Many people dream of making a six-figure income. And why wouldn’t they? But what about saving six-figures and achieving a net worth of $100,000? After all, it’s not what you earn but what you keep that matters.
I reached a 6-figure net worth by age 25. Many others have done the same. Most anyone can reach a net worth of $100,000 with proper planning and enough time. J$ from Budgets Are Sexy believes saving the first $100,000 is the hardest. After you get there its rinse and repeat.
The U.S. Census Bureau reported in September 2017 that the median household income was $59,039. This means half the country makes less than $59k. Also, half the country makes more than $59k.
So, most will never earn a six-figure income. But many can save their way to a $100,000+ net worth. Below you will find six money saving tips
6 Steps to Saving a Six-Figure Net Worth
1. Pay yourself first
Pay yourself first. Pay yourself first. Pay yourself first. This is one of the most important steps to building wealth. It does not matter if your goal is to save $1,000, $10,000 or $10 million.
Reaching any savings or net worth goal will be challenging if you do not pay yourself first.
What is paying yourself first? Simply put, its sending money to your savings, retirement or investment accounts before you pay all your bills. This guarantees you will save money and create wealth.
Most people pay all their bills. Then they spend what is left. If they did not spend the leftovers they will ‘save’ the rest. This is no way to live or build wealth. Don’t be most people; this is a recipe for mediocracy and financially troubled life.
First, focus on building an emergency fund through savings. Aim to save three to six months worth of expenses. These funds should be held in a checking or savings account.
Tip – if you find it hard to save the money in your checking or savings account – set up a new account at another bank. Direct deposit a portion of every paycheck into the new account. This automates the process and makes saving easy.
Also, do not carry the new account’s debit card with you. This makes it harder to access the funds and less likely that you will spend the money on something stupid like a fidget spinner.
Second, retirement savings accounts, like an employer-sponsored 401k plan, provide a great way to save money and pay less taxes. The IRS contribution limit for 2017 was $18,000. The limit will increase to $18,500 ins 2018.
The average employer provides a 3% matching contribution. This means your employer match your contribution dollar for dollar up to 3% of your income.
Example: you make $50,000 a year. You contribute 3% of your salary to your 401k which is $1,500/year. Your employer will also contribute $1,500/year. Now you have $3,000 in your 401k.
At a bare minimum, you should contribute enough to get the employer match. This is FREE money. Yes, 100% FREE effin money. Don’t pass this up. My friend, Apathy Ends shares how a 401k is like a Sundae and the employer match is the cherry on top.
Over time, you should contribute more to your 401k. Keep increasing your contributions every year until you are reaching the contribution limit. This took me 4 years to achieve.
2. Live like a college student for as long as possible
‘Live like a college student for as long as possible’ was some of the best advice I ever received.
No, I am not talking about a keg party on a Tuesday night, taking beer bongs or pulling a Van Wilder. Some habits should fade away after graduation.
For many, college was the best four years of their lives. College also probably served as the most broke four years of their lives.
If you attended college, think back to that time. Remember how little cash you had? Many lived on a ramen budget. Going out to eat all the time was not an option and the dining hall was a lifeline to cure hunger.
Pocket change was a luxury and $0.50 bought a can of beer at some dive bar.
Student housing was not fancy.
Entertainment came from time with friends, free activities on campus and exploring your surroundings – not from expensive nights out.
Continuing to live on a ‘college student’ budget is a great way to save money. Prepare most of your meals at home. Have fun by spending time with friends and being outdoors.
Treat yourself occasionally and enjoy life. Do not deprive yourself.
You once lived on a ‘spaghetti budget’. Do not develop a ‘caviar lifestyle’ because you suddenly have a paycheck.
Over time, many people’s spending increases. Earn more. Spend more. This is called lifestyle inflation. Have you fallen victim to lifestyle inflation?
That’s ok – there is still hope. My friend Grant at Millennial Money struggled with lifestyle inflation and spent over $200,000 in a year. He shares his story about a return to frugality, regaining control of his spending and focusing on saving.
3. Keep your housing expense minimal
Housing expenses eat up a third of the average monthly budget. In expensive coastal cities, this number sometimes exceeds 50%.
The occasional latte from Starbucks will not break the bank. Passing on a trip to Starbucks will not make you rich either.
Instead, you should focus on the large items in your budget. Housing, transportation, and food are the three biggest expenses in most budgets.
Paying too much in rent will keep you in the poor house. Do not overpay for housing. You can do this by living with a roommate or roommates, renting a smaller place or moving to a more affordable neighborhood.
I eliminated my housing expenses by house hacking. By purchasing a home and renting out the extra rooms, I no longer had to pay rent. I also did not have to pay for my mortgage. I got paid to live in my house. How awesome is that?
Keeping my housing expenses low allowed me to go from a negative net worth to over $500,000 in 4 years.
4. Drive your old car into the ground
A new car serves as the first major purchase for many adults. This usually happens after graduating college or landing that first ‘big-boy’ or ‘big-girl’ job. Society views this as a right of passage and a status symbol.
And who could hate on a fresh set of wheels?
But while your friends rush off to buy a new car you should strongly resist the urge to follow the crowd. A hefty monthly payment accompanies their new purchase.
According to Experian, the average car payment is over $500 a month. That does not include taxes, insurance, gas or maintenance.
Cars are expensive and a liability. In fact, a $30,000 car cost my friend over $240,000. If you already have a reliable car forgo buying a new one. If you must buy a car, purchase a lightly used and practical model.
My car is 19 years old and has over 200,000 miles. Not having a car payment saves me $6,000 a year. This is money in the bank. Better yet, this is money I can invest and grow.
Coach Cason shares how to retire rich by driving embarrassing old cars and fixer-upper houses.
5. Avoid credit card debt
Saving and investing regularly will do wonders for your ability to create wealth. Having credit card debt will unravel all of your hard work. Compound interest can work for you or against you.
Albert Einstein said it best:
When you invest, your money compounds and grows exponentially. Likewise, when you have credit card debt, your debt compounds and grows exponentially.
Unfortunately, credit card companies usually charge high-interest rates. The average rate is around 16% but many cards charge 20-25%.
Historically, the stock market averages about 10% return annually.
Since credit card debt compounds faster (at a higher rate) than traditional investments, your debt will grow more quickly than your investments. Credit card debt destroys wealth.
If possible, avoid credit card debt at all costs. If you have credit card debt, you should focus on paying off your credit card debt as quickly as possible.
6. Side Hustle and grow your earning potential
Living frugally and reducing expenses leads to saving more money. However, expenses can only be cut so much. Life is short and we want to enjoy our time on earth. As such, we do not want to deprive ourselves either.
Growing your income is a great way to increase your net worth and personal wealth. Earning more leads to saving more assuming you do not increase your spending habits.
Today, it’s never been easier to earn extra income. The sharing economy and technology provide countless ways to earn extra money. You can drive for a rideshare service, use an app to walk dogs or sell stuff online.
You can ask your employer for a raise. Take an online course or earn another degree to add to your skill set. Switching jobs every few years is a great way to boost your income.
Start a side business.
No one size fits all
There are many ways to increase your savings rate, build your net worth and generate wealth. Hopefully, these tips will help you increase your savings. Remember it’s not what you earn but what you keep.
It’s never too early to start saving. The best time to start was yesterday but there is nothing wrong with starting now. Building wealth in your 30s or building wealth in 40s is great. If you are in your 50s or older, there is still time. The most important step is to start saving and take action – the earlier the better.
What tips or life hacks have you used to increase your net worth? Do you have your own money tips for saving and generating wealth? Do you have other ways to build wealth?