Charlie Munger: Why Net Worth EXPLODES After $100k

The hard part of the process for most people is the first $100,000. If you have a standing start at zero, getting together $100,000 is a long struggle. Getting your first $100,000 saved and invested will transform your life in ways you cannot yet imagine. You're going to find out why in this video, but don't just take my word for it. This is advice coming from billionaire and legendary investor Charlie Munger.

If you know anything about Charlie Munger, you know he had quite the way with words. Munger was once asked a question from a young man on his best advice on how to get rich quickly. The young man was frustrated that his net worth wasn't increasing at the rate that he wanted. Munger was asked this question in front of an audience of thousands at one of the legendary Berkshire Hathaway annual shareholder meetings. The audience was silent with anticipation, leaning in to hear the wisdom from one of the greatest financial minds to have ever walked the planet.

Munger's answer shocked the audience. Instead of some complicated formula or arcane investing advice, the brilliance of Munger's advice was in its simplicity. Here's what Charlie said: "The first $100,000 is a b***h, but you got to do it." Well, that definitely got the audience's attention. He didn't stop there. He went on to say, "I don't care what you 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 your first $100,000."

After that, you can ease off on the gas a little bit. Essentially, what Munger is saying here is that it is extremely important for you to get your first $100,000 saved and invested as quickly as possible. You need to do whatever it takes—legally and ethically, of course—to hit that $100,000 mark. This is by far the hardest milestone to hit on your wealth-building journey, and every subsequent milestone—$200,000, $500,000, a million, even $10 million—becomes easier and easier.

In this video, we're going to cover why everything changes once you hit $100,000, wealth-building principles Charlie Munger swore by, and importantly, practical steps you can take to your first or even next $100,000. Stick around until the end of the video, as we've saved my personal favorite of Munger’s suggestions for hitting your $100,000 wealth-building milestone until last.

The reason why Munger advocated so strongly for hitting that $100,000 mark as quickly as possible has to do with the two most powerful words in investing: compound interest. As you're about to see, compound interest is going to be your best friend when it comes to your wealth-building journey. Once you truly understand the concept of compound interest and the powerful influence it can have on your net worth, you will never view money the same way again.

The technical definition of compound interest does little to describe its life-changing magic. Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. Instead of this boring technical definition, I think the wonders of compound interest are best explained using an example from Charlie Munger's business partner, Warren Buffett.

Buffett compares compound interest to a snowball rolling down a long hill. Imagine you were standing on top of a massive hill covered in thick, wet snow. You do the hard work of making the first little snowball while you're standing on top of the hill. You then roll the snowball down the hill and watch it go. With each roll, the snowball is picking up more and more snow, and it's getting larger and larger. At the bottom of the long hill, the snowball is massive compared to the tiny snowball you started out with. You did no extra work besides just making the small snowball to start out with. After that, all you did was roll it down the hill and let time and gravity do the work for you.

The same concept applies to compound interest and wealth building. To demonstrate what I mean, let me introduce you to John and Matt. John and Matt are both 20 years old. Each has a good job and are all right when it comes to money. There's just one key difference: John heard this advice from Charlie Munger on the importance of your first $100,000 and truly took it to heart. John committed himself; he would do whatever it took to get to that $100,000 mark as quickly as possible. He became frugal, intentional with how he spent every single dollar. He even worked more to be able to increase how much money he could earn.

All this hard work paid off, and John hit the magical $100,000 mark at just 25 years old. Matt, on the other hand, didn't see this video, so he didn't know that it was important to save and invest $100,000 as quickly as possible. Matt coasted when it came to his money. He didn't monitor his spending and wasn't intentional with saving money. Fortunately for Matt, he worked a really good job and was able to hit the $100,000 mark eventually; however, it wasn't until Matt turned 35—a whole 10 years after his friend John.

Assuming neither Matt nor John put even another dollar into their investment accounts once they hit $100,000, how much do you think each would have when they hit 65 years old? For the sake of this example, let's assume a 10% annual return. At 65, Matt has $1.74 million sitting in his investment account—not too shabby at all. Matt is a millionaire, despite never contributing another dime after hitting his $100,000 milestone—very impressive indeed.

