Let me start off by saying (or writing in this case) that $100,000 in savings isn’t a huge accomplishment because it’s not enough to retire on in a city like Toronto. But saving a large amount of money can be done. You just have to set your mind to it.
Here are some of the ways I was able to save $100,000:
1. Started early
The best way to end up with a large sum of money is to put money as early as possible. Compounding will do most of the work for you. For example, if Emily starts saving $250 a month when she’s 25 and earns a 6% annual rate of return, she’ll end up with $497,872.68 at 65. If Bob waits until he’s 45 to save and puts away $500 a month, he’ll have $231,020.45 in savings by the time he’s 65 (assuming the same 6% annual rate of return). Even though they each saved $120,000 in total, Emily will have more than twice as much saved as Bob. That’s the power of compounding. I started investing in GICs and mutual funds while in university and began purchasing individual stocks when I started working.
2. Saved automatically/joined workplace savings plan
I’ve written about the benefits of automatic savings a number of times. You can set up a pre-authorized contribution on a regular basis to force yourself to put money away. If you work for a large company, your employer may offer a pension plan, group retirement plan, or an employee stock ownership plan. Some organizations offer two or all three. Many employers will match your contributions to a group RRSP or give you a discount on stock purchases up to a certain percentage. If you have this option, you should join. Free money from the companies I worked for helped me save at a much faster pace.
3. Maxed out my RRSP
Until the TFSA came around, I almost always maxed out my RRSP every year. Saving 18% of your before-tax salary can be difficult, but it’s doable even if you have a student loan to pay off and are trying to save for a condo. Trust me, I know. While I made a few sacrifices in order to save, I don’t think I lived a bummer lifestyle.
4. Used tax refund wisely
Many people choose to spend their tax refund. Unfortunately, that money is, in reality, the amount you overpaid to the government. Most of the time, I’ve reinvested my refund in my RRSP or TFSA or used a portion to pay down debt.
A side hustle can help supplement your income. I’ve done a little extra writing or editing on the side to earn some extra cash. When you earn more, you have more options. That additional income can be used to boost your savings or to pay down debt.
6. Borrowed to invest
Borrowing money to invest isn’t for everyone. But when interest rates are low, it’s usually worth it if the return on investment is higher than the interest rate you pay. Using leverage can magnify gains, but it can also magnify losses. You should weigh the pros and cons of borrowing to invest before taking on any risks. I’ve used RRSP loans (and paid them off early) or used margin to invest. So far, so good.
7. Invested aggressively
Taking on more risk can lead to higher potential returns. For example, if Winnie saves $250 a month and earns a 6% annual rate of return, she’ll have $251,128.76 in 30 years. If Kevin saves $425 a month and earns a 3% annual rate of return, he’ll have $247,663.18 in 30 years even though he saved 70% more ($153,000 compared to Winnie’s $90,000).
Stashing a large portion of your money in bonds, GICs, or a high-interest savings account isn’t the best idea if you’re young and trying to save for retirement. While there’s a place for fixed-income investments and cash in a portfolio, they’re unlikely to produce high returns when the economy is strong and interest rates are low. I’m not suggesting you should have an all-stock portfolio, but if you’re young you should be taking on more risk for long-term savings goals such as retirement. Just make sure you’re comfortable with the amount of risk you take. While I do have some bond exchange-traded funds, most of my portfolio is invested in stocks.
The bottom line
Saving $100,000 can be done. It took me much longer than expected for a number of reasons: I had a student loan to pay off, I couldn’t find a good-paying job after graduation (that’s what you get for majoring in journalism), and decided to buy a condo. If setting a savings goal of $100,000 seems too high for you, start with $10,000 or $25,000 and set your sights higher once you reach your first objective.