Charlie Munger the right-hand man of Warren Buffett who recently passed with over a net worth of $2. 3 billion has a famous quote which he says the first $100,000 is a but you got to do it I don't care what you have to do find a way to get your hands on $100,000 he stresses getting to 100K by any legal means necessary is so important because the reason is is that your net worth completely explodes after your first 100K now this is due to a few core principles that we're going to discuss in today's video as well as at the end of the video I'm going to share with you guys some strategies that you can employ in your everyday life in order to get there as quickly as possible the first principle to understand is that Capital scales really well now what do I mean by this I'm referring to the idea that the benefits or the returns from having Capital increase proportionally as the amount of capital itself increases for example if you were to invest $100 in the stock market or some other type of investment you take on some risk and by the end of the year let's pretend you make a 10% return that means you'd have an extra $10 in that that case now that's not a life-changing amount of money and I would actually argue that most of us can actually make $10 an hour doing some sort of job or some sort of task so in this case you risked $100 of your hard-earned money and you have $10 at the end of the year to show for it that's not very powerful now let's pretend for a moment that you had $100,000 invested in the stock market and you got that same 10% return that's $110,000 and what the interesting thing is is that you took on the same amount of risk as in the first scenario both scenarios same risk same amount time taken but two very different results because the amount of capital that you started with is completely different this is basically the reason why people say it takes money to make money the second principle to understand is that as you stack up money to your first 100K it's like rolling a snowball down the hill as the snowball travels downward it gets bigger and bigger because it accumulates more snow along the way and the momentum carries it down the mountain pretend you save $10,000 a year and you're able to get a 7% return on your investment in the stock market now the stock market typically returns about 8 to 10% per year but let's use 7% because of taxes and any fees saving up to your first 100K in this case would take you about 7. 84 years if you were to save 10K each year and you invested it now a common misconception would be that saving a million dollar would be then 7.
84 years time 10 but that's actually not the case in fact it only takes a fraction of that time to get to a million dollar it won't take you 78 years but let's look at how long it actually takes to get to 200k at after you get to $100,000 getting to 200k Total would only take you 5. 1 years because now your initial 100K is generating you interest and you're still keeping at it with the 10K in contributions every year now fast forward to 500k and you can see that each 100K is faster than the previous you're responsible for contributing 10K per year while the money you have invested continues to work for you at 7% per year so knowing this let's take a look at how long it takes to get to each 100K for the first $500k and in the first 100K it's 7. 84 years then it's 5.
1 years then it's 3. 78 years 3. 01 years and finally the fifth 100K only takes you 2.
5 years when you finally get to that $1 million mark it would have taken you 3. 74 years with our assumptions but let's actually look at the breakdown of time the first 100K took you 7. 84 years or 25.
5% of the total amount of time it took to get to a million the remaining 900k took 7 4. 5% of the time and isn't that kind of funny because that means your wealth accumulation is disproportionately harder in the beginning of this entire thing by the way if you're curious the next 100K after you hit a million dollar is only 15 months and that's only 15% of the time that it actually took you to get your first 100K okay so hopefully this illustrates to you that your net worth absolutely explodes after you hit 100K but even more importantly it shows you that if we can get to 100K faster than 7. 84 years then we're going to have so much more time for a crap ton of wealth accumulation essentially all the friction of wealth accumulation is in the beginning in the first 100K and that's why Charlie Munger says it's a and that's why you should do everything that you can to get there and this is one of the biggest problems that I see going on with some of my friends as well as this generation right now we live in an instant gratification world and often times we're not thinking about the consequences of our spending before we do them I see my friends they don't have close to 100,000 in net worth just quite yet but they're tirelessly blaming societ Y and rage spending all the money that they have because they'd rather live in the moment because they can't quote afford anything and while I definitely agree that you should try to still live your life and knowing that cost of living is still incredibly expensive I still think we should still be reasonable with any of the dollars that we have left knowing what you know now about how important the first $100,000 is to hit how does that change your perception around a night out of drinking or perhaps impulse shopping to buy the latest trendiest clothing or perhaps spending $300 more per month on a car payment than you actually need to before you hit $100,000 in net worth you have to realize that every single dollar is so much more important especially in the beginning and that's probably why you hear all these people on social media saying that you shouldn't buy coffee or as Millennials we shouldn't be eating avocado toast I'm looking at you Graham and I got to say there's no better money than the money spent by Millennials because usually it's atrocious there is some truth to the fact that you should be saving as much as you can when you're younger and trying to accumulate that wealth my dad always has this dumb saying that he tells me which is $1 million son it's made up of 1 million single $1 bills it's a really dumb saying but I think what the importance of it is is that every single dollar matters and slowly as you stack up these $1 $1 $1 bills then you get to a bigger number let's say 1,000 5,000 or 10,000 and then it becomes more meaningful the takeaway here is that you need to stack up your chips slowly and save up to $100,000 and savings is so important because let me illustrate this to you right here contrary to what people believe the first 100K is actually not priz of just sole investment returns in the market take a look at this calculator from the four-pillar freedom blog I'll link the blog in the description by the way but if you save $15,000 a year for 6 years and you're able to attain a modest 4.
