Why Your First £100k Is The Magical Number For Reaching £1m | Charlie Munger
I want to explain to you mathematically why saving and investing your first 100k is the magical number that will snowball your wealth towards £1m or $1m.
Charlie Munger, a business partner to Warren Buffett and billionaire investor, has been credited for saying that 100k is what you need to save first in order to build wealth 😀.
Several years ago, at an event, a young man asked Charlie Munger for some advice, because he was struggling to save, invest and see his net worth grow.
Charlie Munger said saving that first 100k is challenging, but necessary. Specifically, he said:
It’s a b****, 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.
Why Your First 100k is Necessary
I want to explore why this number matters.
You might be thinking, “Ken, £100k seems impossible. It's pretty much like trying to climb Mount Everest.”
We recently shared a case study of how Jenny, a member of The Humble Penny community, saved her first £100k through diligent saving, investing and trying to earn more.
Now, even if you are super far away from 100k, my goal for today is to inspire you and give you an aim.
If you know what it takes to get to 100k, it should motivate you to try and do everything possible to save and invest till you get there.
Scenarios To Reach Your First 100k
To show you why this 100k really matters, I'm going to be doing a couple of scenarios.
I will look at saving and investing £10,000 per year at a return of 7% and 5%.
Now in case you're thinking to yourself 7% is an unrealistic return to achieve.
I've written a detailed blog post that I want you to go and check out in your own time.
It shows you the different places where you might be able to invest to achieve that kind of return.
But remember, that return is over a long period of time, so potentially decades down the line.
But to keep things realistic, I'll also be looking at a 5% return scenario.
Reaching Your First 100k
Imagine Emily is 30 years old, she's got a 40-year investment horizon.
She's looking to invest about £10,000 per year (£833 per month).
Let's assume an average annual return of 7%.
Here is what hitting that first 100k looks like for Emily:
As you can see, it will take her around 7.7 years to reach her first 100k.
She starts with £10k and the effects of compounding then start to kick in to get her to £100k.
How Every £100k Grows Quicker
Now assuming that she carried on investing £10,000 per year, something pretty powerful happens, based on a 7% return.
I will also do another scenario with a 5% return.
What happens next is pretty remarkable.
Her first 100k as we saw earlier took 7.7 years.
The next 100k if she carried on investing £10k per year will take 5 years to happen.
Then the next one will take 3.75 years to happen and so on 🤯.
It will carry on like that, notice how the years are decreasing.
The most difficult and longest period to acquire the first £100k took 7.7 years, compared to the last £100k, which would take 1.33 years giving a total of 30.3 years to reach £1m.
Here is a summary for you:
I thought that was remarkable until I took a much closer look at the numbers to see the power of compounding at work.
Notice that the first 300k takes 16.4 years, more years than the last 700k, which takes 13.9 years to happen.
This speaks to the importance of starting to invest early and time being the asset that's required for you to create wealth.
Impact of 5% Growth on 100k
We saw above the impact of 7% growth on £100k.
In case you're thinking to yourself, “Ken, 7% seems a bit ambitious, what about a lower number, something that might seem a bit more realistic?”
By the way, I think 7% is pretty realistic if you think of the many, many years ahead of us, decades down the line.
If we look at the 5% return scenario, the pattern remains the same.
The first £100k will take 8.2 years,
The next would take 5.8 years.
Then the next 100k to get us to 300k will take 4.5 years and so on.
You can see that it carries on decreasing year after year to a very low 1.83 years to go from 900k to that 1 million pounds.
However, note that the first 300k takes 18.5 years which is more time than the remaining 700k, which takes 17.8 years to bring us to that total of 36.3 years.
Why Your First £100k Matters So Much
I've shown you what happens once you hit that very first 100k.
You might be thinking to yourself, why does that happen? Let us unpack that right now.
1. Exponential Growth
The first reason why you see that big shift in the number of years dropping significantly every year is because of exponential growth.
This comes from compound interest.
To illustrate the power of compound interest, let's look at two scenarios.
Let's say that you were saving and investing 10k a year at 7% average returns and you left that running for 40 years.
You might think to yourself that you'd get the same returns if you doubled the amount you're investing, so go from 10k per year to 20k per year.
But rather than leaving it for 40 years, you invest it for 20 years, instead.
Again, the same 7% return. Have a guess what happens from a returns perspective.
The £10k per year, over 40 years at 7% turns out to be £2,059,618.
