Getting to $100k
Getting to your first $100k is according to most millionaires the hardest part of the journey. So if you haven’t reached this goal yet, chances are, you are also finding it hard to get there.
In this post I’m going to reveal why it’s supposed to be harder, how easy it’s going to become later and what is the easiest path to reach your first $100,000 even if you don’t start a million dollar business.
A little Berkshire Hathaway Story
At a Berkshire Hathaway Shareholder Meeting in the 90s, a young man asked Charlie Munger, Warren Buffett’s right-hand man, for his best advice on creating wealth. Charlie Munger’s quote became one of the most famous quotes in finance and was:
“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 – Vice chairman of Berkshire Hathaway
I love this quote because when I started saving and investing it took me so long that I thought I would have never reached $100,000. It was really hard, but there is a reason for this.
First of all, how is it that you can make money?
There are basically two ways: the way of the employee and the way of the entrepreneur. Obviously if you want to make tons of money in a relatively short period of time the best way is to start a business, but it’s also harder:
According to data from the Bureau of Labor Statistics, approximately 20 percent of small businesses fail within the first year, 30 percent by the second year, and so on up to a 70 percent failure rate after a decade.
The way of the employee is basically “saving and investing”. All that said, in this post we are focusing on the case that you don’t have a business and we’re going to discuss how to get to your first $100,000 assuming that you have a regular job.
Coming back to Munger’s quote, you can see that you have to assume that your first $100,000 will come from savings, not from investment. And this is what’s fascinating because people typically believe that to get to 100k you need to be good at investing or have particular skills, but the truth is, your investment results are not going to make a dent at the beginning.
Let’s say for example that you’re saving $15,000 a year and you invest them in the total stock market, for example through VTI which gives an average of 7% return. After 6 years you’re going to have reached $114k, but the interesting thing is that 78% of it will be composed of pure savings, and only 22% or investment return. And here you can see that the % of your portfolio which is your savings is going to be higher than the returns for almost 20 years.
Let’s say now that you want to get to 100k faster, so you decide to invest like $30,000 per year. As you can see in the following picture, you’re going to need 3 years to get to $100k with a 7% return and savings this time are going to be 87% of your portfolio, not 78% like before.
The point I’m making here is that getting your first 100K, except if you start a business, is rarely from investment gains. Instead it’s all about saving, being smart with your money and earning more money.
Another point I want to make is that the faster you want to save $100,000, the more you rely on savings and the less important investment returns become. Now the beauty is that after you get to your first 100k it’s going to be much easier because the compound effect is going to start kicking in.
Let’s assume that you save $10k per year. To get to your first 100k you’re going to need 7.8 years, but to get 100k more you’re just going to need 5.1 years then 3.8, 3 and so on. And this is, by the way, assuming that you always save the same amount every year but if you increase your salary over time you’re also going to be able to save more and all this process is going to speed up even more than this.
Getting to your first 100k as soon as possible is not only important because they are the hardest, like Munger says, but it’s also already a great result because with just 100k investment returns start to make life a little easier.
If your $100,00 portfolio earns 4% in annual dividends, which is not so hard, you’re going to get $4,000 per year or $333 every single month without doing any work. And that amount of money can make a real difference already. If you have the 100k invested in the S&P500, which gave so far an average annual return of 10%, you would be getting over 800$ per month pretax of free passive income.
But now, how do you get to $100,000? If you don’t start a business you’re going to go the slower but safer road of the employee and here there are 3 important steps that are going to take you there and I call it ACI:
Automate, Cut Expenses and Increase Income.
Tip Nr. 1 – Automate
Step number one is going to be automating your savings. This one, I promise, will change your life and it’s the first step if you want to get serious about getting to your goal.
The first thing you want to do is decide how much you can save every month. If you want, you can use the tool I showed you before, that you can download for free from here.
What you’re going to do then is set up an automatic transfer from your checking account to a savings account or a brokerage account that you’re going to use for investing.
Typical brokerage accounts that you can even open with your phone are Webull, M1 Finance or Robinhood. If instead you want to get to 100k without investing, which as we’ve seen is almost the same at least to get to 100k, you can automate a transfer to a high yield savings account.
Many people ignore this step of automating because they think they can have everything under control, but the truth is that if we see a certain amount of money in our account we are probably going to spend it… or at least we’ll do everything we can to try to spend it.
It’s better to just have in your account what you’re going to need for rent and food plus something for entertaining but important is that you define as quickly as possible how much you are able to save every month and you set up this system so that that money leaves your account every month after you get your paycheck.
As they say, “Out of sight, out of mind”.
Now, a good amount to start with is at least 10 percent of your paycheck but, to be honest, the more the better. I’m personally saving more than 50% every month and of course this way you get to your goal much faster.
In case you decide to send the money to a brokerage account instead of a savings account, my second tip is to open a Roth IRA Account. You can do it in like half an hour through your brokerage account and the advantage is that whatever after tax money you invest through the Roth IRA is going to grow tax free and if you withdraw it after retirement you’re going to get the whole return tax free.
One last thing you should do to improve your finances and automate the whole process is to subscribe to my youtube channel and click the ring bell – jokes aside, you’d be automatically notified of new videos without any effort, so what do you have to lose?
