Building wealth is undoubtedly a gradual journey, especially when you’re just starting out. Many successful individuals, like Charlie Munger, have attested to this fact. Munger once remarked that the first $100,000 is a significant milestone. While he made this statement at a Berkshire Hathaway shareholder meeting in the 1990s, it remains relevant today and for the foreseeable future. In fact, for most people, reaching their first $100,000 is one of the most challenging milestones.
The same holds true for your first $1 million. Just think about having a million dollars to retire early, purchase your dream home, or fulfill other lifelong goals. It may seem daunting, as saving a million dollars would require investing $33,000 annually for 30 years. This might seem unrealistic, especially when you consider other financial obligations such as vacations, mortgages, raising children, and more. Many people abandon the idea of reaching a million dollars because they lack a clear plan.
I’ll help you envision your path to one million dollars by delving into some basic math. I’ll explain why reaching your first $100,000 can be challenging, but I’ll also show you why progressing to your first $1 million is easier than you might think.
The first step is to shift your mindset from merely focusing on your cash or bank balance to growing your wealth and net worth. While this might seem unfamiliar at first, it’s essential to reach your financial goals. Wealth accumulation is the process of generating long-term income from multiple sources, including your job, savings, investments, and income-generating assets.
Investing is a critical component of wealth accumulation, yet it can be intimidating for many. Common reasons for avoiding investing include lack of knowledge, fear of losing money, the belief that one doesn’t have enough money to invest, or simply procrastination. Some individuals cite risk as a deterrent and avoid investing altogether. However, taking the first step into the world of investing is often the most challenging part.
Remember that investing doesn’t have to be complex or frightening. With a bit of knowledge and insight, you can begin your investment journey today and work toward accumulating your first $100,000.
Charlie Munger emphasized that the first $100,000 is a pivotal milestone. To reach it, you must train your mind and maintain a clear goal. If you’re not accustomed to budgeting, now is the time to start. Budgeting will be your ally in achieving your goal, as you’ll need to save diligently to accumulate your initial $100,000. Create a budget geared toward reaching your goal, and remember that even small changes, such as cutting back on daily expenses like coffee or opting for public transportation over driving, can add up to significant savings.
Compound interest also plays a crucial role once your portfolio reaches a certain size. While percentage returns may not drastically increase, the monetary returns grow significantly. Understanding that every little sacrifice brings you closer to your first $100,000 will make the journey smoother.
Let’s break down the numbers: If you save and invest $250 per month or $3,000 annually at a 7% annual interest rate, your net worth will reach $100,000 in 17 years and 5 months, with a total investment of $52,250. However, if you invest $500 per month or $6,000 annually, you’ll reach $100,000 in just 11 years and 2 months, with a total investment of $67,000. Investing $1,000 per month or $12,000 annually will allow you to achieve your first $100,000 in only 6 years and 7 months, with a total investment of $79,000. Each dollar you invest now is crucial to your path to financial success, so the more you can invest, the sooner you’ll reach the $100,000 milestone.
And that’s a significant milestone because it’s just the beginning. Your ultimate goal is $1 million.
Now that you’ve reached your first $100,000, a substantial amount by any measure, it’s time to set your sights on your one-million-dollar goal. You might be thinking that it sounds difficult, even impossible. However, while it’s a long journey, it’s surprisingly achievable.
Consider Lisa, who consistently saved and invested $10,000 annually. Her net worth reached $100,000 in 7.84 years, or 7 years and 10 months, with a 7% annual interest rate. If she continues to invest $10,000 per year at the same interest rate, she’ll reach her next $100,000 in just 5 years and 1 month. Over time, Shannon will find that she can accumulate each additional $100,000 more quickly, thanks to the power of compound interest. This effect becomes more pronounced with each passing year.
Lisa’s example demonstrates that it takes 7 years and 10 months to go from a net worth of $0 to $100,000. However, it only takes 6 years and 4 months to go from $600,000 to $1 million. This showcases the incredible potential of compound interest once you have a substantial sum saved.
Regardless of the annual interest rate, it consistently takes around 7 to 8 years to save the first $100,000 when you’re starting out. During this initial phase, the amount you save matters more than your investment returns. A graphic further illustrates how long it takes to save each additional $100,000 based on varied annual savings, assuming a 7% interest rate.
The beauty of this approach is that it works at every level. While we’ve examined the scenario of saving $10,000 per year at a 7% interest rate, the same principles apply regardless of your savings amount or interest rate. Compound interest ensures that your net worth grows faster with each passing year. It’s important to note that income growth is not factored into this calculation, and as you progress in your career, your ability to save more each year will likely increase, accelerating your journey to financial success.
Earning your first $100,000 is undoubtedly challenging, but once you cross that threshold, the path becomes smoother. Don’t be discouraged if reaching your initial $100,000 takes longer than you anticipated. This is the most challenging part of the journey and is likely to take the most time. However, as your savings and investments grow, compound interest will work in your favor, making the subsequent milestones easier to achieve.
Furthermore, as your income grows over time, you’ll be able to save and invest more each year, further accelerating your progress toward your financial goals. So, while earning your first $100,000 might seem like a formidable task, earning your first million is well within reach.
