In this article, I want to share with you how I saved my first $250,000. I hope this doesn’t come off as bragging, but rather demonstrate some of the things I did to get where I am today. I was lucky enough to have just the right combination of things happening to me that I was able to achieve this great milestone. Your result will vary depending on your income, saving options, and ability to save.
Automatic-Investment Plan (AIP)
I started working in 1996 as a contract worker, so I was not able to participate in a 401k plan. Personally, I am not a budgeting type, so I had to somehow find a way to “pay myself first.” The only option available to me then was Automatic-Investment Plan through my discount broker, Charles Schwab (I have since moved to a lower cost discount brokerage firm). The plan basically withdraws a fixed amount of money from my money market account and buys shares of mutual funds that I selected. It was flexible enough for me to specify exactly how many dollars I want to contribute to each fund and how often.
401k is probably the best automatic investment plan available. When I was hired full-time in 1998, I was able to participate in my employer’s 401k program. With 401k, I was able to contribute with my pre-tax money before I even get my paychecks. There are several distinct advantages with 401k:
- I can invest with pre-tax dollars – this allow me to pay less taxes.
- I don’t have to pay any tax on yearly distributions and dividends from investments inside the 401k plan.
- My company matches my first 6% of yearly contribution. This is not a huge amount, but it is an instant return on investment!
- It is very easy to rebalancemy portfolio.
- It is an automatic dollar cost averaging program.
In 1998, I bought my first house and later in 2002 refinanced it to 15 years through my company’s Credit Union. In order to save money for mortgage payment, I set up a payroll deduction to deposit a portion of my paychecks into the Credit Union’s checking account which automatically pays the mortgage each month.
If your company offers this option, this is a good way to pay yourself first and use it for investing purpose as well. Direct deposit can also be used, but it typically does not offer the ability to split up your paycheck into several accounts; therefore, you need some discipline to divert a portion of your money for investing.
Aside from these three primary methods, here are some additional ideas:
- Automatic reinvestment — For all my investments, I instruct the brokerage firm to reinvest all dividend payments and yearly distributions. This way my investments can take advantage of compounded growth.
- Credit card reward — This is not recommended if you have problem with debt. I always pay my credit cards in full each month. I have 2 credit cards that I primarily use, and both offers cash back reward. I make most of my purchases using these cards. Once I collect enough reward money, I deposit it into my investment account.
- Tax Withholding — personally, I do not over-withhold because I think it is silly to give the government a tax free loan. However, for those of us who have hard time saving money and do not have other choices. Over-withholding can be an option, as long as you DO deposit the refund into an interest paying savings account.
It took me almost 10 years to save my first $250,000, and it was not easy. I lived well below my means and maxed out my 401k and IRA every year. I also learned my investment lessons early so my losses were limited. Saving money and being frugal, along with a good investment strategy, allowed me to reach this point.
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.