The best piece of advice I ever received about building a high net worth came from a millionaire I admired as a kid. His words stuck with me: “Don’t worry about earning millions; instead, focus on the first $100,000 because, after that, your net worth will go crazy.” This advice transformed my financial journey, and it can do the same for you.
Why is the First $100K the Hardest?
1. Earning Power
When you’re younger, you haven’t had enough time to build up your skills, limiting your earning potential. Gen Z, for example, has 86% less buying power than boomers did at the same age.
2. Lack of Compound Interest
Without substantial initial capital, your investments can’t benefit significantly from compound interest. The key is to build up your investing pot quickly.
The Power of Compound Interest
1. The Snowball Effect
Investing money can be compared to rolling a snowball down a hill. As it rolls, it picks up more snow (compound interest), and the bigger it gets, the more snow it collects.
2. Example of Compound Interest
Investing $10K in an S&P 500 Index fund with a 7% return over five years will grow your money to $14,176. The more you invest, the more compound interest works in your favor.
Why Net Worth Grows Faster After the First $100K
1. Compound Interest Acceleration
Once you hit $100K, compound interest accelerates your wealth growth. For example, it takes 7.84 years to go from $0 to $100K, but only 5.1 years to go from $100K to $200K.
2. Exponential Growth
As you invest more, the time to accumulate additional $100K decreases. This exponential growth continues, making wealth building much easier after the initial $100K.
The Growth Method to Reach Your First $100K
1. Gain Control of Your Finances
Budgeting is essential to gain control of your money. Understand the difference between your needs and wants to make informed financial decisions.
2. Root Your Investments
Invest consistently in an S&P 500 Index fund. Even small contributions can grow significantly over time due to compound interest.
3. Optimize Your Tax Management
Take advantage of tax deductions and write-offs to reduce your taxable income. Starting a business around your passion can help save on taxes.
4. Weed Out Debts
Prioritize paying off high-interest debts to avoid the negative effects of compound interest working against you. Make small payments consistently to reduce debt.
5. Tap into Additional Streams of Income
Start a side hustle to diversify your income and increase your investing power. More income streams mean more money to invest.
6. Heighten Self-Discipline
Discipline is the currency of success. Stay focused on your financial goals and resist the urge to make impulsive purchases.
Conclusion
Reaching your first $100K is the hardest part of building wealth, but once you achieve it, compound interest will work in your favor, accelerating your net worth growth. By following the Growth Method, you can control your finances, invest wisely, manage taxes, eliminate debt, diversify income, and maintain discipline to build a strong financial foundation.
FAQs
Why is the first $100K the hardest to achieve?
The first $100K is challenging due to limited earning power and the lack of substantial compound interest. It requires building up your investing pot quickly.
How does compound interest help in wealth building?
Compound interest accelerates wealth growth by earning interest on both the initial principal and accumulated interest, leading to exponential growth over time.
What is the Growth Method?
The Growth Method involves gaining control of your finances, rooting your investments, optimizing tax management, weeding out debts, tapping into additional income streams, and heightening self-discipline to reach your first $100K.