Once you save $1,000 the next goal is going to be to grow it. The interesting thing about a thousand dollars is that it’s kind of a weird number like it’s either the starting point of you growing your savings to five thousand, ten thousand, or fifty thousand dollars, or it’s that number where you go and buy a new pair of shoes or an Xbox and it immediately goes back down to five hundred dollars.
There’s always going to be a lot of Temptation around us telling us to spend money, and with inflation pretty high, it’s becoming even tougher to save money. But your first thousand dollars is your most important because once you save a thousand dollars, more options open up to you so that you can save another thousand dollars. And hopefully, each incremental thousand dollars after that just gets easier and easier.
In this article, we’re not only going to talk about how to best manage your thousand dollars but also how to grow it and leverage your thousand so that you can build your wealth.
1. Figure Out How Much You Need
The first step I would do after having a thousand dollars in my bank account is to figure out how much money I need in total to reach my goals. Your dreams of retiring early, traveling the world, or just living a fulfilled life will probably cost you more than that thousand dollars.
So before we do anything else, we actually need to sit down and figure out what Financial Freedom means to us, and what specific financial goals we would like to accomplish. Let’s say that you want to take the traditional path of retiring around 65 years old, and you want to live off around $70,000 a year for the rest of your life.
The General Financial rule of thumb out there is that you should multiply your estimated annual retirement spending by 25. This is known as the 25x rule. In this scenario, you would need seventy thousand dollars per year times 25 which is about $1.75 million in order to comfortably retire.
Another way to think about this is the 4% rule. It states that you can withdraw four percent of your savings every year in retirement, and this will reduce your chances of ever running out of money. 4% of $1.75 million equals $70,000. so you can see no matter how you think about it, the 25x or the 4% rule are both great rules of thumb.
That way, you can work backward to figure out how to achieve that number. Of course, these rules heavily depend on when you retire and how long your retirement will last. So if you choose to take the traditional route and retire at the age of 65, the 25x and 4% will likely end up working out.
If you want to retire at say the age of 40 then these rules might not apply to you because you’re going to have to account for around 40 to 50 years of retirement, compared to the 25 to 35 years of retirement if you were to retire at the age of 65.
There have been a ton of studies done to determine what the safest withdrawal rate is for a longer retirement. One study found that using a withdrawal rate of 3.5% or under is very safe even if your time horizon is significantly longer than the traditional 30 years or so of retirement.
If you’re using 3.5% of a withdrawal rate then you want to take the amount of money you think you’ll spend each year in retirement and multiply it around 30X to get your magic retirement number.
So for example, if you want to retire at the age of 45 and plan on living off around $60,000 a year then you’re going to need around $1.7 million in order to comfortably retire.
2. Assess Your Financial Situation
Now that you’ve figured out how much you need, the next step is to assess your current financial situation. Say you’re a small business owner, every business owner will regularly sit down and calculate their income, their expenses, and their overall profit and losses in order to make sure that their business is on track.
This habit though shouldn’t just be for businesses but everyone in general. Start with looking at your assets and your liabilities.
Assets are things that you own like the cash in your bank account, the car that you bought last year, and the stocks that you have in your portfolio. On the other hand, liabilities are the things that you owe money on like credit card debt, student loan debt, and car loan debt.
Once you get these two numbers, your assets and your liabilities, you figured out what your current financial situation is. Now, if you still have debt, don’t worry that’s when you want to go to step three. But if you don’t have debt you can skip ahead and just go to step four.
3. Pay Off High-Interest Rate Debt
The third step that you can do with a thousand dollars saved is to start paying off high-interest rate debt. When you think of a term like compound interest, that sounds like a good thing because it means that your money is growing and compounding on itself, so that your money starts to make money.
But when it comes to debt, compound interest is a principle that works against you. When you borrow money, you rack up interest charges on any amount that you don’t pay back. And I’ve seen many people fall into this trap where they only make the minimum payment required that usually ends up spiraling out of control. They rack up more and more debt.
