7 Rules I Used to Save $100,000 by Age 25

7 Rules I Used to Save $100,000 by Age 25

7 Rules I Used to Save $100,000

Hey guys! I have an awesome guest post that I’ve been waiting almost a week to share with you. My friend over at My Money Wizard hit the $100k mark this year! He’s sharing how he did it by 25 years old. Enjoy! ~M$M

A couple of months ago I logged into my bank account, retirement account, and index funds, added all the numbers together, and celebrated a moment of internal triumph. That final number now included 6 digits.

$101,530.

That sure has a nice ring to it.

I briefly thought about throwing a crazy, wild party. I could have followed the lead of the 78% of NFL players who go bankrupt by heading to the nearest night club for some bottle service. And although I did stop to Homer Simpson fist pump for a moment:

The rest of my reaction was a little more subdued.

I paused for some self-reflection. At 25 years old, most of my friends had been working since age 15 or 16, graduated college a few years ago, were now gainfully employed, and still hadn’t managed to make a dent into their student loans or save a penny to their name.

What exactly had I done differently? What could my friends, both real life and online, (yes, I’m talking about you, e-amigos) do to save $100,000 faster than anyone will tell you is possible?

In this moment of money induced zen-like clarity, I identified 7 rules that propelled me to the proverbial fat stack.

Some of these I lucked into, some of them I did by accident. The crazy part is that there’s nothing stopping you from using these exact same rules to ramp up your financial position, no matter where you stand now.

1.  Start Early

In 2006, at age 16, I made my first investment, a high interest rate bank CD – a 5% risk free interest rate. (Wouldn’t that be nice today?)

I purchased my first stock in 2007, and I’ve been steadily investing more and more of my earnings ever since. Today, I secretly save over 60% of my income.

Although I’m young (still? maybe?) my dollar bills are seasoned veterans of this compound interest game. They’ve been diligently working away for over 10 years, which is enough time to start seeing the beauty of the compound interest snowball at work.

Andrew Hallam, author of the New York Times Bestseller Millionaire Teacher, sums it up beautifully:

“It’s not timing the market that matters; it’s time in the market.”

Simply put, there’s no financial force stronger that compound interest. And the most important variable in any future value calculation is time. 

We’ve all heard the example of the two hypothetical investors, right?

Sally Stability

  • Starting at age 25, Sally Stability invests $10,000 every year for only ten years.
  • At age 35, she stops investing completely.
  • Her money sits in the stock market earning historically average returns of 7% per year.
  • By age 65, she holds over $1,000,000.

Pete Procrastinator

  • Pete waits 10 years and doesn’t start investing until Sally stopped. (You had to see this coming right? C’mon, it’s in his name…)
  • Just to retire with the same amount of money as Sally, Pete has to invest over $11,000 every year from age 35 to 65.
  • Every. Single. Year.
  • Total cost of procrastinating? $234,000 just because he started 10 years later.

Start today. Start yesterday. The market is not that scary, despite what that financial advisor salesman will try to tell you.

Even if it’s just a few dollars, the earlier you start, the wealthier you get.

2. Invest When Others Are Fearful

I sort of lucked into this one. The majority of my first substantial stock market investments happened in 2008.

It was a scary time to be an investor. The financial crisis had reached full blown panic mode. The value of the market had plummeted by nearly half, and the newsflashes were everywhere. The talking heads were warning about how the end of the world was near.

I’m pretty sure I actually heard a World War III prediction in the middle of a reputable news broadcast.

This makes for a bit of an uncomfortable time coming into your first substantial income with an eagerness to invest…

Thankfully, Warren Buffet’s words were a beacon of light in the dark tunnel of media doom:

“You want to be greedy when others are fearful. You want to be fearful when others are greedy.”

Taken this way, low stock prices weren’t something to be scared of. Stocks were on sale! Often 30-50% off!

And when productive assets are cheap, your future-self reaps the rewards.

In a few years, the market had recovered and then some, and my portfolio was forever boosted by the recession’s discounted stock prices.

That’s exactly what scary markets are: a cheap opportunity to boost up your portfolio.

Today, I look forward to the next recession. I got a taste of the wealth building power of bargain stocks in 2008, and I’m hooked. You better believe I’ll be greedy.

war

Investing during a recession can feel like this… Fight on smart investor, fight on!

3. Save Your Pretax Dollars First 

Or how I learned to stop worrying and love the 401K. I remember the moment I finally made the jump and maxed out my 401K like it was yesterday.

