Reaching $100K Net Worth Unlocks the Power of Compounding
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Reaching $100K Net Worth Unlocks the Power of Compounding
Reaching $100K net worth as quickly as possible unlocks the power of compounding, often resulting in a wealth explosion. It is important to remember achieving $100,000 in net worth is not a one-time event, but rather a dedicated process occurring over many years. The majority of the first $100K usually comes from income individuals work for and save up. Therefore, it is crucial to save every dollar possible. The sooner an individual reaches $100,000, the sooner their net worth will start to skyrocket.
Power of Compounding
Compounding is the process where an asset’s earnings, either from capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment generates earnings from both its initial principal and accumulated earnings from previous periods.
Represented in the table below is the classic example of the power of compounding where starting with a penny, the amount is doubled each day.
| Day | Amount | Day | Amount | Day | Amount |
|---|---|---|---|---|---|
| 1 | $0.01 | 11 | $10.24 | 21 | $10,486 |
| 2 | $0.02 | 12 | $20.48 | 22 | $20,972 |
| 3 | $0.04 | 13 | $40.96 | 23 | $41,943 |
| 4 | $0.08 | 14 | $81.92 | 24 | $83,886 |
| 5 | $0.16 | 15 | $163.84 | 25 | $167,772 |
| 6 | $0.32 | 16 | $327.68 | 26 | $335,544 |
| 7 | $0.64 | 17 | $655.36 | 27 | $671,089 |
| 8 | $1.28 | 18 | $1,311 | 28 | $1,342,177 |
| 9 | $2.56 | 19 | $2,621 | 29 | $2,684,355 |
| 10 | $5.12 | 20 | $5,243 | 30 | $5,368,709 |
The first few days of growth may be slow, however, after 10 days, the growth starts to accelerate. Starting with day 11 and continuing through the next 10 days, the growth rate continues to accelerate rapidly. Achieving the milestone of $100K net worth is similar to starting at day 20 where the growth starts to rocket upwards due to the compounding effect.
Compounding Effect with 10% Annual Return
The table below demonstrates the compounding effect if an individual were to invest $10,000 annually with a 10% rate of return and how many years before reaching $100K net worth.
| Year | Start of Year | Contribution | 10% Return | Total |
|---|---|---|---|---|
| 1 | $0 | $10,000 | $0 | $10,000 |
| 2 | $10,000 | $10,000 | $1,000 | $21,000 |
| 3 | $21,000 | $10,000 | $2,100 | $33,100 |
| 4 | $33,100 | $10,000 | $3,310 | $46,410 |
| 5 | $46,410 | $10,000 | $4,641 | $61,051 |
| 6 | $61,051 | $10,000 | $6,105 | $77,156 |
| 7 | $77,156 | $10,000 | $7,716 | $94,872 |
| 8 | $94,872 | $10,000 | $9,487 | $114,359 |
| 9 | $114,359 | $10,000 | $11,436 | $135,795 |
| 10 | $135,795 | $10,000 | $13,579 | $159,374 |
| 11 | $159,374 | $10,000 | $15,937 | $185,312 |
| 12 | $185,312 | $10,000 | $18,531 | $213,843 |
| 13 | $213,843 | $10,000 | $21,384 | $245,227 |
| 14 | $245,227 | $10,000 | $24,523 | $279,750 |
| 15 | $279,750 | $10,000 | $27,975 | $317,725 |
| 16 | $317,725 | $10,000 | $31,773 | $359,497 |
| 17 | $359,497 | $10,000 | $35,950 | $405,447 |
| 18 | $405,447 | $10,000 | $40,545 | $455,992 |
| 19 | $455,992 | $10,000 | $45,599 | $511,591 |
| 20 | $511,591 | $10,000 | $51,159 | $572,750 |
| 21 | $572,750 | $10,000 | $57,275 | $640,025 |
| 22 | $640,025 | $10,000 | $64,003 | $714,027 |
| 23 | $714,027 | $10,000 | $71,403 | $795,430 |
| 24 | $795,430 | $10,000 | $79,543 | $884,973 |
| 25 | $884,973 | $10,000 | $88,498 | $983,471 |
| 26 | $983,471 | $10,000 | $98,347 | $1,091,818 |
It is important to note here the number of years it takes to earn $100,000.
It takes 8 years to achieve the first $100,000, however, it only takes 4 years to reach the second $100,000 (year 8 with $114,359 to year 12 with $213,843).
Furthermore, it then takes 3 years to earn the third $100,000 (year 12 with $213,843 to year 15 with $317,725).
The process of making more money becomes easier as investments are compounding. This creates a powerful cycle, with a net worth increase of $100,000 each year upon reaching year 25 and even less time beyond year 26.
Starting the Journey
To achieve financial success, it is essential to live within your means and spend less than you make. Making sacrifices to save up your first $100K may not be enjoyable, but it will be short-term pain for long-term gain.
Remember not to neglect the income part of the equation, as there are only so many expenses most people can cut, especially in today’s high cost of living due to inflation. Therefore, it’s essential to also focus on growing income instead of solely focusing on cutting back expenses.
All in all, the sooner an individual starts the journey to reaching $100K net worth, the quicker they will overcome the early phase and start achieving more explosive growth. This can often be accomplished through retirement accounts, stock market accounts, brokerage accounts or similar accounts. Trust the process and start investing early to achieve the critical milestone of 100K net worth.
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