**Alexander Bennett**

Entrepreneur and Businessman

## Charlie Munger’s Insight on Earning $100,000

Charlie Munger once said

“

That your first $100,000 is the toughest to earn but most crucial for building wealth. I don’t care what you have to doâ€”if it means walking everywhere and not eating anything that wasn’t purchased with a couponâ€”find a way to get your hands on $100,000.“

In today’s article, let’s put the CPA hat on and dissect why your first $100,000 is so important. Weâ€™ll break down the math of savings goals and explain how you can get there and why net worth skyrockets after $100K. So why $100,000?

## Reasons Behind the Importance of $100,000

### Compounding Returns and the Snowball Effect

There are two main reasons for the importance of reaching $100,000. The first is compounding returns and the snowball effect. This is the magical part of the math behind it. Iâ€™m going to pull out the Excel in a moment to show you this. The Tooth Fairy doesnâ€™t come and put a tooth under your pillow when you hit $100,000, but the snowball effect can definitely be shown in a spreadsheet.

### Psychological and Qualitative Factors

The second reason is the qualitative or psychological aspect. Getting to $100,000 is a grind. The short-term sacrifices you have to make to reach this milestone are required, but after that, it becomes much easier.

## Demonstrating the Math: Saving $10,000 a Year

### Annual vs. Monthly Contributions

Letâ€™s use an example to demonstrate the math. Assume that you save $10,000 a year. I ran the numbers for both annual savings of $10,000 (10K a year on January 1st) and for $850 a month. If you’re wondering whether contributing monthly or an annual lump sum makes a difference, in this example, it doesnâ€™t make a huge difference mathematically.

### Historical Returns and Emotional Factors

The average annual return of the S&P has been 10% since its historical inception. I got this information from Google. However, in the real world, investment performance depends on individual investors, who are not always rational and tend to make decisions based on emotion. Factoring in emotion, letâ€™s say a 7% return is fair for this calculation. Investing at a 7% return would take approximately 6.5 years to save $100,000.

### Key Variables in the Calculation

The variables included in this calculation are the future value (the $100,000 we’re trying to save), the initial investment or initial amount saved (in this example, itâ€™s $10,000), and the savings per period (either once a year or every month). The interest rate is 7%.

## Compounding and Investment Frequency

### Annual vs. Monthly Compounding

How often the investment compounds is another factor. If we did an annual lump sum of $10,000 a year into your investment account, compounding would be once a year. If we did a monthly investment, the compounding number of periods would be monthly.

### Assumptions for Calculations

The assumptions weâ€™ll make are that you donâ€™t have any other sources of income or assets; 100% of your money is being put into the S&P market, and this investment return reflects what the historical S&P has shown in the past. Weâ€™re also not going to model any qualitative factors, although we will discuss qualitative factors at the end.

## The Journey Beyond $100,000

### Reaching $200,000 and Beyond

So, 6.5 years to get to $100,000, and the hardest part is over. Now that you have $100,000 saved, thatâ€™s just step one. With $100,000 working hard for you, letâ€™s say you continue to save $110,000 a year. How long would it take to reach $200,000? Based on these calculations, at a 7% return, it takes 6.5 years to get to $100K, but to go from $100K to $200K, it takes 4.9 years. To go from $200K to $300K, it takes 3.7 years.

### The Acceleration Effect

The power of compound investing shows that as the amount of time it takes to hit each milestone (measured in hundreds of thousands of dollars) decreases, it just keeps getting faster and faster. If you continue down this path and assume $110,000 of savings a year, you eventually reach $500K saved.

## The Acceleration Effect

### Growth Beyond $500,000

Here is where things get really interesting. Remember, to get to $100,000, it took 6.5 years. But to go from $500K to $600K, it only takes 2.5 years. Once you have a million dollars in assets that generate a 7% return, you have the ability to make an additional $100K per year. This is actually a fairly conservative calculation because it assumes youâ€™re basically just saving money from your paycheck and not seeking new sources of income or getting a raise.

### The Mathematical Inflection Point

This calculation assumes very little risk and no uncertainty. As you can see, $100,000 is the mathematical inflection point. The slope of this line is much flatter before $100K, but after $100K, it literally starts to shoot upward, kind of like a hockey stick sort of growth. The actual speed at which it goes up is around 400% per return for a 10% return on your investment and around 300% for a 7% return.

