. His exact words to me were, "Don't worry about earning millions; instead, focus on the first 100,000 because, after that, your net worth will go crazy.
Hitting the $100K Net Worth at 25
I didn't fully understand him at the time, but I did what he said, and lo and behold, it worked. So why is the first $100K the hardest? Well, there are two main reasons for this. The first one is your earning power. Think of this as your level in a article game. You just haven't been playing long enough to build up your skills and, therefore, can't compete with the more experienced players.
This is exactly the same when it comes to making money when you're younger. This issue is actually getting even worse. A recent study found that Gen Z has about 86% less buying power than my generation, the boomers, did at the same age. This is partly due to older people staying in the workforce for longer, meaning that higher-paid positions are harder to come by.
But it isn't all doom and gloom, as the internet offers a great way for younger people to make far more money than the older generation, as most of them don't understand how to use Instagram, let alone build an online side hustle. In contrast to myself, not many baby boomers are capable of keeping pace with you in the technological realm.
The second reason your first $100,000 is the hardest is your lack of compound interest. Think of your money like a snowball. You roll it down a hill by investing money, and as it rolls, it picks up more snow, which is your compound interest. The bigger your snowball gets, the more snow it collects and, therefore, the more compound interest you earn.
It sounds amazing, right? Well, yes and no. Let me explain. Right now, if you don't have at least $100K, then your snowball isn't big enough for it to pick up any significant income. You can't really benefit from compound interest. I mean, let's say you invest $10K in an S&P 500 Index fund and get an average yearly return of 7%, which has historically been the amount investors can expect.
After five years, your money will have grown from $10,000 to $14,176. That's five whole years to earn $4,176. That's why it's so hard to reach the first $100,000. It's all about how much you can contribute to your investment pot rather than how much compound interest you're making. This means you're going to have to make more money any way you can.
Honestly, it was no different for me. I remember doing at least three different side hustles at the same time in order to earn enough money. Working this many hours and also resisting the urge to spend it on vacations and the latest designer clothes is really a killer. But trust me, it's worth it, as once you hit that first $100K, it's way, way, way easier to grow your money.
So why does net worth go crazy after $100K? The answer. Because compound interest stops being lame, and it actually starts to sound pretty unbelievable. Take a look at this chart. If you invest $10K annually with a 7% average yearly return, going from naught to $100K will take 7.84 years. However, going from $100K to $200K will only take 5.1 years.
So, overall, it'll take 2.74 years less to make the second $100K compared to the first. That's 35% faster to make your second 100 grand than the first, and it gets even better. If we expand things, going from $200K to $300K only takes 3.78 years. Then $300K to $400K takes three years, and $400K to 500,000 takes only 2.5 years.
Is a $100k net worth at the age of 26 bad?
We could keep going, but I think you get the idea. Just look at how the chart starts to go crazy. But it all happens after the first $100,000. Getting that chunk of money as fast as possible is the key. Just think, if you can shave just a couple of years off how long it takes you to reach that $100K mark, how much quicker you'll become a millionaire.
Once you get to this point, it's almost inevitable that you'll be wealthy if you just invest in a low-cost index fund. If all you wanted to do was save up this $100K and invest it in an S&P 500 Index fund and never invest again—let's say, I don't know, you completely forgot about the account—you would still become a millionaire within 33 years.
That's how powerful compound interest is once you've made that first $100,000. So, how do you make your first $100,000? Well, all you need to do is follow the Growth Method. I actually came up with this myself, and it helped me in those early days of wealth building, so hopefully it can help you, too. The G stands for gaining control of your finances.
There's one way and one way only to gain control, and that's budgeting. Yep, I said it. Now, don't get it twisted. Budgeting isn't a rule book designed to stop you from having fun. It's more like a guide that navigates you towards more informed choices. I'm not saying you have to be super frugal with your money, but you do need to understand the difference between your needs and your wants.
The R stands for root your investments. Let's say you invest $250 a month in an S&P 500 Index fund and get an average yearly return of 7%. In 40 years, you'll have $656K. But what's even more impressive is that $536K of this is from compound interest. In other words, you only have to put in $120,000 of it yourself.
I know what you're probably thinking: "That's all well and good, but by that time, I'll be over 60 years old and dribbling into my dinner." I fully understand. That's why if you can get this first $100K invested as soon as possible, then you'll do much better than this example.
Now that you're making some money, you need to focus on the O, which stands for optimize your tax management. It might sound fancy, but, in reality, it's as simple as this: avoid paying tax. Now, let me make something very clear. Tax avoidance is completely fine and something that smart people do. Tax evasion, on the other hand, is illegal and not what I'm talking about.
the late Charlie Munger once said your first $100K
But, Mark, if you're earning more, you should pay more tax." I agree with you, and the rich do pay the majority of the taxes. But there should also be an incentive for someone to become an entrepreneur, as they provide jobs for the rest of society, and luckily, there is. Entrepreneurs are taxed on the profits they make at the end of each year, which means they can deduct expenses from their earnings.
These are called write-offs. This is different for an employee, as they're taxed off their monthly salary. So, say you're really passionate about the latest tech, like the new iPhone; you could start a YouTube channel reviewing gadgets, and once it's generating you money, you could deduct the cost of your tech items from your profit and get them tax-free.
Essentially, the government has helped you pay for the item you want. However, you can only do this within reason. Your business or side hustle has to have a need for this item. In other words, it must be a justifiable expense. That's why starting your business around your passion can be a great way to save a lot of tax.
It's what I did with my radio-controlled model shops, and my son also does with his article production company. If this sounds interesting to you, we're going to be talking about it even more in my $2K Challenge I'm running on Discord. I'll leave a link in the description if you want to save your spot.
It's completely free, and there's even an opportunity to win some great prizes. So next up, we have W: weed out debts. Did you know the average American carries $21,800 in debt? So, if you're in debt, then you're not alone. As soon as possible, list out all your debts and prioritize them based on their interest rates.
So, all the debts that you own with the highest interest rates are the ones you need to tackle first. This is the dark side of compound interest. If you don't understand it, then it can actually start to work against you. Think of it like the hot sun beating down on the snow you're trying to collect to make your first $100,000.
How I Saved $100K at 25
If you have too much debt to melt away, then you are never going to get to the stage where your money is working for you. So my advice for this one is to make tiny snowflake payments where possible, because every little helps. Don't give up, though, because neglecting your debt will cause you a lot of stress in the future.
So, although it feels like you're losing money from the payments, think of it as an investment towards your first $100,000. T stands for tapping into additional streams of income. Yes, I'm talking about starting a side hustle. As of 2023, 50% of Americans have a side hustle, even if they earn over $100K per year.
A side hustle gives you multiple advantages by diversifying your income. You'll have more money to put into your tax-advantage account, so more investments. And, again, you're just adding more snow to your snowball, allowing for compound interest to take its course. H stands for heightened self-discipline.
To put all these things we've discussed into effect, you need to find your inner discipline. Discipline is the currency of success. The more you earn, the wealthier your future will become. If you want to know how to build your wealth from $0, then I'm going to leave that article right up there. But don't click on it just yet.
Conclusions
At just 25 years old, achieving a net worth of $100K is an impressive milestone that signifies financial discipline and smart decision-making. This accomplishment sets the stage for future financial success and security, providing a solid foundation for long-term wealth building. By reaching this target at a relatively young age, individuals demonstrate the power of early financial planning and investment. As we celebrate these achievements, it's important to recognize the dedication and commitment required to reach this goal, and to encourage others to set their sights on their own financial milestones. Let's continue to educate and empower young adults to pursue their own path toward financial freedom and stability.