What You Can do
The last place you want to be is in a position where even though you’re making minimum payments, the amount of your debt is not going down. If you have different types of debt that you owe I’d start with paying off the higher interest rate debt first since high interest is the most dangerous type of debt to leave around.
For most of us, the most common form of high-interest rate debt is going to be credit card debt, but it can also include personal loans or debt consolidation loans. The reason why you should start with your highest interest rate debt first is that it’s the most expensive. By paying that off first, you’re basically reducing the overall amount of interest that you pay and also decreasing your overall debt.
After that’s paid off, you can go to the debt with the next highest interest rate and work on paying off that one. This method is sometimes called the debt Avalanche method.
So with a thousand dollars, I would figure out how much you can reasonably use to chip away at your high-interest-rate debt because that might just be the highest return on your dollar that you can immediately deploy.
4. Build an Emergency Fund
The fourth step is to build an emergency fund. While researching for this post, I found that only around 44% of Americans have enough savings to cover an unplanned expense of a thousand dollars.
In other words, if someone’s car were to break down or they needed to visit the ER, chances are that they would have to take out a loan, use their credit card, or find some other way to pay for those unexpected costs.
One way to protect yourself from these annoying surprise expenses is to have a fund that you do not touch unless for absolute emergencies. That’s because the last thing you want is for a random emergency to become a big Financial setback that leads you to take on more debt.
How Much You Need in an Emergency Fund
Now, I know what you’re probably thinking which is “Prince, how much money do I need to have in an emergency fund?” And that is a valid question.
Generally, the amount that most Financial experts say is three to six months’ worth of expenses. Now, this is a great idea but it also requires a lot of effort and can seem like a scary amount of money. If it’s something that seems a little daunting to you, I would try to set smaller savings goals along the way.
If three months’ worth of your expenses is $6,000, that’s the total emergency fund that you’re looking to build. Perhaps it’s easier to try to save $300 worth of expenses in the first month, that’s way more doable, and reaching that first goal can give you the motivation to keep going.
You would then set your second goal higher, perhaps, so maybe you save a thousand dollars in a month. Now, if you’re looking for the easiest way to save up money, you want to start with small but regular contributions, and automate your savings.
If you make $3,000 a month in your salary you could set up a recurring deposit into a separate savings account so that whenever you get paid maybe $250 or $300 goes into that savings account, which will be the foundation to your emergency fund.
That way your savings also stays out of sight and reduces the risk of you touching that money for something other than emergencies. After doing this for a while, the saving will hopefully feel more regular and you’ll feel more confident about larger savings goals.
Step five is investing, the fun part.
There are a ton of videos, books, and articles about investing, and I know it can get confusing. So here’s the basic rundown. Over time, the US economy and the global economy probably will grow, and because of that, companies across the world tend to go up in value.
This year is rough for investors but people forget that this is really the first legitimate bear or down Market that we’ve had since the 2008 financial crisis. From then until 2021 it’s been growing pretty steadily slowly up and to the right.
In the short to the near term, it’s really hard to guess what’s going to happen, even Wall Street Pros have a tough time predicting the market. However, one way to invest is to invest with ETFs or index funds, which track the General market, and an index fund is a type of pooled investment that you can buy in your brokerage account.
The way that it works is that the fund itself will invest in different sectors, and by buying into that one fund you own a small percentage of everything that it holds.
A real-world example is if you were to buy the S&P, you would own a small percentage of every stock in the S&P 500, thus tracking the entire index. That automatically provides diversification because your investment is now spread across 500 different companies and buying an index fund is way too cheaper than individually buying into each of those 500 companies on their own.
There are some other advantages of owning index funds as well including the fact that even Warren Buffett thinks it’s the best way for everyday investors to grow their money. His regular recommendation has been a low-cost S&P 500 Index Fund for most people.
A couple of ETFs that I like is VOO and VTI. VOO tracks the S&P 500 which are the 500 largest companies in the United States and VTI is a total stock market index that tracks over 4,000 companies.
Now, the stock market doesn’t always just go up, and you could lose money like this year. So I would invest what you can afford to leave in the market without touching it for many years.