Remember, both Matt and John had $100,000 in their investment accounts. The only difference is that John hit that milestone 10 years before Matt. How much more money do you think John has in his account than Matt? An additional few hundred thousand? Maybe an additional million if John is lucky? Not even close. John has a whopping $4.53 million—nearly $3 million more than Matt. Both John and Matt contributed the exact same amount of money down to the very last dollar, and both generated the same return. Literally, the only difference is that John hit the $100,000 milestone before Matt.

Hopefully, you can now see why Charlie is so adamant about getting your first $100,000 saved and invested as quickly as possible. The quicker you are able to get there, the longer you give compound interest to work its magic. So now that we have established why hitting the $100,000 milestone as quickly as possible is so important, I want to spend the rest of the video talking about how you can get there: practical lessons from Charlie Munger on how everyday normal people can build incredible wealth.

But first, our friend John here is an example of a loyal subscriber to the channel, and it paid off handsomely with an additional $3 million sitting in his bank account. Which reminds me, make sure to hit that subscribe button because our community is well over 300,000 people from across the world. It would be even better with you as a part of it. Stick around until the end as I'll be giving you a handy tool that you can use to help you better plan your wealth-building journey.

Now, before we dive in, just a quick bit of background on Charlie Munger. He graduated from Harvard Law School and enjoyed studying physics and philosophy in his spare time. It's fair to say that Charlie was a genius. Thankfully, though, for those of us with more normal IQs, the one equation that you need to know to build your wealth involves only the simplest of maths. In order to build wealth, you need to be able to save money. The amount of money you can save in any given time period is simply the difference between the money you earned in income and subsequently spent on your expenses.

Think of yourself as a business: Revenue (what you earned) minus your expenses (what you spent) equals your profit. And just like a business, your goal should be to maximize the profit line. The greater this profit line, the more you can save, and the bigger you can make your snowball. There are only really two ways to go about maximizing what you can save in any given period: maximizing your income and minimizing your expenses. These are the two variables that you can change that will lead to you having the most amount of money to save and invest.

Let's start off by talking about the income side of the equation. One of the biggest lessons I've learned from studying the life of Charlie Munger is the concept of selling your time back to yourself. Listen to Charlie explain:

"Charlie, you used to sell yourself the best hour of the day or something."

"Sure, early in the morning, you bet. Yeah, tell them what you did."

"Well, when I was young, I read that Savings Bank thing, the richest man in Babylon, which taught the joys of underspending your income and investing the difference, and how wonderfully it would work over time, and lo and behold, I did exactly what this little pamphlet suggested and it worked."

"And, uh, the other idea, and so I got the idea that I had a mental compound interest thing too, and so I finally decided I was just going to give the best hour of the day to improving my own mind, and then the world could buy the rest of the time. That may have been a very selfish thing to do, but it worked."

When Charlie was a young lawyer, he was probably getting billed out to clients at $20 an hour—a very good chunk of change back in the 1950s. Charlie thought to himself, "Who's my most valuable client?" and he decided it was himself. So he decided to sell himself an hour of his own time each day. He did it early in the morning, working on construction projects and real estate deals. Everybody should do this: be the client and then work for other people too and sell yourself back to yourself for at least an hour a day.

There is something that often gets overlooked in the story from Charlie Munger's early days, though. Notice how Charlie spent this hour working on very potentially lucrative activities. He wasn't working part-time at a grocery store or delivering newspapers in the morning just to earn an extra dollar or two. Instead, he was spending his time on activities that could make him significant amounts of money relative to the time he needed to put in. For Charlie, that meant doing real estate deals while still working full-time as a lawyer. These real estate deals turned out to be incredibly lucrative, combining to earn Charlie hundreds of thousands of dollars of additional income over the years—even more impressive when you consider that this was way back in the 1960s.

The lesson for you from this story is twofold: yes, you should be selling your time back to yourself each and every day, but also—and this is very important—these tasks need to be things that have the potential to really move the needle in terms of your income. Things like driving an Uber or delivering food an hour a day simply aren't going to cut it. For Charlie, that activity was real estate.

One mental model that can be helpful for determining what activity could be worth you spending your time on is to picture a Venn diagram with three circles: what you are good at, what you enjoy doing, and what is monetarily valued by society. Each person is different, but you want to find something at the intersection of these three circles.

