“The first $100,000 is a bitch”

The first $100,000

Seems daunting from down here, doesn't it?
Seems daunting from down here, doesn’t it?

In her book Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Janet Lowe credits Charlie Munger with uttering the sentence, “The first $100,000 is a bitch” at an annual shareholders meeting.

It may be tempting to roll your eyes and see this as some kind of platitude that has no real relevance to where you are today, but that would be a mistake.  There’s both wisdom and math behind that deceptively simple sentence.

As anybody who has ever undertaken a long-term project can tell you, the hill seems steepest at the bottom.  At the end of Grade 12, the four years it takes to earn a university degree seems  like an eternity.  In September, ask any school student (or teacher) how long ten months are.  Even getting down to household chores that may take a few hours to complete can seem to take all of your willpower. Of course, when these undertakings have been completed, the time seems to have flown by, and you wonder why you got so worked up in the first place.

We’re all familiar with the concept of time and work seeming to vary greatly, depending on our perspective at any given moment. It is vital to realize, however, that unlike the aforementioned examples, building one’s net worth is not a linear process; in all of the other examples mentioned, it is only the perception that changes, depending on your point of view.  With building net worth, however, once you get going, it is not just the perception of the task that changes, but the task itself.  As you make progress, the path really does get easier.

  • The first reason increasing net worth after the first $100,000 becomes easier is because you get used to doing what you have to do to save and invest money. Having found a way to live below your means, staying there is much easier than getting there in the first place. Of course, if you’re just starting out, and earning your own money for the first time, or if you’ve just received a raise, you’ve got a shortcut; keep spending what you were living on before, and bank or invest the rest.
  • The second reason is purely psychological: doing anything the second time is easier than doing it the first time. You’ve managed to get to $100,000, so you know for a fact that it can be done.
  • You’ve certainly learned a lot while you were working towards building $1000,000 in savings/investments. You can use that knowledge to make the second hundred thousand come much more quickly.

The final, and most important factor, that makes the second $100,000 easier than the first is not a habit, or a psychological boost, or even the expertise that you’ve gained.  It’s something much more tangible than that. While you are working on your second hundred thousand, your first hundred thousand is giving you a helping hand. If you invested in dividend paying stocks (which is the basis of my whole investing philosophy) you are earning income from those stocks, and that income can be used to generate more income, in a virtuous circle that will bring a smile to your face.

Consider this simple example: Assuming a rate of return of 5%, a $100,000 investment will earn an extra $5000 per year.  That means that if you’re planning on taking, say, 6 years to get to your second $100,000, you have actually given yourself 6 years to get to $70, 000, because $30,000 will earn itself, as it were, on the dividends of your first $100,000.

As sharp as you are, I’m sure you’ve noticed that those numbers aren’t quite right.  In actual fact, the amount of money you would have to set aside (i.e. that would need to come from money earned outside your investments) would be even less.  In the second year, your existing investments would not generate an extra $5,000, but an extra $5,250, the “extra” $250 having come from the additional stock bought last year with the $5,000 that had been earned from the original $100,000.  This growth – where money is earned on money that itself was earned with other money – is called compound interest, and it’s a wonderful thing.

Albert Einstein is (probably apocryphally) credited variously with saying that compound interest was the 8th wonder of the world, or the most powerful force of nature, or the greatest mathematical discovery of all time. The source of these supposed quotes may be in question, but the point they make certainly is not.  Once you reach a critical point of momentum, the math will take over, and you won’t have to spend nearly so much time or money growing your investents.  That critical point is certainly not $100,000, unless you’re very young or have a very modest lifestyle, but by the time you reach that threshold, you’re well on your way — and you’re probably a lot further along that you realize.



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