“Uh… Money Wizard, that’s because it practically was yesterday”

True, I only just switched my primary saving method from a stock brokerage to my 401K barely over a year ago. And a year is hardly a blip in the investment world.

But with one nervous click of the mouse, I ramped up my IRA contributions from 5% of my paycheck to over 25%.

At first, I didn’t notice much. The world kept turning. Then I forgot about this adjustment for a while. When I logged back into my 401K account, I nearly had a heart attack! It was huge!

The rate of growth, especially compared to what’s possible using only after tax dollars, was simply staggering.

Investing directly into your 401K or similar pre-tax account drastically reduces your income in the eyes of the tax man. Less income earned = less taxes paid = more money to keep.

I save over $6,000 per year in taxes just from maxing out my 401K contributions.

“Sure, I think I’ll keep that money rather than using it to pay taxes for no reason, thank you very much.”

Mixed with the maximum yearly 401K contribution limits of $18K, we are looking at building our net worth by $24,000 every year, PLUS any market appreciation.

If you were to continue investing this amount until standard retirement age, how much money are you looking at? Try over $4 million. 

4. Avoid Consumer Debt like the Plague it is

Consumer debt is fascinating because it’s a recent creation. Car loans, mortgages, credit cards… Once upon a time none of these existed.

Until the early 1900s, debt had always been intended for businesses. Providing capital to businesses is an economic miracle grow. It allows them to invest in assets, to expand their business, and weather market fluctuations.

Debt for consumer purchases is personal financial poison. It tricks unknowing consumers into believing they can afford something they don’t yet have the money for. It dishes out the satisfying rush from a new purchase; instant gratification, without the prior work. Then the interest rates kick in, and a constant financial drain sucks your savings dry.

Trying to build wealth while paying any sort of interest is like swimming against the current.

Just say No.*

*I have not included student loans in this category, which I’ll have to defer to M$M as the resident expert in this area. Admittedly, I was fortunate to avoid student loans thanks to extremely generous parents. I will not downplay the enormous positive impact of this on my ability to save.

If you’re currently battling student loans, check out any number of M$M’s excellent debt destroying articles. I hope this one just shows how incredibly awesome your savings can be once you’re free.

anchor

Throw that rusty anchor of debt back into the water, where it belongs!

5. Adopt a Minimalist Mindset 

Notice I only said to adopt a minimalist mindset. No, you don’t have to start enjoying furniture-less houses and plain white walls, and you definitely don’t have to purge, sell, or gift everything you own until all of your material possessions can be counted on one hand.

A minimalist mindset is simply realizing that more is not always better. It means becoming aware of the things that you own, becoming aware of the burden “stuff” can create, and carefully scrutinizing items bringing them into your life.

How much happiness do your possessions really bring you? How much of your time are you working to buy these things? How much time are you spending maintaining your stuff?

Living in a bigger house doesn’t mean you have a better home, it just means you have a larger house.

6. Don’t Keep Up with the Joneses 

Screw the Joneses. They’re a financial mess and probably can’t afford most of what they own anyway.

Ignoring the expectations of others is probably the most important obstacle in the path to uncommon wealth.

Do you want to reach complete financial freedom, or do you want to impress strangers who plan on slaving away in middle management for the next 40 years? Freedom to do whatever you want when you want, or a fancy car that might make a stranger look twice?

The desire to appear above average ironically makes you extremely average. Freeing yourself from this desire is probably the most powerful hack in the frugal playbook.

7. Have a side hustle 

For as long as I can remember, I’ve had a side hustle. When I was barely old enough to ride my own bike to school, I ran a baseball card business and lemonade stand that made me feel like an entrepreneurial mastermind for earning $30 in one month. When I was in college I bought, sold, and traded the ridiculously small niche that is slowpitch softball bats to ensure I still had enough to invest after a shockingly expensive beer drinking habit. Today, my blog is making tons of money hopefully on the verge of earning enough to keep its own lights on.

Side hustles are not just powerful through the extra income they create. They have a much more profound psychological impact in proving that your earning capabilities are not contingent on your annual salary, your boss’s opinion, or office politics.

Earning that first check from a side hustle slaps you in the face with the startling reality that your earning power is entirely determined by you. 

Capitalize on a special skill. Create art. Flip items on craigslist. Start a blog.

Everyone has some skill or motivation that makes them valuable. Find yours. You’ll have $100,000 before you know it.