Dollar Cost Average
One other way you can mitigate some of the risks of investing is through dollar cost averaging. It’s a pretty easy way to deal with uncertain and volatile markets and the idea that you invest set amounts of money periodically and automatically.
You can choose to do regular Investments weekly, bi-weekly, monthly, quarterly, or whatever you feel is good for your financial goals. That way, you’re reducing the overall volatility of your Investments and also reducing the chance of poorly timed Investments.
The best part is that most brokerages have fractional shares now, so even if you can’t afford a full share of say the S&P 500 index fund, you can buy a fraction of it every single time you dollar cost average into the market.
6. Roth IRA
Another powerful way to invest is in a Roth IRA. The Roth IRA is an individual retirement account that anyone can start provided that they have something called earned income. That means that you need to make wages, salaries, or tips. So basically, you need to have a pay stub, W-2, or 1099 income.
You can open up a Roth IRA at almost any brokerage firm that allows for retirement accounts. The main advantage of having a Roth IRA is that your earnings and your profits are growing tax-free. That means when you retire and you withdraw all the earnings on this account, you won’t pay any taxes on it.
This account is so good that if you’re under the age of 50 you can only contribute $6,000 a year into it and that does go up to $6,500 a year in 2023. If you’re over the age of 50, you can contribute $7,000 a year as a catch-up mechanism.
The other notable thing is that you need to contribute to the Roth IRA with what’s called after-tax dollars. In a traditional IRA, money is going in pre-tax but coming out taxed, in the Roth IRA it’s the exact opposite. Money going in is taxed already so that when you withdraw it they’re not taxed at all.
If you withdraw the money before the age of 59 and a half, you will take a 10% penalty but it’s still a very powerful account.
How Compound Interest Works With Roth IRA
Let me give you an example using compound interest. Let’s say you invest $100 and you get a 7% return this year, that means you would have made $7 on your $100 investment. The next year rolls around and your new starting amount is $107, and let’s say you make another 7% return, that means you made $7.49 slightly more than last year.
Now, this goes on and on and on, and that’s the beauty of compounding. The more time you let your Investments sit, the bigger your balance will likely grow, and you’re likely going to be making more money on your money.
If you consistently invest in a Roth IRA monthly, your balance should grow even faster. if you invest $3,500 per year consistently in the market, which on average returns about 8% a year, you can expect your Roth IRA to grow to over a million dollars in 40 years, which is not bad if you’re starting at the age of 25.
That’s why it’s essential to start your Roth IRA early, consistently invest in it, and watch that balance grow. And when you do retire, all those earnings will be tax-free. If you have that thousand dollars saved up and that’s all you have, I will say that you shouldn’t really be investing your money unless you have your foundations covered.
That means no high-interest rate debt, and that you’ve already established your emergency fund.
7. Invest in Yourself
Step number seven that you can take with that thousand dollars is to invest in yourself and you don’t really hear and read about this in finance videos and articles that often. Chances are if you’re reading this article you’re probably in your teens or in your 20s, I’m in my mid-20s as well, and one slight thing I understood is that I should take on more risks at this age.
Every time you take on more risk, you either learn something from failing or you come out better than when you went in. When you’re younger, you want to be taking on more risk that’s because the younger you are the more time you have ahead of you, which means the more opportunities you have ahead of you to make and earn income.
You also have more time to allow your Investments to compound, so while I know that many people will tell you to invest in the market as early as possible, I think another really good investment to make when you’re relatively young is to invest in yourself.
Whenever you learn more or improve your skills in whatever field that you’re in, it’ll almost always result in more money coming in at the end of the day. Having more skills and knowledge on different topics means that you’ll be able to be more competitive in the job market.
So if you’re still in your 20s like me or in your teens, I would really focus on learning as much as possible by reading, listening to podcasts, or taking some online courses. I think these will all give you a super high return on investment in the long run.
Alright with that being said, I hope you guys enjoyed this article. And as always, Peace and Happy Hustling