The first $100,000 invested is the hardest (but the most important)

Investing is one of the best ways to generate wealth, but the path to personal wealth isn’t always a clear one. For instance, if you are starting from scratch, investing your first $100,000 can seem extraordinarily difficult. But reaching this milestone is the most important because building wealth can be much easier once you get there.

The reason? Compound interest. If you keep your money invested, it will grow at an increasing rate. Eventually, the interest you receive might even outpace your contributions. However, before that can happen, you must get past the financial and psychological obstacles standing in your way.

Understanding the psychological barriers

The first barriers you must break through on your way to building wealth are psychological. If you don’t believe you can build wealth, you’ll never take the steps necessary to do so. You must first understand the mental barriers that can get in the way.

Fear of losing money

Investing can be scary, especially if you are new. The stock market can be volatile, which can cause your investments to drop in value. This can make it feel like gambling, which can lead some people to keep their money in a checking or savings account. But this means you are effectively losing money over time, thanks to inflation.

Tori Dunlap, founder of Her First 100k, says mindset is often a limiting factor. “Women wait to start investing compared to men because they’re nervous about making a mistake.” But Dunlap says this costs women serious money. “That’s why I do the work that I do: breaking down the investing jargon to get them started,” Dunlap added.

To get past this fear, it helps to zoom out and look at the long term. While the stock market can drop for weeks, months, or even years, it has always rebounded. Take the Dow Jones 100-year historical chart, for example. In this chart, we can see that the Dow has increased by about 20 times in the past 100 years. And this includes the Great Depression, the 2008 financial crisis, and various other recessions.

Investing is not a get-rich-quick scheme. To succeed with investing, you must stick to your strategy for the long term. Over the years and decades, the committed investor will see their money grow.

Paralysis by analysis

Another problem that can stop new investors in their tracks is the enormous amount of information available today. With thousands upon thousands of articles, books and podcasts discussing investing, new investors can get overwhelmed and, again, throw up their hands.

Instead of trying to learn about everything at once, you must take things slow if you are new. If your employer offers a 401(k) or similar plan, start by learning what investments are available in the plan.

Once you have a handle on your employer’s investment choices, you can start learning about other investments, but you should continue to take things slow. For example, you can try learning about simple investments, such as total stock market index funds and three-fund portfolios.

Once you have the basics down, you might consider learning about more advanced investing strategies. However, learning about the basics first is important so you don’t get inundated with information.

Delayed gratification

When you invest, you aren’t investing for today. Instead, you are investing for the years and decades ahead. Chances are, a large portion of your investments will go toward your retirement so you can retire comfortably.

The challenge this presents is one of delayed gratification. It takes a huge amount of patience to see your efforts pay off. For the first several years or even the first decade, it may seem like your investments are barely growing. For example, consider the following example from a compound interest calculator:

• Initial investment: $0
• Monthly contribution: $500
• Time horizon: 30 years
• Average annual return: 7%
• Annual compounding

At the end of year five, you will have contributed $30,000, and your portfolio will be worth $34,504, or less than $5,000 in interest. After year 10, you invested $60,000, and your portfolio is worth $82,898, or just over $20,000 of interest. But by the end of year 20, you contribute $120,000, and your portfolio is worth $245,972, or over $125,000 of interest.

In this example, it takes 20 years, but your interest eventually starts to outpace your contributions. Of course, these numbers vary, but generally, your hard work and dedication will start to pay off after several years.

Financial challenges

In reality, most of the challenges of starting your journey to $100,000 are psychological. However, there can also be financial challenges. The most obvious financial challenge is starting with nothing. When you have to build wealth from scratch, it can take a long time to get real traction.

The best way to overcome this is to consistently make contributions. Anything is better than nothing and if possible, you should also work to increase your income so you can also increase your monthly contributions.

Another financial challenge might be the impact of small mistakes in the beginning. For example, you might modify your portfolio frequently in an effort to find the “perfect” strategy. However, this can lead to penalties, capital gains tax or fees. These things cut into your returns, so it’s best to find a strategy that works and stick to it.

Tips for reaching the first $100,000

There are many ways to reach your first $100,000 more quickly. However, a few basic concepts can go a long way in helping you speed things up:

• Start early: We can’t turn back time, but if you are early in your career right now, this is the time to start. If you don’t have a lot of money to invest, plenty of online brokers let you start investing with very small amounts. Even if you are starting with $10 per month, you should still get started due to the time value of money.
• Stay consistent: One key to saving your first $100k is to stay committed. “Investing a small amount every month is better than waiting to invest until you have a large sum,” Dunlap says. Dunlap added that this consistency shouldn’t change even when you reach $100k. The only difference is you will have compounding to help your money grow faster.

• Diversify your investments: You have probably heard that you shouldn’t put all your eggs in one basket, and this very much applies to investing. You should diversify your portfolio, or invest in a large number of companies, and also consider investments like bonds and real estate. And don’t forget to maintain a small amount of cash in a high yield savings account so you can invest in future opportunities quickly.

• 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 custom portfolio to help you meet them.

Remember, investing is not a way to get rich overnight. It generally takes years of hard work and dedication, but the payoff could be a financially secure retirement.

Bottom line

Investing your first $100,000 can be incredibly challenging, especially if you don’t have money to start. You must overcome various psychological and financial challenges, and some investors give up because it seems too difficult. However, staying committed and reaching that first $100,000 invested can help you reach a tipping point where your investments start to 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.