Questions for you:

  1. What kind of side hustle sounds cool to you?

  2. Are you maxing out your 401k (if you have one)?

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31 comments… add one
  • The Green Swan Sep 9, 2016, 6:58 am

    Kudos to you for having the courage to invest money while the market was in full panic mode. Having experienced that as well I know how difficult that must have been. I specifically remember a phone conversation with my brother about why I should even keep the money I had in the market. I had lost what was a meaningful chunk of money too me at the time and was a little distraught. Thankfully I stayed in and kept investing and the market turned around!

    • The Money Wizard Sep 9, 2016, 10:36 am

      So true Green Swan. It’s easy to forget how scary that time really was. Weathering those storms can be brutal, but it’s worth it in the end!

  • Christa Szabo Sep 9, 2016, 8:46 am

    Wow!! Great tips!! I remember thinking I was rolling in the money when I was 10 because my mom paid me $.25 for every bed I made when we had our resort lol. If I put my money into bank CDs instead of music CDs, I probably wouldn’t have my current money issues. But I’m now trying my hand at the stock markrt with a virtual account so I’m at least learning by doing, just not with my own money. Any tips for the noob would be appreciated lol. Keep it up and keep up the great articles!!

    • Millennial Money Man Sep 9, 2016, 8:57 am

      That’s a great idea to try virtual stocks instead of actual stocks to practice!

      • Christa Szabo Sep 9, 2016, 9:02 am

        Got a free 60 day trial with iVest through one of the Rich Dad’s free webinars. I bought his book Rich Dad, Poor Dad after you mentioned it and I’ve been hooked ever since so thanks for the recommendation!! Ever since finding your blog, everything has been a life changer!

        • Millennial Money Man Sep 9, 2016, 9:09 am

          🙂 I love that book! That’s one of the ones that totally changed my perception of entrepreneurship and money.

    • The Money Wizard Sep 9, 2016, 10:37 am

      Thanks Christa! Rich Dad, Poor Dad changed my outlook on money too, and I also played around with fake stock portfolios on Yahoo for a while before I got the courage to invest my real money.

      For a total noob, (and even most all experienced investors) I’d caution against trying to pick individual stocks and instead employ Warren Buffet’s recommended strategy: buy a low fee index fund and dollar cost average. You’ll come out way ahead of most stock pickers in the long run.

      Glad you liked my article!

  • Financial Panther Sep 9, 2016, 9:19 am

    Awesome work Money Wizard! You are just killing it! Definitely agree with all your points, and especially the side hustle tip. It only takes a few thousand bucks to max out an IRA or HSA. I think anyone can make a few thousand bucks in a year on the side.

    That 65% savings rate is impressive. Is that pre-tax or post-tax?

    • The Money Wizard Sep 9, 2016, 10:38 am

      Thanks Financial Panther! I love your outlook on side hustles.

      I calculate my savings rate relative to my post tax pay, and include my employer 401K match. The last time I calculated it, my rate was 62.6% of take home pay, but hey, I like to round up. 🙂

  • Julie @ Millennial Boss Sep 9, 2016, 11:12 am

    Pete the procrastinator needs to get his act together!! One thing I would add – even if you do keep up with the Jones’s, it’s never too late to go back and correct those mistakes. I bought a house that was bigger than I needed as well as a brand new SUV. Yeah, I would be better off not having made those choices but I was able to correct them by selling the car and now renting out the house after trying to sell it. Some people are afraid to sell new cars or houses because they don’t think it’s easy to correct those mistakes but it is!

    • The Money Wizard Sep 11, 2016, 1:26 pm

      Great point Julie! That’s one of the coolest things about personal finance – everything is fixable!

  • Christa Szabo Sep 9, 2016, 12:26 pm

    I’m just looking to make $300 a week with stock options lol. Since I’ve never made more than $2,000 a month in my entire adult life, I figure $300 a week is doable. I can’t even imagine what it’s like to max out your IRA. I’m trying the side hustle thing, but rough to get off the ground. But I’m trying!

  • Millennial Moola Sep 9, 2016, 1:38 pm

    Tutoring is usually a pretty good side hustle. As is consulting for various debt or financial problems for close friends. I maxed out my 401k while working, it allowed me to do a Roth IRA rollover so I could max my assistance through Obamacare

  • Mimi Sep 9, 2016, 2:00 pm

    When my grandparents died my parents received $2500.00 That’s it. They worked hard all their lives and that’s all they had. My mother was determined not to end up like that so she took her $2500.00 and invested in the stock market. That was 1976. She has turned that money into $500k. It is NEVER too late to start!

