3 min read
Suppose you have $0 and your goal is to save $100,000.
By diligently saving and investing $10,000 each year at a 5% annual rate of return, you would be able to save $100,000 in about 8 years.
Next, you might have a goal to reach $200,000. It turns out it would only take a little under 6 years to go from $100k to $200k, assuming you kept investing $10k each year earning a 5% annual rate of return.
This pattern holds true as your net worth grows. Each $100k comes quicker than the last.
The numbers start to become mind-blowing when we look at how long it takes to save $1 million. Again, assume you save $10k each year earning 5% returns. It turns out that it would take you longer to go from $0 to $300k than it would to go from $300k to $1 million:
This is the nature of compound interest. The more you save and invest, the more investment returns begin to account for more gains.
I recently shared the math that shows how investment returns begin to account for more net worth growth over time. This table shows what percentage of net worth growth each year comes from savings vs investment returns, assuming you invest $10k each year and earn 5% annual returns:
Notice how investment returns begin to matter more than savings after about 15 years. This explains why the road from $300k to $1 million is shorter than you’d expect: investment returns do most of the heavy lifting during that time.
Here’s a look at how long it takes to go from $0 to $300k and $300k to $1 million based on various annual investment amounts and annual returns:
The numbers change a bit depending on our annual return assumptions, but the general pattern holds: saving your first $300k takes roughly the same amount of time as saving the next $700k.
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