## Qualitative Factors and Real-Life Considerations

### Behavioral Change and Taxation

To bring theory into real life, we also have to talk about qualitative factors. There are many ways to get to $100K, but for most people, it will be from their job, which they have to pay taxes on and save money from their after-tax paycheck. The premise behind the $100,000 benchmark and why it’s the hardest is largely due to behavioral change. For most people, they will be saving from employment income, which is what I had to do to save my first $100K.

### Challenges of Saving Your First $100K

Saving your first $100K is a grind. No matter how much money you make, you still have to live below your means. In the US, the median salary for a whole family is $75,000 before tax. After tax, this is probably around $50K. Assuming a savings rate of 20%, this means that you’re only putting $10K aside a year. Even if you use a tax-advantaged account such as a Roth IRA or 401(k) and you donâ€™t experience an immediate tax consequence, and even if your employer is generous and offers a 50% match, it still takes almost 7 years (6.5 to 7 years) to set aside that first $100K.

## Impact of Debts and Real-World Variability

### The Effect of Debts on Savings

Another factor worth discussing is debts. If you are paying off other debts, such as college debt or student loans, this can extend the time beyond 6.5 years. You might not be able to save $10,000 a year if you’re paying off student loans.

### The Role of Financial Opportunities

This is all theory based on normal returns that the average person can access in the stock market. In reality, this may or may not be the case. I personally believe that we are given different financial opportunities at different points in our lives. Whether we choose to seize those opportunities is our own personal choice, and how you seek out, take action on, and realize these opportunities is also your choice based on your risk tolerance.

## The Role of Increased Earning Potential

### Benefits of Higher Income

I just mentioned the point about student loans. If you have any debts, it may take a bit longer to reach $100,000. But on the flip side, I also didnâ€™t talk about your saving percentage and how that can increase if your earning potential goes up. One of the biggest benefits of earning more, if youâ€™re financially savvy, is that the percentage of savings you make every month can also increase.

### Increased Savings with Higher Earnings

If you previously saved only 20% of your income and end up making more, you might keep the same lifestyle or even cut down on expenses. Maybe now you can save 30% or 40% of your income, which would make the process go faster.

## Impact of Life Changes

### Major Life Events and Their Impact

Life changes are definitely another qualitative factor because this calculation doesnâ€™t factor in any major life changes. If you have a big wedding in the middle of your 6.5 years, it can take a lot longer. If you move cities, that can also extend the time. If you buy a house, this whole formula changes.

### Theoretical Assumptions vs. Real Life

This formula, while great in theory, assumes that youâ€™ll live the same life for 7 years without making any major life changes that require a lump sum of money. It depends on the person and factors like age, career changes, and starting a business.

## The Psychological Boost After $100K

### The Impact of Developed Financial Habits

There are many factors that can either speed up or slow down this process. However, one of the biggest reasons why net worth skyrockets after $100,000 is because of the good habits you had to develop to get that $100,000 in the first place. These financial habits, if continued, will accelerate and grow your wealth.

### Skills and Knowledge as Long-Term Assets

For some people, these skills might be related to investing or saving money, or knowledge gained to earn more and speed up the process. Having more cash in the bank, along with these skills and knowledge, is crucial. Skills and knowledge canâ€™t be taken away from you, while money is finite and comes and goes.

## Conclusion: The Long-Term Benefits of Early Savings

I think that is one of the biggest reasons why net worth shoots up so much after your first $100K. Once you learn something and train your nervous system to adapt through the hard part of learning, you will always know how to do it. Throughout this process of saving your first $100K, youâ€™re likely also skill stacking. As your bank account grows, so do your skills, knowledge, and awareness. Maybe you buy some real estate, and rental income helps accelerate your growth.

There are many reasons that can accelerate this formula. Beyond the math, the biggest reason for increased net worth is more psychological than return-based. Just knowing that you can do it and that youâ€™ve done it before provides proof of concept that you can keep going.

Alexander Bennett is an experienced business consultant and startup coach having over 15 years of guiding entrepreneurs and well-established corporations through the intricacies of finances. The specializations that he carries include developing new business strategies with practical financial planning expertise which help startups go through these early stages smoothly before turning into giant enterprises or even corporations.