  • Nurse Jackie Sep 9, 2016, 2:40 pm

    I really want to take a moment to thank both of you – Millenial Money Man and The Money Wizard. I was raised to think and save money like you all are preaching, and by following and reading your articles, I remember why I am doing it!
    Having only graduated in May and begun my career in June, I will have my 403b maxed by the end of November (which means 80% of my paychecks don’t making into my checking account), and sometimes people look at me like I have 3 heads! My side hustles definitely help. Full time nurse, part time bartender and flower sales associate.

    You all are my idols!

    • Millennial Money Man Sep 9, 2016, 3:00 pm

      I LOVE NURSE JACKIE. Haha. Seriously…that show is freaking great! So so so glad you are finding some value out of our articles, that makes all the time spent on it worth it! 🙂

    • The Money Wizard Sep 11, 2016, 1:21 pm

      That’s some seriously impressive savings Nurse Jackie. So awesome to hear that you’re maxing your 403b, keep it up!

      And I’m also really glad you’re enjoying the articles. M$M is right, that makes all it all worth it!

  • Finance Solver Sep 9, 2016, 7:23 pm

    Since I started in the latter half of this year (July), I can’t max out my 401k. However, instead of only investing 9000, half of the maximum allowed, I will be contributing $15,000 onto it (if I include my HSA account too). Next year is when I can contribute the maximum without fail and will be looking to save even more after that!

    • The Money Wizard Sep 11, 2016, 1:22 pm

      Very cool. One day your rich future self will look back on these early years of discipline, and say, “Thanks self.” 🙂

      Nice job!

  • Martin Sep 10, 2016, 11:27 am

    I also hit this milestone. The trick is to start early. I started hustling at 17. I was just a greedy kid looking to load up his bank account.

  • Mustard Seed Money Sep 11, 2016, 6:58 am

    I recently interviewed a former NFL player about life and finances after the NFL. He said they were all like “Pete the Procrastinator” and were expected to spend their first contract and save their second contract. However, most of these NFL players don’t get a second NFL contract and end up broke like your stat says above. Getting into good money habits at a young age is key. Congrats on hitting $100k!!!

  • Emilie Burke Sep 21, 2016, 7:37 am

    Right now, my primary focus is getting rid of all my debt (down to 15 K from 22+K on Jan 1 making <50K). I'm hoping that my car will hold out until I'm debt-free in Fall/Winter 2017, so that I can try to replace it with cash! Once I have those pieces in place, it'll be much easier to start working towards my first 100K!

  • Sarah @tortoisehappy Sep 21, 2016, 4:29 pm

    For a long time, I thought I was being sensible by avoiding the risks of the stock market and lost some key years keeping money in savings accounts. Luckily I had a ‘penny drop moment when I was 27’.

    Although I used to think investing was a bad idea, I did at least think that investing in my employer pension was a good idea (I know, it makes no sense to commit to it in one respect and be afraid in another, but I’m glad I didn’t shun investments completely) and did so from 18.

  • Jack Sep 23, 2016, 4:10 pm

    You do realize that your 401k money is going to be stuck in retirement until you’re 59 1/2 right? I hope you have some other money set aside when you turn 37 to live your “retirement” dream. Because taking that money out is going to cost you a 10% penalty PLUS your tax rate.

  • jack Sep 24, 2016, 7:37 pm

    Bravo!

    Consider sharing an eighth rule… Save your raises. When your salary goes up you can upgrade your life or upgrade your savings. Sounds like you’ve done that.

    peace,

    -j

  • Catherine Sep 26, 2016, 9:25 am

    I love the article! I just graduated from college and have been working for a year now. I try to save 50% of my income and I just picked up a side job. I have a few questions for you.. is the 401K tax savings actually savings or just deferred taxes? Don’t you have to pay taxes on that money when you finally do pull it out of the 401K?

    Also – you said avoid consumer debt like a mortgage. Are you suggesting renting is best? Isn’t buying a house like an investment?

    • Jen Oct 9, 2016, 3:51 pm

      With the traditional 401k the taxes are deferred until you take the money out. With a roth you pay taxes now instead of later. 🙂

  • ZJ Thorne Oct 8, 2016, 11:06 pm

    Congrats on the first $100,000. Really impressive.

  • Lilian Dec 26, 2016, 4:54 pm

    Would you suggest Roth or Pre-Tax for your 401k? Im 24 years old and I just started working about 1.5 years and as of I have 14% as my contributions for every paycheck. I’m also increasing my contribution 1-2% each year. So I’m still figuring out what is best between Roth and pre-tax, so was wondering what is your thoughts on them? Thank you!

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