Why Net Worth EXPLODES After $100K (And How to Get There ASAP)

Charlie Munger, the famous billionaire investor, and former vice chairman of Berkshire Hathaway, said that earning the first $100,000 is the hardest part of getting rich.

Many people who have made lots of money agree with him. 

People also say the same thing about earning the first million dollars. 

After you reach $100,000, getting to $200,000, $300,000, and more becomes much easier.

Once you make your first million, earning the second million is that much faster. 

This idea can help people who are working hard to get richer but feel like it's taking too long. 

It shows that patience and slow progress are important. 

Now before we start, this is Ivan here from the Vanilla Investor, a former investment analyst and with over $100k invested in the markets. 

My goal is to bring you simple finance at your fingertips. 

Let’s talk about why your net worth explodes after you have your first $100,000 dollars. 

So let’s start with how not having enough time to develop your skills can hinder your progress. 

And also why compound interest isn’t working for you, which leads perfectly into when will compound interest become your friend?

After that, we will go over 7 steps to follow to get there as soon as possible:

1. Tracking your money
2. Building an emergency fund
3. Invest, invest, invest
4. Increasing your income
5. Minimizing your taxes (legally, of course)
6. Erasing high-interest debt
7. Getting additional sources of income

Not Enough Time To Develop Your Skills

So, why is reaching the first $100K the hardest? 

There are two main reasons. 

First, it's like being in a video game. 

You need time to get better and catch up with the experienced players. 

This is true for earning money when you're young, which is getting worse and worse. 

Also, a study showed that Gen Z has 86% less buying power than boomers had at the same age.

This is because older people are working longer, so there are fewer high-paying jobs. 

But there's good news!

The internet offers young people a great chance to make more money, even more than the previous generations. 

Many older folks don't know how to use Instagram or TikTok, or start an online side job. 

In tech, not many boomers can keep up with the younger generation.

Compound Interest Not Working For You

The second reason getting the first $100K is hard is because of compound interest, or the lack of it. 

Think of your money like a snowball rolling down a hill. 

As it rolls, it gathers more snow, which is like compound interest.

The bigger the snowball, the more snow it picks up. 

Sounds good, right? 

Well, yes and no. Let me explain. 

If you have less than $100K right now, your snowball isn't big enough to gain much from compound interest. 

So, you won’t be able to fully benefit from it. 

For example, if you invest $10K in an S&P 500 Index fund and get a 7% return each year, after five years, your $10,000 would grow to $14,176. 

That's a gain of $4,176 over five years.

This shows why it's hard to reach the first $100K. 

It's more about how much you can add to your investment, not just relying on compound interest. 

So, you need to find ways to earn more money. 

I remember working many side jobs at once to make enough money. 

It was tough working long hours and avoiding spending on vacations and fancy restaurants. 

But it's worth it because once you reach that first $100K, growing your wealth becomes much easier.

When Will Compound Interest Become Your Friend?

So, why does net worth grow so fast after hitting $100K? 

It's because compound interest starts becoming your friend and working really well for you. 

Let's look at a simple example. 

If you invest $10K each year with a 7% return, it takes about 7.84 years to go from zero to $100K. 

But to go from $100K to $200K, it only takes about 5.1 years. 

That's 2.74 years less for the second $100K, which is 35% faster! 

It keeps getting better: from $200K to $300K takes about 3.78 years, from $300K to $400K takes 3 years, and from $400K to $500K takes just 2.5 years. 

We can keep going, but I think you get the idea. 

The chart goes up quickly after you reach that first $100K. 

So, the key is to work hard and reach that first $100K as soon as you can. 

If you can save time getting to $100K, you'll become a millionaire even faster. 

Once you reach $100K, getting rich is almost certain, especially if you invest in a low-cost index fund. 

For example, if you only saved $100K and invested it in an S&P 500 Index fund without adding more, you'd become a millionaire in about 33 years.

That's the amazing power of compound interest after you hit $100K.

1: Tracking Your Money

So, how can you reach your first $100K? 

It's simple, really. 

Just follow these seven steps. 

I've done this myself, and it really helped me at the time when I have close to nothing, so I hope it works for you too. 

The first step is to take control of your money. 

And the best way to do that? 

Budgeting.

Yes, I know, budgeting can sound boring, but trust me, it's not about taking away all the fun. 

Think of it as a roadmap that helps you make smarter decisions. 

You don't need to become super thrifty, but it's important to know the difference between your needs and your wants. 

And guess what?

I made a spending tracker for you to help you get to your first $100K faster. 

The tracker follows the 50/30/20 rule and updates in real-time as you fill in the numbers to show you if you are on track with your goals. 

If you want it, just click here to get it!

2: Emergency Fund

Step 2, make sure to build an emergency fund. 

This means saving enough money to cover three to six months' worth of expenses. 

It helps you avoid going into debt when something unexpected happens. 

