The First $100,000 Is the Most Difficult: Check!
Charlie Munger, the vice chairman of Berkshire Hathaway (of Warren Buffett fame), famously said that obtaining your first $100,000 of investment capital is the most difficult part of building wealth. After all, if you are fresh out of college earning $50,000 per year, $100,000 represents two full years of income—more than that actually when you take taxes into account. It’s no wonder, then, that it takes the average investor several years (or decades even) to save their first $100,000!
Although the $100,000 dollar amount cited by Charlie Munger is somewhat arbitrary, the principle should behind it should be clear: it’s easier to grow a large amount of money than a small amount of money. Consider, for example, the average rate of growth of the stock market over time. On average, the value of the S&P 500 index tends to double every seven years or so. If you are investing, say, only $1,000, you can reasonably expect your investment to be worth $2,000 in seven years, and you could expect it to be worth approximately $4,000 in seven more years after that. If, however, you are starting with $100,000, you can reasonably expect your investment to be worth $200,000 in seven years, and a whopping $400,000 in seven more years after that!
Since the same principle always applies, investments doubling every seven years or so regardless of the initial dollar amount, obviously it’s better to have the largest amount of starting capital possible. When I first started this personal finance blog back in 2007, now 15 years ago, I was excited to have a spare $100 to invest from time to time when I was a relatively poor graduate student. The next 15 years or so were spent working, working, and working. Even if I was unable to save and invest consistently, I was able to save and invest some, not as much as I would have liked but enough to be able to say that I now have over $100,000 invested in the stock market, even despite the recent downturn in the first half of 2022. All things being equal, even if I didn’t invest anything further—which is unlikely, as I have at least a couple more decades to my working life left to go—I could expect to have well over $200,000 in seven years, $400,000 in 14 years, $800,000 in 21 years, and so on. I fully expect the actual amount to be even higher as I continue to invest more of my income along the way.
Another way to look at it is in terms of the amount of time it takes to earn each subsequent $100,000. Although it took me 15 years to have $100,000, the next $100,000 should take only seven more years. The next $100,000 after that should take only 3.5 more years, and so on. Even with the fuzziness of that timeline as result of unforeseen ups and downs of the stock market over time, the principle should be clear: the amount of time it takes to earn the same amount of money again and again tends to decrease as your investments grow. Hence, again, the importance of scrimping and saving and sacrificing to get that first largish amount of capital invested, as it only gets easier from there!
Charlie Munger was right: those first $100,000 were difficult to get. They took years of work, commuting, sacrificing, saving, investing, commuting, career development, side gigs, stops and starts, backslides, and more. Yet here I am, 15 years into my foray into investing, with over $100,000 invested during a market downturn. If Charlie Munger’s principle holds, building wealth from here on out should be much easier, with increasing returns on my investments, in actual dollar amounts, even as I continue to work in my career over the next few years and decades much as I have been doing for the past 15 years.
Those first 15 years were not without sacrifice and loss, however. The time spent commuting and working took its toll on my marriage, ultimately culminating in a lengthy divorce, and even on my own psyche and on my mental/emotional health. So I my only word of caution would be to ensure that you aren’t sacrificing too much for the sake of that first $100,000, the opportunity cost of which can cause you to miss out on other joys in life that you can never get back once they are gone, no matter what new joys or pleasures come your way in the future.