The math behind selling yourself an hour of your time each day is very convincing when it comes to building wealth. Imagine someone makes $5,000 a month and has expenses of $4,000. Using our wealth-building equation from earlier, this person will be able to save and invest $1,000 a month. However, let's say they are able to generate an additional $500 a month in income, implementing this strategy from Charlie. This is so powerful in helping save money because all of this individual's expenses are covered by the income from the day job. This means that every dollar earned through this side venture can go directly into their investment account.

Now, instead of being able to invest $1,000 a month, this person can invest $1,500 a month because of the extra $500 of income they generated. The person's income only increased by 10% from $5,000 a month to $5,500 a month, but the amount they save each month increases by a whopping 50% from $1,000 to $1,500 a month. This right here is exactly why the concept of selling your time back to yourself can be extremely powerful to help you make progress towards your first or even next $100,000.

Now, I want to transition to the other part of the wealth-building equation: minimizing expenses. In one of his now iconic speeches, Charlie gave a list of the secrets to a happy life. In that list was to never overspend your income. Here’s Charlie to explain:

“Another thing, of course, that does one in is the self-serving bias to which we're all subject. You think the true little me is entitled to do what it wants to do. And, for instance, why shouldn't the true little me overspend my income? Well, there once was a man who became the most famous composer in the world, but he was utterly miserable most of the time, and one of the reasons was he always overspent his income. That was Mozart. If Mozart can't get by with this kind of asinine conduct, I don't think you should try it."

When it comes to building wealth, it doesn't matter how much you earn; it matters how much you keep. One of the biggest destroyers of wealth is due to a phenomenon known as lifestyle inflation. This is where people make more money as they progress in their careers, their expenses increase proportionately. Lifestyle inflation is a big reason why so many people with high incomes are still living paycheck to paycheck.

Let me show you the numbers behind why lifestyle inflation is the biggest barrier that keeps the average person from hitting the $100,000 mark. Let's go back to our friends from earlier, Matt and John. Matt recently joined the workforce and took a job with a starting salary of $65,000. Matt is extremely ambitious and works diligently at his job day in, day out. Through additional responsibilities and promotions, Matt is able to secure annual raises of 8%. However, Matt fell into the trap of lifestyle inflation, and his expenses also kept growing by 8% a year.

In his first year working, his living expenses are $60,000 a year, allowing him to save $5,000. But every single year, Matt continues to succumb to lifestyle inflation. His income increases at 8% a year, but so do his expenses at that same rate. As a result, Matt has only been able to increase how much he can save each year from $5,000 a year in year 1 to a little under $10,000 a year in year 10. This is despite the fact that he went from making $65,000 a year in year 1 to making $130,000 a year in year 10. Over the 10-year period, Matt managed to save around $72,000.

Now, don't get me wrong; this is a solid amount of money. However, let's see how our friend John did. Just like Matt, John also started out with $65,000 in his first year. John is also a great employee, and he was able to get the same 8% annual raises. However, there’s one big difference between John and Matt: John was successful in resisting the temptation of lifestyle inflation. Instead of his expenses increasing at the same rate as his income, John was able to limit his expense growth to just 2% a year.

How much more money do you think he would have been able to save at the end of the 10-year period than his friend Matt? The answer, quite frankly, is shocking. John was able to save nearly $280,000 in total—nearly four times that of Matt. This is simply because John was able to resist the temptation to drastically increase his lifestyle as he made more money. John and Matt made the exact same amount of money over the 10-year period in this example; however, John made it a point to continuously underspend his income.

Charlie Munger would be quite proud. If you made it this far into the video, I can tell you are intelligent, motivated, and serious about following the lessons of Charlie Munger and other super investors to help you plan out your wealth-building journey. We've created an advanced compound growth calculator in Excel. You can use it to see how much money you'll make by investing, and you can customize variables such as starting amount and rate of return and monthly contributions to your situation. The calculator will give you a year-over-year breakdown so you can see when your wealth will start to explode under different scenarios that you create.

Click on the link in the description below to access the calculator now, and make sure you hit that subscribe button because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.