Charlie Munger's Money Advice Changed My Life
The most important (and difficult) wealth building milestone
If you don’t know who Charlie Munger is, he is Warren Buffett’s long-time business partner and legendary investor in his own right.
He’s also a 98-year-old man who is not afraid to speak in the bluntest of terms when he has strong convictions. Of all of the memorable Munger quotes, this is the one that will stick with me for the rest of my life:
The first $100,000 is a b*tch, but you gotta do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.
- Charlie Munger
Having been on both sides of the $100,000 threshold, it’s become clear that the $100,000 threshold is the most important wealth-building milestone. The earlier you get there, the easier your life will be. But the maddening truth is that it’s also hands down the hardest financial milestone to reach.
The importance of saving $100,000
Saving my first $100,000 changed my life in three ways.
It changed my mindset from believing to expecting I could achieve financial independence. Being able to crawl out of debt and save $100k by 30 made me feel like I was finally in control of my life.
It allowed me to start saying “no.” The less money you have, the less freedom you have to say “no” to things you don’t enjoy. $100,000 is not “FU” money, but it’s enough of a cushion to start saying “no” more often.
$100,000 is the point where compound interest begins to matter.
Let’s drill down on the issue of compounding and why Munger is right when he says, “you can ease off the gas a little bit.” once you hit $100,000.
Going from $0 to $100,000 is more difficult than going from $100,000 to $1 million.
It took me 30 years and cost me $150,000 to save my first $100,000. It took me 3 years to move up from $100,000 to $300,000.
Here is why saving your first $100,000 is so hard.
You’re early in your career and likely on a starting salary.
The less money you make, the less money you have to save after your expenses are paid off.
You start from $0.
Starting from $0 means you can’t rely on investment returns.
If you saved $10,000 in your first year of saving and your investments made a 10% return in year 2, that would provide a $1,000 return which is 1% of $100,000.
You’re doing all the heavy lifting.
If—like me— you had a pile of debt in your 20s, you’re not starting from $0. You’re starting from less than $0.
Once I factored in my student loan payments, I had to save $150,000 to reach $100,000 in savings.
At $100,000, everything became easier
It took me until I was 30 years old to save my first $100,000. By 33, I was had over $300,000 saved.
Moving from $100,000 to $300,000 was easier for several reasons.
My student loans were paid off (those payments redirected to savings.)
I was making significantly more money as I was moving up in my career.
After saving $100,000, compound interest took the wheel.
A 10% return on $100,000 is $10,000, which of course, is 10% of the way to the next $100,000 without saving another penny.
Of course, if you do continue to save more money, things begin compounding rather quickly.
Compounded savings explained in 1 chart
Let’s assume you:
Make $50,000 in year 1.
Get a 3% raise each year.
Save 20% of your income (including employer match on 401k)
Investment returns average 6% per year.
Here’s how long it would take you to save each $100,000 increment on your way to $1 million.
It would take you:
7.25 years to save your first $100,000.
4.6 years to get to $200,000.
3.33 years to get from $200,000 to $300,000
The clear trend is that each $100,000 milestone is easier to hit than the last, thanks to compounding investment returns.
How I supercharged my savings
If you have read my book, you’re familiar with The 10% Rule.
If you can replace 10% of the income you make from your day job with a side hustle you are passionate about, you can spend your days doing work you love in 10 years or less.
The idea is that you are supplementing your 9-5 paycheck with a side hustle and saving every penny from the side hustle.
If you make $50,000 per year at your day job, you would start a side hustle with a goal of making an additional $5,000 in the first 12-months (10% of your income.) In year 2 you would aim to make $10,000 (20% of your income) and so on.
In addition to putting you on a realistic path to doing work you love full-time, the 10% rule can help you compound your savings.
Let’s return to our chart where we measured how long it will take to save each $100,000 increment on your way to $1 million.
We make all the previous assumptions about savings rates and investment returns and add in an assumption that you have a side hustle that can replace an additional 10% of your salary each year, and you invest 100% of that new money.
It would take you:
3.9 years to save your first $100,000.
2 years to get to $200,000.
1.4 years to get from $200,000 to $300,000
To bring this entire discussion full circle and hammer home the importance of reaching that first $100,000, consider:
Starting from scratch, it would take 13 years to save $1 million using the 10% rule compared to 27 years without it.
Once you hit $100,000, it would only take 9 years to reach $1 million.
It’s a monstrous goal, but once you hit it, life becomes easier and more options begin opening up to you.
5 Cult-like Communities in Personal finance
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.