You may have a financial freedom figure in mind: $1 million invested in order to retire early.
However, if you’re just starting off this can seem quite daunting: $1m seems a long way away.
Good news: it doesn’t have to be. Rather than focusing on a $1m, focus on your first $100k.
- Up to $100k, compounding sucks; you don’t really see the effects until after you hit $100k.
- Until then, you’ll want to reach this amount as quickly as possible using extra contributions.
- Once you reach $100k, it’ll take less time to reach $200k, and even less to reach $300k, etc.
- Once you make $100k, you can decide whether you want to continue contributing or not.
In this article, I go through why your first $100k is so important, and also the hardest to reach.
I talk about the maths behind reaching your first $100k, up until reaching your first $1 million.
Finally, you can add your own amount and returns using the MYB Early Retirement Calculator.
Why your First $100k is the Hardest
There are 3 main reasons why your first $100k is the hardest to achieve in no particular order.
The first reason being is when you are young and starting off, you don’t earn that much yet.
It’s very difficult to invest £1000 a month if you’re only making £2000 a month from your job.
With rent, bills and other expenses to take off you’d be doing well if you have money to invest.
Not only that but your income is not keeping up with inflation, especially within recent years.
Last year (2022) inflation was around 10% in the UK – did your employer match your salary?
Chances are they didn’t; if you were lucky, you might have made an additional 3% that year.
Therefore not only are you not earning much, but inflation is eating away your buying power.
Finally, the third reason is that you weren’t taught how to invest at school, university, etc.
As a result, you spend a few years of trial and error until you figure out how to actually invest.
Lack of Compound Interest
Another reason why your first $100k is the hardest is due to the lack of compound interest.
You may have heard of the power of compound interest: how it’s the 8th wonder of the world.
After some time, compound interest is the reason why your investments can really take off.
However, no one mentions how compound interest takes off after you have a certain figure.
Say you invest $10k into an index fund with a 10% annual return and no extra contributions.
After 7 years of investing, you may have around $20k – that’s $10k just in investment returns.
Although this sounds great, 7 years is a long time – you’d want to have way more than that.
That’s why you’d to contribute regularly to your investments at this initial stage of investing.
By doing so, you significantly reduce the amount of time it takes to get to your first £100k.
Ideally over those 7 years, you would want to have reached your first £100k in investments.
Your Investments go Crazy after $100k
The answer: compound interest stops being lame and starts to produce incredible results.
Take a look at this: Let’s say that you invest £10k a year with a 10% average annual return.
Starting with $0, it would take you just 7 years to reach your first £100k – that’s incredible.
What’s even more incredible is how long it would take you to get from $100k to $200k.
Keeping your contributions and annual returns, it would take you just 4 years to reach $200k.
That’s almost half the time that it took to reach £100k – why? Thanks to compound interest!
So, after 11 years of investing, you have $200k: more than half of that was getting to $100k.
If we carry along the same path, it would take you just an additional 3 years to reach $300k.
Following on from there, it would take an additional 4 years to get to $500k in investments.
And finally, it would take an additional 6 years to reach $1 million – that’s 24 years in total.
What if you Stopped Investing after $100k?
Let’s take a look at those numbers a bit and see how we got to over $1 million in just 24 years.
Starting with $0 and contributions were $10k a year – that’s $240k in additions over 24 years.
That’s nowhere near $1 million, so where did the extra $760k come from? You guessed it.
The difference is from your returns alone, that’s why it’s so important to invest your money.
However, what would happen if you stopped additional contributions after reaching $100k?
Without additional contributions, it would take you another 7 years to reach $200k – ouch.
However, it would take 4 years to reach $300k and another 3 years to reach $400k – not bad.
From there, it would take an extra 2 years to get to $500k and an extra 7 years to reach $1m.
It would take 30/31 years of investing to reach $1 million without contributions after $100k.
It will take longer to get to $1 million but you do save $240k that otherwise would be invested.
Is your Target Actually $1 million?
A lot of people aim for the $1 million mark, to be able to claim the title of being a millionaire.
However, is you goal really $1 million? Have you done the maths? Do you need that much?
As we’ve discussed in previous articles, most people’s wealth is divided in different accounts.
Some accounts you can access early, some accounts you can’t access until after age 55 or 58.
For accounts you need to last for 30 years, it makes sense to have $500k – $1 million invested.
For accounts you need to last only 15 years, then you may only need $300k – $500k invested.
While you’re still working and earning, you should keep contributing to reach your goal asap.
However, when you stop working is when you can stop additional investment contributions.
But it all starts with saving and investing your first $100k – that should be your key milestone.
It may seem a long way away now but enjoy the journey, you’ll get there before you know it.
To find out more about early retirement, check out our articles on retirement and investing.
Do you know what your FIRE Score is? Take our FIRE Quiz to see how close you are to FIRE.
Are you on the path to early retirement? How is it going? Feel free share in the comments!
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