Tip Nr. 2 – Cut Expenses
The second thing that you need to do is to cut expenses. This is definitely not going to be easy but is going to get you to this goal so much faster.
You need to figure out what you can cut out immediately from your expenses. You’ve probably heard already that 3 expense categories are responsible for spending almost 50% of your total income, and these are Housing, Transportation and Food.
There’s a lot you can do on housing if you are a young and flexible person. You can live with a roommate, or live with your parents for a bit, maybe just take a smaller place if you want to live alone. Of course, you’re still going to be kind of forced on a certain cost based on where you live but generally speaking there is always the way to find a smaller place or a place with a better rent.
Cars and transportation are a great money waster. People seem not to be able to realize the power of depreciation of a vehicle. Buying a new car is a terrible idea because the moment you drive the car out the dealership you already lost 10-15% of value, even though the car is theoretically just as good as new. On the other side, buying a car that is too old will give you higher maintenance costs so the sweet spot is usually with a car that is around 4 to 7 years old.
Even better than that, of course, is if you can use public transportation.
I did an entire video on how to reduce your car costs, where I go in detail on all the different expenses you’re going to have with a car and I tell you not only a way to reduce each of these expenses, but even a way to profit from your car.
Food is another big expense. Dining out in restaurants is in pole position, so I’d definitely try to cook my own meal if I’m used to spending money in restaurants. I personally spend almost no money on dining out because I like cooking – that’s my Italian spirit – and anyway cutting out this cost was one of the first things I did years ago when I started saving and investing.
But it doesn’t stop there, here’s an example that for some people is crazy but in reality I think it’s not, well, sometimes I travel for work and to be fast I go to places like McDonald’s. Now I have the Mc Donald’s app on my phone and there are constantly great discounts and offers if you use the app, like I can get two burgers at the price of one, or I can get a coffee for 99c instead of $2.29. I mean, yeah, you’re saving a couple of bucks. It doesn’t seem like a lot of money but if I manage to save 30% of my dining out, maybe instead of $150 in a month I spent 100, and there I already have 50 bucks more saved every month.
Same is when you buy groceries. You always find products at a discount, sometimes even if you just go in the evening on particular days you’re going to find discounted products only because they are receiving the new delivery, so if you spend $300-400 dollar in food every month and you save 20-30% it’s again over $100 saved. The thing is, it’s not about how much you’re saving with a single coupon but it’s the discipline you build. You don’t get to 100k in savings by buying everything you want without looking at the price.
Tip Nr. 3 – Increase Income
Alright step number 3 is Increasing your income. First of all you need to ask yourself:
Do I like my job?
Do I want to keep my job?
Do I see myself in a different field?
If you want to work as an employee, because you don’t want the trouble or the risk of starting a business, the best way is by increasing your main income and creating other income flows.
First of all, talk to your employer about setting up a 401k if you haven’t done it. It’s one of the best and easiest ways to double your money because for every dollar that you will deposit on your 401k your employer will deposit up to $1 himself.
If you love your job, in my experience you’re going to constantly improve and be promoted or get raises. If you don’t, talk to your employer and ask for a raise. You need to be able to explain why you should be getting a raise and usually the best arguments are your skills.
If you don’t get a raise, either you’re not as valuable as you think, so you should improve more, or maybe he’s really not able to pay you more and you should think about switching company. Usually getting a new job is going to get you a better salary, so sometimes it’s even better to find a new job then asking for a raise because asking for a raise is like a sales pitch, you can’t just ask double as much as before. But you might be able to achieve that with a new job.
In any case you should do everything possible, in terms of time and investments, to increase your skill set and make you more attractive to the market. Sometimes you just need to pay $1,000 for a course that gives you some more skills and thanks to that you can start earning $300 more per month on your job, and you basically get your investment back in 3 months but then keep earning $300 more per month forever.
Another thing that you can do without any effort is selling out what you don’t need. This is not going to make you rich but most people I know who live paycheck to paycheck still spend hundreds of dollars every month on clothes, phones and other stuff. So there are surely things you don’t really need which lie around in your home. Just sell them on Facebook Marketplace, Craigslist or Ebay.
If you do love the field you work in, you should invest all your effort into getting better at it. No way around it. Even if you work at Mc Donald’s or at a call center, if you improve and get better than the others, at some point you’re going to become team leader, or maybe area manager.
But if you don’t love what you do, but for some reason you can’t change it, then at least use your free time to increase your income and if you don’t want or can’t start a business you should consider starting a side hustle. It might be as simple as a service based business like dog sitting, window cleaning, lawn mowing, which are all businesses you can start with practically no skills.
In this case I would try to find my first customers and then try to fill up my free time as much as possible. Who knows, maybe it becomes profitable enough and you get enough experience that you want to make it a real business.
Or you might start something with higher potential for which you have to build some skills. It might be offering some services on Skillshare, or maybe you are creative and can sell something on Etsy, maybe print on demand which is easy and risk free. You have millions of ways to earn some money on the side in your free time and the cool thing is:
- You can learn everything for free from the internet
- You’re going to build new skills
- You open new doors that might get you to places you never thought of
If you are interesting in finance and investing, don’t forget to visit my youtube channel and drop me a comment or an email any time with your questions.
And don’t forget to download my free Google Sheets Savings vs Investment Return Calculator!