I love when high-net-worth bloggers share their financial journeys because I always see a similar trend: It takes years to save the first $100k, but after crossing that threshold, compound interest starts pushing net worth higher at a faster and faster rate as each year passes.
Today I want to explore the math that explains why net worth begins to take off like a rocket ship after crossing the $100k threshold.
Consider our friend Shannon who saves and invests $10,000 every year. At a 7% annual interest rate, her net worth will grow to $100k in 7.84 years.
If Shannon continues to invest $10k per year at a 7% interest rate, she’ll be able to save her next $100k in only 5.1 years.
As time goes on, Shannon will be able to save each additional $100k in shorter and shorter amounts of time.
Although she is saving the exact same amount each year, the money she already saved is working for her behind the scenes, pushing her net worth higher at a faster rate each year.
Here is a chart that shows how long it would take to save each additional $100k (up to $2 million) based on different annual interest rates:
If we stick with the example of Shannon investing $10k each year at a 7% interest rate, there’s a mind-boggling stat to be seen: To increase her net worth from $0 to $100k, it will take her 7.84 years. But to increase her net worth from $600k to $1 million, it will only take 6.37 years.
This illustrates just how insanely powerful compound interest is once you have a few hundred thousand dollars saved up. As Charlie Munger said, getting the first $100k is a hard, but once you cross that threshold, your savings begin to do the heavy lifting for you.
Notice in the chart above that it takes 7 – 8 years to save the first $100k no matter what annual interest rate your savings grows at. This is because the amount you save matters far more than your investment returns when you’re just starting out.
As an additional resource, here’s a chart that shows how long it will take to save each additional $100k based on different annual savings. This chart assumes a 7% annual interest rate on investments.
The Math Works at Every Level
Saving $10k per year at a 7% interest rate is just a hypothetical scenario I chose to explore here. The math holds true for every amount of savings and every interest rate, though. As time goes on, your net worth will ramp up faster and faster each year due to compound interest.
Unfortunately, the magic of compound interest doesn’t tend to reveal itself until you cross the $100k net worth mark. It’s around that point that you have enough savings for interest to have a noticeable impact.
There’s an important lesson to be learned here: Don’t be discouraged if it takes you longer than you hoped to save your first $100k. This is by far the hardest financial journeys to save and will likely take you the longest to save. Once you cross that point, the road only gets easier from there.
I should also mention that I didn’t account for any increases in financial journeys here. More than likely, as you get older your income will increase, which means you’ll be able to save more and more each year. This increased savings combined with compound interest will help you increase your net worth even faster than what these charts show.