This will make you feel safe and help you stay on track with your money goals. 

To build your emergency fund, first figure out how much money you need each month for things like rent, groceries, utilities, and transportation.

Then multiply that amount by three to six to know how much you should save. 

Also, remember to keep your emergency fund in a separate, easily accessible account, like a high-yield savings account. 

This way, you won't be tempted to spend it on non-emergencies, but you can still get to it quickly if you need it.

3: Invest, Invest, Invest

Step Number 3 is all about investing your money smartly. 

Start by learning about different types of investments and choose ones that fit your risk tolerance and goals. 

Even if you start small, the important thing is to get started. 

Consider low-cost index funds or mutual funds as a good way to begin. 

I use a platform called Interactive Brokers for this, but any good investment account will work. 

Let’s do some simple math. 

Imagine you put $250 every month into an S&P 500 Index fund and earn 7% extra money each year. 

After 40 years, you’ll have $656,000! 

But here’s the cool part: 

$536,000 of that comes from the compound interest your investment made, not just what you put in. 

You only put in $120,000 yourself.

I know, you might be thinking, “Won’t I be retired and old by then?” 

I get it. 

That’s why it’s important to start investing early to get the most out of your money.

4: Increasing your income

Another important step is to find ways to earn more money. 

You can do this in several ways. 

One way is to look for a job that pays better.

You might need to apply for new jobs that offer more money than your current job. 

If you like your job but think you should earn more, you can ask your boss for a raise. 

Be ready to talk about why you deserve more money by showing what you have done well at work. 

Another way to make more money is by starting a side job. 

This means doing extra work besides your main job. 

You can find different side jobs, like doing freelance work or getting a part-time job. 

For example, if you are good at writing or designing, you can help people with these skills and get paid for it. 

You might also find a part-time job to do in your free time. 

If you enjoy making things like jewelry, art, or baked goods, you can sell them online or at local markets. 

This can be a fun way to earn extra money doing something you love.

5: Minimize Your Taxes (Legally)

Now that you’re making more money, it's time to think about step five: minimizing your taxes. 

This might sound a bit funny, but the goal is to lower how much you pay in taxes. 

To be clear, there’s a big difference between two things: tax avoidance and tax evasion. 

Tax avoidance is legal and smart—it means finding ways to pay less in taxes using legal methods.

Tax evasion is illegal and not okay—it means cheating on your taxes.

You might think, "But if you earn more, don’t you have to pay more taxes?" 

Yes, the rich do pay a lot in taxes. 

But there are also rewards for people who start businesses because they create jobs. 

These business owners are taxed on their profits at the end of the fiscal year, so they can save money by deducting business expenses from their taxes.

This is called a write-off. 

This is different from regular employees who pay taxes on their salary every month. 

For example, if you love new tech gadgets like the latest iPhone, you could start a YouTube channel where you review these gadgets.

Once your channel earns money, you can subtract the cost of buying the gadgets from your income before paying taxes. 

This way, you can get the gadgets without paying extra tax on them. 

But remember, you need to prove that these expenses are for your business. 

You can’t just claim any expense you want. 

So, finding a way to combine your business with something you love can help you save on taxes.

6: Erasing High-Interest Debt

Let’s move on to step 6: erasing your high-interest debts. 

Debt can hold you back from saving and investing. 

Did you know that the average American owes about $21,800?

If you have debt, you’re not alone. 

Make a plan to pay it off as quickly as possible so you can free up more money for saving and investing. 

The first thing you should do is make a list of all your debts and figure out which ones have the highest interest rates. 

Then you can start by paying off the debts with the highest interest rates first.

But, this is where compound interest can work against you if you're not careful. 

Imagine compound interest like a hot sun melting away the snow you’re trying to build for your first $100K. 

If you have too much debt, it can slow down your progress. 

Try to make small payments whenever you can, because every little bit helps. 

Don’t get discouraged if it seems like you’re losing money with each payment. 

Think of it as an investment in reaching your goal of $100K. 

Ignoring your debts will only make things worse later on.

7: Additional Sources Of Income

Step 7 is about finding extra ways to make money, often called starting a side hustle. 

In 2024, about half of Americans have a side hustle, even if they already make over $100K a year. 

Having a side hustle can be really helpful. 

It means you have more ways to earn money, which you can use to put into tax-advantaged accounts, like Roth IRA or 401k, that help your money grow faster.

Think of it like adding more snow to your snowball, making it bigger and letting compound interest help you more. 

Which, as I have mentioned, is really important for reaching your first $100K. 

Once you get there, you might think about slowing down a bit, as Charlie Munger suggests. 

However, if you are not at the $100k mark yet, then you might want to buckle up and cut back on your expenses. 

And that’s where this next article will help you with the 15 worst purchases you can make that you will regret, so do check it out!

Thank you for reading, cheers!

- Ivan