5% return on your savings you would be at $105,000 after 6 years but 85% of that would have been comprised of savings and 15% would be the investment returns in another example let's say you save $110,000 per year but you average a 10% return it will take you 7 years at a 10% return and your savings will comprise 67% of the total $14,000 here the point is is that rarely your first $100,000 will be made just from investment gains it really just comes to being smart with your money spending a lot less money and trying to earn more money down the road all right so if you want $100,000 as soon as possible I have three strategies that I want to share with you guys now two of these strategies are famously named by the book The Millionaire Next Door which I will refer to in this section but these are all really great strategies for you to get started strategy number one is to increase your offense this is somewhat of a sports or a gaming analogy here a big factor affecting your path to $100,000 is to as quickly as possible try to increase the amount of income that you're earning on an everyday basis regardless of your income level your offense should be really focused on building that wealth this is where you can take on continuing classes for certifications you could try new side hustles or perhaps some freelance work or you can try to switch jobs if the opportunity presents itself another option is to invest your money in stocks real estate or any other type of businesses you can also develop a high income skill in the next year or so and I detail exactly how you can even get started thinking about that in my video about how to go from Z to 100K in a single year and I'll link that video at the end of this one the idea here is that your time should be spent thinking about how your resources and your time can be allocated to Building Wealth rather than spending it which actually brings me to strategy number two which is playing good defense now I'm going to read you guys a quote from the the book that I just referenced The Millionaire Next Door this is an older book from the 1990s but it says quote here that if you cannot increase your compensation significantly become wealthy some other way do it defensively the whole premise of this book is that it studied the 95% of Americans who had over a million dollars in net worth in $1 1990 and they actually found that most of these people were regular people who just had consistent foundational Financial Lifestyles it found that many of those millionaires played good defense even if their income wasn't as high as it could be so defense in this context means that we are figuring out strategically how to spend less money that means actionable items like planning the year ahead budgeting and cutting back on some discretionary categories that we might be spending too much money in for example do you know how much you spent in total eating out last year I bet you most people that I asked that question to will probably not know but the idea here is that most people in this book The millionaires they actually knew it's not that they loved budgeting or anything it's just that they needed to do it in order to make sure that their spending was kept at a good level now strategy number three is to maximize the efficiency of the dollars that you do have if you live in any Western Country you know that the government loves taking a portion of your pay in some countries that can be upwards of 50% but here in America the highest federal tax bracket rate is about 37% so an easy way to accumulate and keep more of your money is to do so in some sort of tax sheltered account like the Roth IRA the traditional IRA or your 401K plans the Roth IRA your earnings grow taxfree in the traditional IRA at least you're getting a tax deduction on the amount that you contribute in any single year and with the 401K at least you can get some employer match so that you get some free money as well as some of the tax benefits as well if you can maximize your dollars in this type of way you're getting a tax shelter which means that the government is going to be taking that 37% away from you at the end of the day that means you're going to be increasing your wealth a little bit faster and we know that the friction is all in the beginning so if we can get over that hump as as quickly as possible that's going to be good for us another efficiency you should consider is getting a high yield savings account if your cash is just sitting in a bigger bank's checking account earning you 0.
