Why Net Worth EXPLODES After $100K (And How to Get There ASAP)
Summary
TLDRThe video discusses how accumulating your first $100k in net worth is difficult but critical, as your wealth grows exponentially afterwards due to the power of compound interest and capital scaling. It shares principles like how capital scales well as it grows, and saving money is like rolling a snowball downhill. It suggests strategies to reach $100k faster, like increasing income, cutting discretionary spending, and maximizing account efficiencies via vehicles like IRAs and high-yield savings.
Takeaways
- 😀 Getting to $100k net worth is critical because that's when your wealth starts growing exponentially
- 📈 Capital scales well - the returns from capital increase proportionally to the amount of capital
- 🌡️ Accumulating the first $100k is like rolling a snowball downhill - it gets bigger and bigger over time
- ⏳ Over 75% of the time to accumulate $1 million is spent making the first $100k
- 💰 Every dollar matters when trying to get to $100k - be smart with spending
- 👆🏻 Increase your income as much as possible to build wealth faster (increase your 'offense')
- ⬇️ Cut discretionary spending and budget better to accumulate savings (play 'defense')
- 🔑 Tax advantaged accounts help you keep more of your money - maximize them
- 🏦 High yield savings accounts earn far better interest than big bank checking accounts
- 💡 Getting to $100k quicker means more time for wealth to compound later
Q & A
Why does Charlie Munger emphasize getting to $100,000 in net worth?
-Because he says your net worth explodes after your first $100,000 due to principles like capital scaling well and the snowball effect of compounding returns.
What does it mean when it's said that capital scales well?
-It refers to the idea that the returns or benefits from capital increase proportionally as the amount of capital itself increases.
How does getting to $100,000 help you accumulate wealth faster?
-The friction of wealth accumulation is highest in the first $100,000. So getting to $100,000 faster gives you more time for accumulating further wealth through the snowball effect.
Why is saving money important in getting to the first $100,000?
-Studies show that rarely is the first $100,000 made up purely of investment gains. Significant savings comprise a major portion in getting to the $100,000 mark.
What are some ways suggested to increase your offense financially?
-Ways include taking certification courses, trying side hustles, switching jobs if good opportunities exist, investing in assets, developing high income skills.
What does it mean to play good defense financially?
-It means strategically cutting back on spending through steps like planning ahead, budgeting, reducing discretionary spending categories.
How can you maximize efficiency of existing dollars?
-Using tax-advantaged accounts like IRA and 401(k) to shelter taxes, and keeping cash in high yield savings accounts rather than regular checking.
What were some key findings from the book The Millionaire Next Door?
-It found most millionaires were regular people with consistent, foundational financial lifestyles, rather than high rollers. Many played good defense with spending.
Why is getting to $100,000 as fast as possible important?
-It gives you more time for further wealth accumulation due to the snowball effect of compounding returns.
How long does it take to get to $1 million based on the assumptions provided?
-It would take approximately 18.74 years if saving $10,000 per year and getting a 7% annual return.
Outlines
😊 Charlie Munger's famous $100k quote and the principles behind rapidly growing your net worth
This paragraph discusses a famous quote by Charlie Munger about the importance of getting your first $100k. It talks about how your net worth grows exponentially after hitting $100k due to principles like capital scaling well as it increases, and accumulating money being like rolling a snowball downhill. It shares an example of how long it takes to get to $100k if you save/invest $10k per year.
👌 Your early dollars are the most important, don't overspend before hitting $100k net worth
This paragraph emphasizes how important every dollar is before you hit $100k net worth. It advises being careful with spending money on nights out, impulse shopping etc. at this stage, since early dollars compound the most over time. It also touches on why advice like not buying coffee may seem unreasonable but stems from this principle.
💰 3 key strategies to start accumulating your first $100k as fast as possible
This paragraph shares 3 strategies to accelerate getting to $100k - increasing income/offense, cutting expenses/playing defense, and maximizing efficiency of dollars through tax-advantaged accounts and high-yield savings.
