Investing is one of the best ways to generate wealth, but the path to personal wealth is not always clear. For example, if you’re starting from scratch, investing your first $100,000 may seem extremely difficult. But reaching this milestone is the most important thing, because building wealth can be much easier once you get there.
The reason? Compound interest. If you keep your money invested, it will grow faster and faster. Ultimately, the interest you receive may even be greater than your contributions. However, before that can happen, you must first overcome the financial and psychological obstacles that stand in your way.
Understanding the psychological barriers
The first barriers you need to break on your way to building wealth are psychological. If you don’t believe you can build wealth, you will never take the necessary steps to do so. You must first understand what mental barriers may be standing in your way.
Fear of losing money
Investing can be scary, especially when you’re new. The stock market can be volatile, which could cause your investments to decline in value. This can make it feel like gambling, which can lead some people to leave their money in a checking or savings account. But this means you’re actually losing money over time, thanks to inflation.
Tori Dunlap, founder of Her First 100k, says mindset is often a limiting factor. “Women wait to invest, compared to men, because they are afraid of making a mistake.” But Dunlap says this costs women a lot of money. “That’s why I do the work I do: cut through the investment jargon to help them get started,” Dunlap added.
To get over this fear, it helps to zoom out and look at the long term. Although the stock market may fall for weeks, months or even years, it has always recovered. Take the Dow Jones Historical chart of 100 yearsFor example. In this chart we can see that the Dow Jones has risen about twenty times over the last hundred years. And this includes the Great Depression, the 2008 financial crisis and several other recessions.
Investing is not a way to get rich quick. To invest successfully, you must stick to your long-term strategy. Over the years and decades, the dedicated investor will see his money grow.
Paralysis by analysis
Another problem that can hold back new investors is the sheer amount of information available today. With thousands of articles, books, and podcasts on investing, new investors can become overwhelmed and raise their hands again.
Instead of trying to learn everything at once, take it slow when you’re new. If your employer offers a 401(k) or similar plan, start by finding out what investments are available in the plan.
Once you have a handle on your employer’s investment choices, you can start looking into other investments, but you should take it slow. For example, you can try learning more about simple investments such as total stock index funds and three-fund portfolios.
Once you’ve mastered the basics, consider learning more advanced investment strategies. However, it’s important to learn the basics first so you don’t become overwhelmed with information.
Delayed gratification
When you invest, you don’t invest for today. Instead, you invest for the years and decades to come. Chances are good that a large portion of your investments will go towards your pension, so you can retire comfortably.
The challenge this presents is one of delayed gratification. It takes a lot of patience to see your efforts pay off. During the first few years or even the first decade, it may seem like your investments are barely growing. For example, consider the following example of a compound interest calculator:
- Initial investment: $0
- Monthly contribution: $500
- Time horizon: 30 years
- Average annual return: 7%
- Annual composition
At the end of year five, you’ll have contributed $30,000 and your portfolio will be worth $34,504, or less than $5,000 in interest. After year 10, you will have invested $60,000 and your portfolio will be worth $82,898, or just over $20,000 in interest. But by the end of year 20, you contribute $120,000, and your portfolio is worth $245,972, or over $125,000 in interest.
In this example, it takes 20 years, but your interest eventually starts to exceed your contributions. Of course, these numbers vary, but generally your hard work and dedication will pay off after a few years.
Financial challenges
In reality, most of the challenges in starting your journey to $100,000 are psychological. However, there can also be financial challenges. The most obvious financial challenge is starting with nothing. If you have to build wealth from scratch, it can take a long time to gain real traction.
The best way to overcome this is to contribute consistently. Anything is better than nothing and if it is possible, you should also work on increasing your income so that you can also increase your monthly contributions.
Another financial challenge can be the impact of small mistakes in the beginning. For example, you can adjust your portfolio regularly in an attempt to find the ‘perfect’ strategy. However, this may result in penalties, capital gains taxes or fees. These things lower your returns, so it’s best to find a strategy that works and stick to it.
Tips to Reach the First $100,000
There are many ways to reach your first $100,000 faster. However, a few basic concepts can go a long way to speeding things up:
- Start early: We can’t turn back time, but if you’re at the beginning of your career now is the time to start. If you don’t have a lot of money to invest, many online brokers allow you to start investing with very small amounts. Even if you start with $10 a month, you still need to get started because of the time value of money.
- Stay consistent: One key to saving your first $100,000 is to stay committed. “Investing a small amount every month is better than waiting to invest until you have a large amount,” says Dunlap. Dunlap added that this consistency shouldn’t change even if you reach $100k. The only difference is that you get compounding to help your money grow faster.
- Diversify your investments: You’ve probably heard that you shouldn’t put all your eggs in one basket, and this certainly applies to investing. You should diversify your portfolio or invest in a wide range of companies, and also consider investments such as bonds and real estate. And don’t forget to keep a small amount of cash in a high-yield savings account so you can quickly invest in future opportunities.
- Talk to a professional: Educating yourself about investing is a great idea, but it always helps to get a professional opinion. A financial advisor can help you determine your financial goals and develop a customized portfolio to help you achieve them.
Remember, investing is not a way to get rich overnight. It generally takes years of hard work and dedication, but the payoff can be a financially secure retirement.
In short
Investing your first $100,000 can be a huge challenge, especially if you don’t have the money to get started. You have to overcome several psychological and financial challenges, and some investors give up because it seems too difficult. However, if you stay committed and reach the first €100,000 invested, you may reach a tipping point where your investments take on a life of their own. Getting there isn’t easy, but it can lead to a financially secure future, which is well worth the effort.
