Why Your Net Worth Explodes After $100K, According to Ramit Sethi
Written by
Marc Guberti
Edited by
Amber Barkley
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Reaching a $100,000 net worth is a herculean task that can take several years, but it gets much easier once you reach this big milestone. That’s according to Ramit Sethi, and he’s provided several data points that support his claim in a recent YouTube video.
Next, learn how the “big wins” are the ones that matter most when you’re trying to build wealth.
The Power of Compound Interest
Investing your money allows it to compound over time. Basically, the larger your portfolio is, the more it grows. Sethi ran through an example of investing $10,000 per year — $833 per month — and earning a 7% return on your investment.
An investor who follows this plan would end up with a $100,000 portfolio in 7.5 years. The investor would have contributed $76,000 and received $24,000 in interest. Even though it takes 7.5 years to reach $100,000, it would only take another 22 years to exceed a $1 million net worth. That’s a significant improvement.
That’s because there eventually comes a point when portfolio growth outpaces contributions. By the time this investor reaches $1 million, roughly 70% of their net worth would have come from portfolio growth instead of contributions.
The key to generating wealth in the stock market is to spend more time in the market. Sethi has been investing for more than 25 years. He praised compounded growth in the stock market as something that turns small, consistent investing into something huge.
How To Make Your First $100K
While side hustles and reducing personal expenses are widely known strategies for making money, Sethi shared some tactics that specifically relate to investing.
First, he said the thing that matters the most when it comes to building your wealth is time. Even if you haven’t been in the stock market for as long as Sethi, you can get started now. It’s still possible to get started at 30 years old: Contribute $584 a month and, at 7% annualized returns, end up with a $1 million portfolio within 35 years.
Getting started in any capacity is vital, as it becomes more difficult to reach a $1 million portfolio as you get older. Sethi said a 60-year-old who is just getting started would have to contribute $14,000 per month to become a millionaire by 65.
“You have two choices,” Sethi added. “You can be depressed … or you can say … ‘Let me start today.'” The first mentality puts you in the victim position, while the second puts you in the position to change your future.
Sethi also recommended looking carefully at each ETF’s expense ratio and thinking twice before working with a financial advisor who charges a 1% portfolio fee. Expenses like these are silent, but they can deplete your portfolio of long-term returns. According to Sethi, a 1% fee can add up to 28% of lifetime investment returns paid out to your financial advisor.
Track Percentages, Not Numbers
Sethi values a percentage-based mentality rather than a dollar-based mentality when it comes to contributing to your portfolio. Instead of focusing on a number, like a $500 per month contribution, Sethi encouraged a percentage, such as contributing 10% of your paycheck to the stock market.
The percentage model allows you to set goals that are tailored to your finances. Instead of seeing a monthly contribution amount suggested on the web and thinking that’s too much, you can stick with a percentage that works for you. Furthermore, the percentage model invites people to increase their monthly contributions as they make more money.
Incomes aren’t static. People get raises, pick up side hustles and develop new skills to pursue better career opportunities. Your portfolio contributions can match up with the ebbs and flows of your income.
Sethi also recommended a challenge based on the percentage of your paycheck that you put into your portfolio. The challenge is to increase your portfolio contribution percentage by 1% each year. For instance, if you contributed 10% of your paycheck to your portfolio this year, raise it up to an 11% annual contribution the following year. Then, inch it up to 12%.
If you can make more progress than that, then your portfolio will grow faster. However, the annual 1% boost is a feasible challenge that will translate into a higher net worth.
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