There are many things you can do with $100,000. You could pay for your kid’s education, for example, or face down an economic downturn with some confidence.
But, for most people, having that much money in the bank is a pipe dream. Well, it doesn’t have to be, and you don’t necessarily need to win the lottery to see six figures in your bank account.
There are simple strategies you can employ—no scratch-off tickets required.
Simple interest and compounding
Let’s say you lend a friend $100, and you both agree that after one year, the friend will pay back the $100 plus 10% interest. You’d get back $110. (100 x 0.10=10; 10+100=110).
This is called simple interest, and it’s a fast way to determine how much interest you might earn—on a loan or an investment.
In actuality, the way money earns interest or some other return is often a little more complicated. Money typically earns a return through compound interest.
In simplest terms, compounding is any return earned on your principal, plus your past returns. For example, if you have money in a bank account, it’s the interest on that sum plus the past interest it has earned over time. If you have money in an investment account, it’s the percentage you may earn on top of your original investment, plus its previous earnings.
Here are some terms and concepts to remember: Principal is the original sum of money you put into an investment. Interest and earnings—the percentage you earn on your principal—can be calculated on a daily, monthly, quarterly, or annual basis.
If you’re trying to reach a large savings goal, such as $100,000, then compound interest is going to play a key role.
Here’s an example of how compound interest really begins to take off over time, assuming you put $100 in an account that earns 10% interest over time.
|Year 1||Year 2||Year 3||Year 4|
|+ 10% rate of return||$10||$11||$12.10||$15.31|
Note: Investing your money in a diversified portfolio of stocks, bonds, and funds can help your money grow through the power of compounding. The long-term expected annual return for US large cap stocks (i.e., the S&P 500) is 5.9%. While past results can never predict future returns, investing your money is more likely to get you to your goal faster than just saving it. Always important to note, investing involves risk.
You can see that you’re earning interest on the interest you’ve already been paid, plus the original amount, or principal, that you put into the account.
In order to take advantage of compounding, you first need to save up some money to save or invest. Saving, of course, is easier said than done.
You’ll be tempted, however, to spend that money on something else. The key is to remain disciplined and to contribute to your savings or to invest that money for the future.
Automate the process with Auto-Stash
Stash wants to make saving and investing easier, so we built Auto-Stash to put our users’ saving and investing on autopilot. Every week, Auto-Stash will automatically transfer money into your Stash account.
Before you know it, you could be well on your way to a $100,000 nest egg.