Mindmap
Keywords
💡Capital
💡Compound interest
💡Wealth accumulation
💡Offense
💡Defense
💡Efficiency
💡Friction
💡Net worth
💡Sacrifice
💡Delayed gratification
Highlights
Capital scales really well - the benefits or returns from having capital increase proportionally as the capital itself increases
$100 invested and 10% return is $10. $100k invested and 10% return is $10k - same risk and time, very different results due to amount of starting capital
It takes money to make money - reason why people say this
Stacking money to first $100k is like rolling snowball downhill - accumulates more as it travels, momentum carries it
Friction of wealth accumulation is in beginning, first $100k - why it's so important to get there
Wealth accumulation disproportionately harder at beginning vs later - 25.5% of time to $1M was for first $100k
First $100k rarely just investment gains - really about spending less and earning more
Increase offense - increase income through side hustles, new jobs, investments in business
Play good defense - strategically spend less through budgeting, planning, cutting discretionary expenses
Maximize efficiency - tax sheltered accounts like IRA and 401k to reduce tax drag and keep more $
Move cash to high yield savings accounts, not big banks with 0.01% interest
$1M made up of $1 bills - every dollar matters, stack them to meaningful amounts
Can't increase income? Get wealthy defensively by spending less
Most first $100k accumulators knew their spending and budgeted, not because they loved it but had to
Governments love taxes - maximize tax efficiency of your dollars for faster wealth building
Transcripts
Charlie Munger the right-hand man of
Warren Buffett who recently passed with
over a net worth of $2.3 billion has a
famous quote which he says the first
$100,000 is a but you got to do it
I don't care what you have to do find a
way to get your hands on $100,000 he
stresses getting to 100K by any legal
means necessary is so important because
the reason is is that your net worth
completely explodes after your first
100K now this is due to a few core
principles that we're going to discuss
in today's video as well as at the end
of the video I'm going to share with you
guys some strategies that you can employ
in your everyday life in order to get
there as quickly as possible the first
principle to understand is that Capital
scales really well now what do I mean by
this I'm referring to the idea that the
benefits or the returns from having
Capital increase proportionally as the
amount of capital itself increases for
example if you were to invest $100 in
the stock market or some other type of
investment you take on some risk and by
the end of the year let's pretend you
make a 10% return that means you'd have
an extra $10 in that that case now
that's not a life-changing amount of
money and I would actually argue that
most of us can actually make $10 an hour
doing some sort of job or some sort of
task so in this case you risked $100 of
your hard-earned money and you have $10
at the end of the year to show for it
that's not very powerful now let's
pretend for a moment that you had
$100,000 invested in the stock market
and you got that same 10% return that's
$110,000 and what the interesting thing
is is that you took on the same amount
of risk as in the first scenario both
scenarios same risk same amount time
taken but two very different results
because the amount of capital that you
started with is completely different
this is basically the reason why people
say it takes money to make money the
second principle to understand is that
as you stack up money to your first 100K
it's like rolling a snowball down the
hill as the snowball travels downward it
gets bigger and bigger because it
accumulates more snow along the way and
the momentum carries it down the
mountain pretend you save $10,000 a year
and you're able to get a 7% return on
your investment in the stock market now
the stock market typically returns about
8 to 10% per year but let's use 7%
because of taxes and any fees saving up
to your first 100K in this case would
take you about 7.84 years if you were to
save 10K each year and you invested it
now a common misconception would be that
saving a million dollar would be then
7.84 years time 10 but that's actually
not the case in fact it only takes a
fraction of that time to get to a
million dollar it won't take you 78
years but let's look at how long it
actually takes to get to 200k at after
you get to $100,000 getting to 200k
Total would only take you 5.1 years
because now your initial 100K is
generating you interest and you're still
keeping at it with the 10K in
contributions every year now fast
forward to 500k and you can see that
each 100K is faster than the previous
you're responsible for contributing 10K
per year while the money you have
invested continues to work for you at 7%
per year so knowing this let's take a
look at how long it takes to get to each
100K for the first $500k
and in the first 100K it's 7.84 years
then it's 5.1 years then it's 3.78 years
3.01 years and finally the fifth 100K
only takes you 2.5 years when you
finally get to that $1 million mark it
would have taken you 3.74 years with our
assumptions but let's actually look at
the breakdown of time the first 100K
took you 7.84 years or
25.5% of the total amount of time it
took to get to a million the remaining
900k took 7 4.5% of the time and isn't
that kind of funny because that means
your wealth accumulation is
disproportionately harder in the
beginning of this entire thing by the
way if you're curious the next 100K
after you hit a million dollar is only
15 months and that's only 15% of the
time that it actually took you to get
your first 100K okay so hopefully this
illustrates to you that your net worth
absolutely explodes after you hit 100K
but even more importantly it shows you
that if we can get to 100K faster than
7.84 years then we're going to have so
much more time for a crap ton of wealth
accumulation essentially all the
friction of wealth accumulation is in
the beginning in the first 100K and
that's why Charlie Munger says it's a
and that's why you should do
everything that you can to get there and
this is one of the biggest problems that
I see going on with some of my friends
as well as this generation right now we
live in an instant gratification world
and often times we're not thinking about
the consequences of our spending before
we do them I see my friends they don't
have close to 100,000 in net worth just
quite yet but they're tirelessly blaming
societ Y and rage spending all the money
that they have because they'd rather
live in the moment because they can't
quote afford anything and while I
definitely agree that you should try to
still live your life and knowing that
cost of living is still incredibly
expensive I still think we should still
be reasonable with any of the dollars
that we have left knowing what you know
now about how important the first
$100,000 is to hit how does that change