Whereas your £20k, which is twice the amount invested for half the time of 20 years at the same return of average 7% only leads to £845,893.
This tells us that the power of compounding requires time to work, the longer you leave that money invested, the more you see the power of compounding truly at work.
Just to illustrate this, I've got a chart up for you to look at:
On that chart, you can see I've got two lines there of us investing £10,000 per year 7% return over a period of 40 years.
If you left your money compounding and reinvesting your dividends, you'd end up with over £2 million as I mentioned before (see blue line).
But if you just left your money in your bank account, that money just goes on a straight line and never grows (see red line).
In fact, the purchasing power of that money is reduced by the impact of inflation.
So the beauty of compounding is actually what happens when that curve goes upwards.
It's indicating that there's a greater acceleration of your money, and you are building wealth a lot faster because money is working on money.
The second reason why every additional £100k after your first £100k takes a lot less time to achieve is that you began with a much larger portfolio size.
2. Larger Portfolio Size
This particular one explains why the rich get richer.
Take a practical example, imagine you had £100K and you invested that and generated a 7% return.
A 7% return on £100k is £7,000.
That's money you've just received as a return on your investment for doing nothing apart from having your money invested in the right environment.
And then the very next year, that £100k plus that £7k (i.e. £107k) then generates another 7% return, and so on.
A £7k addition to your original £100k is a significant amount, which itself then goes on to generate even more of a return.
So the £100k that you started with creates a snowball effect, as the years pass by subsequent £100ks are being generated faster, taking a smaller amount of time to achieve.
In summary, a combination of the exponential growth that comes from the compounding and the fact that you started with a much larger portfolio size creates that faster snowball effect.
3. Healthy Money Habits
There's a third reason that leads to you getting to this outcome.
That third reason is all the various things that you needed to have achieved first, to get to your very first £100k.
As we've explained previously, to get to that very first £100k, a number of things need to happen.
You of course need to:
- Live below your means,
- Budget every month,
- Increase your income level to save and invest a significant amount on a monthly basis.
- Minimise your lifestyle such that you are able to create a much bigger buffer to save and invest.
- Automated your investing and live on what's left over after you have invested.
There are so many changes in your habits and your behaviours that happen as an individual.
This led to you becoming that person who gradually and painstakingly over many years gets to that point where you've saved and invested your very first 100k.
That change in your habits, behaviours, money mindset, and so on effectively built a really solid foundation.
Mental Shift To Achieve Your First £100k
You become that person who not only saves and invests £100k, one day, but you likely become that person who sees their wealth grow consistently over time 💪🏽.
That's because you have managed to maintain those money habits that you've developed in that painstaking journey to building that very first £100k.
I want to wrap up by saying that getting to your very first £100k is very difficult.
Make no mistake about it. It will take years and that's ok! it's a possibility for you if you set it as a goal.
One of the biggest reasons why a lot of people don't achieve a lot in their lives financially is because they don't set them as goals in the first place.
My hope is that I have encouraged you by giving you insight into why getting to £100k matters from a wealth-building perspective.
I want to give you hope that although it takes a long time to get to that very first 100k…
What you expect to happen after is a very clear roadmap towards building wealth, and ultimately achieving financial freedom.
Why You Should Stay Realistic
Make sure that you are keeping all your assumptions reasonable.
I looked at a 7% return and then I looked at a 5% return, for example.
With everything to do with the stock market, things never go up in a straight line, which is why these are purely illustrations.
What If Your Stocks Have Been Falling?
The beauty of investing is that we know that things go up and down.
But history has shown that over time, the stock market tends to go upwards overall.
So let that encourage you because I know there'll be people who say, actually, in the last two years, my stocks have fallen and I've actually lost money and so on.
That's because we're looking at things in a very narrow frame of time.
Think long-term when it comes to your investing. Stay diligent, consistent, and keep things automated to see your money grow over time.
And of course, don't forget the effects of inflation, which will play a role in reducing the purchasing power of your money over time.
Starting that investing journey gives you the best possible chance of beating inflation, and seeing your wealth grow over time 😀.
Your goal doesn't need to be £1m either.
Even if you barely have £1000 in your bank account right now, don't be discouraged.
Start by aiming to save and invest that first £1,000 followed by the next £1,000.
The key is to start and not get defeated before you've even begun.
Choose today to invest your money consistently and give yourself the best chance of achieving financial freedom sooner rather than later.
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How far away are you from your first 100k? Jump in the comments and let us know.
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