The $100,000 Solution can change the direction of your life. What is it? It is a few things and this month we will discuss how that number and that solution can have a big impact not only on your life, but on the lives of others. Here is a warning, though. It requires a very different way of thinking and living and many people are not quite ready to make the changes needed to embrace this solution. Are you?
Let's start with the beginning. Get to $100,000 in liquid assets (cash in retirement accounts, brokerage, 529 plans, bank, HSA, etc.) as fast as you can. Definitely get there before 30. Ideally, do it before 25. And if you are lucky (and get some help from those big humans called mom, dad and grandparents), get there before 20! So, why is this so important and how can you do it? Let's explore it.
The faster you get to $100,000, the faster the compounding will happen, turning that number into a much bigger number that helps you reach financial freedom at a faster pace. When you get that $100,000 in low fee stock index funds with an overweighting of 20% or more to Small-Cap Value, you might see a 12% average annual return over time. Your money doubles every 6 years using the Rule of 72!
So how does a child do it? Save, save, and save as early as possible. Mom and Dad (or grandpa and grandma) open a 529 College Plan, investing in stock index funds. Later in life, some of that money could be used for college, and/or up to $35,000 could be rolled over to a Roth IRA once the account is 15 years old with earned income. This approach avoids debt and gets that young person a head start with finances.
A person could also start saving and investing as early as possible in a brokerage account (like Warren Buffett did at 11). That brokerage account would be in Mom and Dad's name with a fund like VTSAX, earmarked for the child and transferred over to them when they hit 18. The money going into the fund could come from income from the child and/or gifts from others like grandma and grandpa.
A young person could have a custodial Roth IRA where the Parent starts it and then transfers the account over to the child when they are an adult (21 in the State of Iowa). This is a great way to get started young when the child has earned income from a job they have at a young age. Investing in VSIAX would be a great option as they max out the Roth IRA every year and into small-cap value.
Let's take a step back and focus on this savings piece. It is key to start saving as early as possible and as much as possible as you invest in stock index funds all along the way. This also means finding multiple ways to make extra money while minimizing the spending. This is the time to be as frugal as possible as you save every extra dollar. This early sacrifice will pay you back years down the road.
That is Stage I. Stage II comes many years later. The $100,000 Solution then deals with compounding via passive income. You MAKE $100,000 in a given year from your liquid investments! Yes, your money made $100,000 as the markets went up and you earned dividends from your portfolio. This is one of those experiences that almost seems magical as your money makes money hand over fist. It is amazing!
How? It is simply that compounding effect over time. $100,000 turns into $200,000, which turns into $400,000, which turns into $800,000, which turns into $1,600,000! If you were averaging 12% per year (all stocks and overweighting to small value in VSIAX and VIOV), you got to $1,600,000 in 24 years! Come year 30, you end up with a cool $3,200,000! That my friends, is how wealth is created.
Are you done with the $100,000 Solution? No, not even close, There is a Stage III that comes into play that makes all of this work and effort worthwhile. This final stage is a life changing event that causes you to grow as a human being and become something much greater than you ever thought possible. This final stage changes lives; many lives. What is it? Stage III is YOU giving away $100,000!
Yep, you give away $100,000 in one fell swoop. To who or what? That is your decision. Here is the key, though. You give unconditionally to help others with no strings attached. This third leg of the journey is an opportunity to complete the circle as Joseph Campbell would tell us. You return back to help others so they too can complete the Hero's Journey, just as you have done. Watch Finding Joe to learn more.
You might become a serial giver. A what? A serial giver is the name I give to those who have found the love of giving so they do it again and again and... Why do they do it? It feels great as they not only help others, but they help themselves through the process, providing more significance to their life. Pass it forward and watch what happens. The solution to a more meaningful, purpose driven life is to GIVE.