your perception around a night out of
drinking or perhaps impulse shopping to
buy the latest trendiest clothing or
perhaps spending $300 more per month on
a car payment than you actually need to
before you hit $100,000 in net worth you
have to realize that every single dollar
is so much more important especially in
the beginning and that's probably why
you hear all these people on social
media saying that you shouldn't buy
coffee or as Millennials we shouldn't be
eating avocado toast I'm looking at you
Graham and I got to say there's no
better money than the money spent by
Millennials because usually it's
atrocious there is some truth to the
fact that you should be saving as much
as you can when you're younger and
trying to accumulate that wealth my dad
always has this dumb saying that he
tells me which is $1 million son it's
made up of 1 million single $1 bills
it's a really dumb saying but I think
what the importance of it is is that
every single dollar matters and slowly
as you stack up these $1 $1 $1 bills
then you get to a bigger number let's
say 1,000 5,000 or 10,000 and then it
becomes more meaningful the takeaway
here is that you need to stack up your
chips slowly and save up to $100,000 and
savings is so important because let me
illustrate this to you right here
contrary to what people believe the
first 100K is actually not priz of just
sole investment returns in the market
take a look at this calculator from the
four-pillar freedom blog I'll link the
blog in the description by the way but
if you save $15,000 a year for 6 years
and you're able to attain a modest 4.5%
return on your savings you would be at
$105,000 after 6 years but 85% of that
would have been comprised of savings and
15% would be the investment returns in
another example let's say you save
$110,000 per year but you average a 10%
return it will take you 7 years at a 10%
return and your savings will comprise
67% of the total
$14,000 here the point is is that rarely
your first $100,000 will be made just
from investment gains it really just
comes to being smart with your money
spending a lot less money and trying to
earn more money down the road all right
so if you want $100,000 as soon as
possible I have three strategies that I
want to share with you guys now two of
these strategies are famously named by
the book The Millionaire Next Door which
I will refer to in this section but
these are all really great strategies
for you to get started strategy number
one is to increase your offense this is
somewhat of a sports or a gaming analogy
here a big factor affecting your path to
$100,000 is to as quickly as possible
try to increase the amount of income
that you're earning on an everyday basis
regardless of your income level your
offense should be really focused on
building that wealth this is where you
can take on continuing classes for
certifications you could try new side
hustles or perhaps some freelance work
or you can try to switch jobs if the
opportunity presents itself another
option is to invest your money in stocks
real estate or any other type of
businesses you can also develop a high
income skill in the next year or so and
I detail exactly how you can even get
started thinking about that in my video
about how to go from Z to 100K in a
single year and I'll link that video at
the end of this one the idea here is
that your time should be spent thinking
about how your resources and your time
can be allocated to Building Wealth
rather than spending it which actually
brings me to strategy number two which
is playing good defense now I'm going to
read you guys a quote from the the book
that I just referenced The Millionaire
Next Door this is an older book from the
1990s but it says quote here that if you
cannot increase your compensation
significantly become wealthy some other
way do it defensively the whole premise
of this book is that it studied the 95%
of Americans who had over a million
dollars in net worth in $1 1990 and they
actually found that most of these people
were regular people who just had
consistent foundational Financial
Lifestyles it found that many of those
millionaires played good defense even if
their income wasn't as high as it could
be so defense in this context means that
we are figuring out strategically how to
spend less money that means actionable
items like planning the year ahead
budgeting and cutting back on some
discretionary categories that we might
be spending too much money in for
example do you know how much you spent
in total eating out last year I bet you
most people that I asked that question
to will probably not know but the idea
here is that most people in this book
The millionaires they actually knew it's
not that they loved budgeting or
anything it's just that they needed to
do it in order to make sure that their
spending was kept at a good level now
strategy number three is to maximize the
efficiency of the dollars that you do
have if you live in any Western Country
you know that the government loves
taking a portion of your pay in some
countries that can be upwards of 50% but
here in America the highest federal tax
bracket rate is about 37% so an easy way
to accumulate and keep more of your
money is to do so in some sort of tax
sheltered account like the Roth IRA the
traditional IRA or your 401K plans the
Roth IRA your earnings grow taxfree in
the traditional IRA at least you're
getting a tax deduction on the amount
that you contribute in any single year
and with the 401K at least you can get
some employer match so that you get some
free money as well as some of the tax
benefits as well if you can maximize
your dollars in this type of way you're
getting a tax shelter which means that
the government is going to be taking
that 37% away from you at the end of the
day that means you're going to be
increasing your wealth a little bit
faster and we know that the friction is
all in the beginning so if we can get
over that hump as as quickly as possible
that's going to be good for us another
efficiency you should consider is
getting a high yield savings account if
your cash is just sitting in a bigger
bank's checking account earning you
0.01% in interest that's really not
efficient at all you best believe that
you should try to move some of that
money into a high yield savings accounts
of which there are so many out there
these days that pay upwards of 4 to 5%
on your money some options for these
bank accounts come from institutions
like Sofi wfront Ally or even Marcus so
I will leave a link Down Below in the
description for some of those resources
all right guys I hope that you enjoyed
this video I'm going to leave up my next
video right here which is how to go from
0 to 100K in a single year I hope you
check that video out it has some repeat
information however the sections on high
income skills and E replaceability are
golden so I really hope to see you guys
in that video or in the next video all
right
peace
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