Why Your First $100,000 Is So Hard (And The Next Is Not)
Charlie Munger, famous billionaire investor and vice chairman of Berkshire Hathaway, believes that the first $100,000 dollars is the hardest to amass.
Not only him though, many people who have grown their wealth believe this to be true, and the same thing is often said about achieving the first million.
Once you achieve the $100,000 dollar mark, it will be significantly easier to reach $200,000, then $300k, $400k, and so on.
The moment you reach your first million, the second one is usually just around the corner compared to the first million.
While this is reassuring for those of us that are on our way to grow our wealth but feel that the journey is extremely slow.
But why exactly is this the case?
Why don’t we try and examine why the first $100,000 dollars takes a disproportionately long time to achieve and also discuss some things you can do to speed up the whole process, so that you can become wealthy years sooner.
The Obstacles Faced
Just Start Investing
An obstacle that is faced by many would be the process of actually beginning to invest.
Sure, investing can seem like a task that is low in priority now, which is why it continually gets pushed to the back burner.
Before you know it, you are 40 years in and scratching your head wondering how you are going to retire.
Let me ask you this, how many people do you know in your life that would start investing if they had more money?
They will say that they will start investing when they have more money, but that is the equivalent of saying that you will start putting wood on a fire once it starts producing heat.
My point is, you don’t start investing because you have too much money, you invest because you want to have more money.
It's Too Risky
Another common excuse I often hear is the risk factor.
Most of us know a coworker or a friend that is against investing and their rationale is that investing is too risky, so they would avoid doing it altogether.
As is the case with many things in life, taking the first step is the hardest, when the finish line seems so far away, it is easy to push something off to some time in the future.
Achieving the first $100,000 dollars requires you to do most of the heavy lifting, meaning the majority of the money needs to be personally contributed by you.
Once your portfolio reaches a sizable amount, compound interest starts to work wonders.
Although the percentage returns don’t necessarily increase, the returns in dollar terms become much larger.
For example, if a $3,000 dollar investment earns a 10% return in a year, that’s only $300 dollars and it is hardly noticeable.
$300 dollars can easily be made by working a few extra hours here and there, when you think of it that way, it can seem insignificant.
What if it’s a $300,000 dollar investment that earns a 10% return, well that’s $30,000 dollars, and it’s a great start to replace your 9 to 5 salary.
Once it reaches a million dollars, a 10% annual return gains you $100,000 dollars, that is a much larger amount that is more than what most people earn in their day jobs annually.
When It Gets Noticeable (Compound Interest)
People say that when their portfolio gets to $100,000 dollars, they can really notice the progress of their investments.
Once that snowball gets rolling, the rate of growth starts to rapidly accelerate.
As your portfolio grows to a large amount, the progress is extremely satisfying and that excitement can speed up the process.
In other words, you would start to look for other ways to grow your portfolio quicker as the results become substantial.
You might look for ways to increase your income so you can contribute more to your portfolio, or you might look for better assets to earn better returns so that the growth is accelerated.
Instead of going out to eat and spending a hundred dollars in a few hours, you might begin to think twice.
Realizing how powerful compound interest is will make you consider more carefully your purchases, and that’s because you realized just how much that $100 dollars can grow and continually reward you if it’s invested making it that much harder for you to part with.
For example, you spent $100 dollars on a meal in a restaurant and that money is now gone forever.
If you had invested that money, it could reward you $10 dollars the first year it’s invested, $11 dollars the next, and $12 dollars the next, and so on and so on.
Of course, $100 dollars isn’t a large amount of money, but it’s the habit of saving $100 dollars in different categories on a regular basis that will add up.
More Opportunities Everywhere
As you become wealthier, you have more options, and this will become more and more obvious.
When you have $100,000 dollars saved, you can do what someone living paycheck to paycheck cannot.
If you have the opportunity to take another job with a potentially higher income or more room for growth, but the pay is not steady, you have the savings to take that risk.
Let’s say your job pays you $50k a year, but if opportunity rises, it is likely to pay you more than $100,000 dollars a year, but it’s commission only.
If you absolutely need that $50,000 dollar paycheck, taking this type of risk is not practical.
Maybe you always wanted to start a business but never have the capital or money to fall back on, the new business could make you millions, but if you can’t begin, then it’s a lost opportunity.
Perhaps an amazing opportunity presents itself in real estate, you have the chance to purchase a property way below market price but it’s a big risk.
When you have money saved up, this might be a risk that’s worth taking.
While it’s not ideal to cash out your investment, the fact is you at least have the option if you want to or if a once in a lifetime opportunity presents itself.
Someone who’s living paycheck to paycheck or with only a little bit of money saved is much more limited in what they can do.
Adding on to the idea of being able to take advantage of more opportunities, when you have more money, you can take more risk in your investments.
If you see potential in a stock, it’s easier to be speculative if you have extra money and it’s not going to ruin you financially if that investment doesn’t work out, you would hopefully still have other types of investment.
A friend of yours could present an opportunity to invest in a new business venture and you are not going to go broke if it doesn't work out.
Someone with little money saved wouldn't have the option to participate in something like that.
How To Speed Up The Process?
Now I know I was droning on about this for a while, and I am not trying to scare anyone here.
But if you are still working on that $100,000 dollar milestone, there are a variety of ways to speed up the process.
Since the majority of these funds is going to be money you personally contribute to, you need to focus on increasing the amount of money you are saving, otherwise known as your savings rate.
This can be the best way that you can accelerate the process.
In order to save more money on a regular basis, you need to increase your active income, this could be done either with an extra job over the weekends or a couple of gigs a week where the extra cash can be deposited directly into your savings.
You might also consider starting a side business that would bring in some extra income.
On the other side of the equation, you ought to be careful when spending on unnecessary items, do you really need to spend $200 dollars eating out or would you rather reserve that for special occasions and save more money instead.
Remember, watching pennies like this is only temporary until you reach your goal of $100,000 dollars, at which point you would be able to ease up a little.
Regardless, stay away from large car payments for vehicles that are simply unnecessary as these expenses are common reasons people never reach $100k, never mind 1 million dollars.
Once you are familiar with the process of saving and investing, it will be much easier to continue doing what you are doing, by the time you obtain a substantial amount of money, you will be used to finding ways to earn extra money and putting that into your savings.
You will also be used to being more deliberate with your purchases and really think whether they are necessary or would it be more rewarding to put it into savings.
What Comes Next?
Moving on to the main topic, you will be more comfortable with taking risks in the process of investing in different market cycles, and you might even learn how to take full advantage of it.
Once you reach the $100,000 dollar mark, you can let off the gas a little bit according to Charlie Munger.
Although the first million is the next milestone, or maybe the next milestone is $500,000 dollars, it’s up to you.
But it definitely becomes easier as the majority of the investments will likely be the result of compound interest instead of money that you will have to contribute yourself.
Next time you are stressed about increasing your net worth, know that it becomes easier, more enjoyable and more rewarding as time goes on.
- Ivan