Note: this post was first published in May 2020 and updated in June 2021
One of the biggest problems of personal finance is that it’s just so damn hard to get started.
We all know saving and investing money is something we should be doing, but hardly anyone does it – or does as much of it as they should.
Ask a hundred people above the age of 30 and I guarantee you the vast majority of them will say “I sure wish I saved more money when I was younger”.
In other words, show me someone who wishes they saved less money when they were younger, and I’ll show you a unicorn.
One of the biggest reasons for this savings crisis is that the whole topic is so damn wishy-washy at times.
Putting money away with the objective of feeling good about it at some distant point in the future simply doesn’t work.
Setting a specific goal and working towards it does. Today, I want to give you that specific goal:
There is a bunch of reasons why you want to aim to save £100k in the first instance.
First of all, it’s a meaningful amount – and yet it’s very much within everyone’s reach (more on that below).
Secondly, while saving up £100k won’t necessarily make you financially independent, it will surely help you sleep better at night.
Most importantly, £100k is the magic number after which your net worth begins to snowball.
Take a look at the graph above.
In this example, getting to £100k took six years. The second £100k, however, only took 4 years. The third – 3 years.
On and on it goes, until you are essentially adding £100k to your net worth every single year – all thanks to the power of compounding.
So how do you get onto this proverbial wealth-building ladder?
The Fastest Way To Save £100k
The answer will depend on two factors only:
1. How much money you are putting away (duh), and,
2. Which savings vehicle you are using to put money away.
The second question is even more important than the first – because choosing the right way to save can accelerate your journey by years, if not decades.
The graph below shows the number of years it will take you to save £100k in a variety of savings vehicles.
Before you ask, it assumes that instead of keeping your money under the mattress, you will invest it in a low-cost index fund instead.
A few observations:
- Even if you only put £50 a month in your ISA, you can get to £100k in 34 years.
- Choose a Lifetime ISA instead? You’ve just shaved four years off your journey, thanks to the government’s 25% bonus.
- Opting into a workplace pension? Even better – you now get both a tax break and an employer match. A higher-rate payer can save £100k 11 years faster by using a pension instead of an ISA.
Let’s pause here for a second because this is the most vivid illustration of the power of your workplace pension.
For those who need a reminder on how much free money you get with a UK workplace pension, here it is:
Here’s another example for you:
As a basic rate taxpayer putting away £250/month, you’ll clear your first £100k in just over ten years.
Want to use your ISA instead? You’ll need to double your contributions to £500/month to get to the same outcome.
I know which one I would choose.
The tradeoff, of course, is the ease of access to your ISA versus other investment vehicles.
Doubling the clip at which you are building wealth is a good choice for most people, but you’ll have to make up your own mind on this one (here’s a good guide to examining the tradeoffs).
It Only Gets Easier With Time
I was about to wrap this post up, but now that I’ve created this fancy chart I’m so proud of, might as well get some mileage out of it!
So here comes:
Once you’ve managed to save £100k, here’s how many years it would take to double that amount:
That’s right. Even if you contribute just £50/month, you’ve got the first hundred grand working away for you.
As long as you keep contributing even the bare minimum, you are guaranteed to clear two hundred thousand in less than a decade.
Want to keep cracking on? Once you’ve socked away £200k, you’ve really got the wind in your sails:
You get the point now, so I’ll leave you with one final graph – the time it takes to save £1m.
Not because I think everyone should aim for £1m or that having a piggy bank of that size will make you the happiest person in the world. I don’t.
Rather, because I think it’s a goal too many people find too lofty.
I disagree. Challenging – yes. But for someone with enough energy, consistency, and most importantly – time, it’s well within reach.
This is why:
Provided you start early enough, you can clear £1m in the course of your working career by simply contributing £200/month into your workplace pension.
And if you are a higher or an additional rate taxpayer, you really have no excuse. Becoming a pension millionaire is well within your reach.
But you will never get there if you don’t save that first £100k. So you better get started now.
PS: By popular request, I’ve uploaded the underlying excel file. You can download it here and play around with the assumptions.
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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