Charlie Munger: Why your first $100,000 will CHANGE YOUR LIFE

Getting your first 100,000 saved and invested will change your life. The quicker you can hit that milestone, the better. But this advice isn't coming from me; it's coming from legendary investor and billionaire Charlie Munger. Hearing what Munger had to say about the importance of getting your first one hundred thousand dollars saved and invested completely changed the way I think about money and wealth building.

In fact, listening to this advice from Charlie helped me grow my own investment portfolio to nearly half a million dollars at 24 years old. I don't say this to brag; there are plenty of people my age who have way more money than me. Instead, I say this to demonstrate that the wealth building principles laid out by Charlie Munger do, in fact, work. I have watched probably every interview Charlie has ever given and have read most of everything he has written publicly. I am summing up the most important takeaways you need to know about wealth building in this video.

All I ask for in exchange is for you to hit the like button and subscribe to the channel if you aren't already. Seriously, that's it! You guys are great. Now, let's get into the video. We all come across popular quotes from successful people all the time. Often, they're not very practical or they're just too abstract to really be of any practical help.

But if you know anything about Charlie Munger, you know he has, let me just say it, quite the way with words. He is famous for his classic one-liners. At an old Berkshire Hathaway shareholders meeting in the 1990s, a young man asked Charlie for his best advice on creating wealth. The young man complained that he was having a hard time getting started; his net worth wasn't increasing as fast as he would like.

This is when Charlie Munger uttered a quote that quickly became famous within the finance industry: "The first one hundred thousand dollars is a b." But you gotta do it while. That definitely got the audience's attention. He didn't stop there. He went on to say, "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 one hundred thousand dollars. After that, you can ease off the gas a little bit."

Essentially, what Munger is saying here is that it is extremely important to get to your first 100,000 saved and invested as quickly as possible. You need to do whatever it takes to hit that 100,000 mark. The first 100,000 is the hardest milestone to hit on your wealth building journey. Every subsequent milestone—two hundred thousand dollars, five hundred thousand dollars, a million dollars—becomes easier.

Let me explain what I mean. The reason why Munger is advocating hitting the one hundred thousand dollar mark as quickly as possible has to do with two very simple and powerful words: compound interest. The words compound interest are two of the most magical words for your wealth building journey. Once you truly understand the concept of compound interest, it changes the way you view money.

The technical definition of compound interest is the following: Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. That definition is far from inspiring and doesn't truly do compound interest justice. Instead, I like to think of compound interest as a snowball rolling down a long hill.

You do the work of making the first little snowball while you are starting on the top of the hill. You then roll the snowball down the hill. With each roll, the snowball is picking up more and more snow and is getting larger and larger. Then, 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 in making the snowball; you just rolled it down the hill and let time and gravity do the work.

The same concept applies to compound interest and wealth building. Let's say that when Charlie provided the wisdom on the importance of getting to your first 100 thousand dollars, there were two people in the crowd: John and Steve. John and Steve were both 20 years old when they heard this advice. Both had good jobs and were generally good with money.

Except when John heard Charlie's advice, something clicked; a light bulb went off in his head. He decided that he would do whatever it takes to follow Charlie's advice. John got super serious. He became insanely frugal and worked more and more to be able to save more money. He got to that first 100,000 at 25 years old. Steve, on the other hand, didn't really appreciate Munger's message. He went on with life as normal and hit the 100,000 mark at 35 years old, 10 years after John.

Assuming both of these guys never put in another dollar into their investment accounts once they hit the 100,000 mark, how much do you think each of them would have when they are 70? For the sake of this example, let's assume a 10% return. This 10% return approximates the long-term historical average return for the stock market. At the age of 70, Steve has 2.8 million dollars. Steve is a millionaire despite never contributing another dollar after hitting the 100,000 mark.

Now, how much more do you think John has than Steve considering he hit 100 thousand dollars 10 years earlier? Maybe you're thinking another 500,000 or 1 million dollars, or maybe an extra 2 million dollars if he's really lucky. Well, those numbers aren't even close. John has a staggering 7.3 million dollars in his account when he is 70. This is around 4.5 million dollars more than his buddy Steve.

Remember, this was John hitting the 100,000 milestone at 25 and then never contributing another dollar to his account. This is what Charlie Munger meant when he said that you can "ease off the gas a little" after you hit one hundred thousand dollars. This is because once you have one hundred thousand dollars in your account, compound interest starts to do a lot of the heavy lifting for you in terms of wealth building.

To use our earlier example, at one hundred thousand dollars, you have built a big enough starting snowball that it is going to pick up a ton of snow as it rolls down the hill. Now before we get to the practical steps and how you can hit that 100,000 milestone, a big part of the magic involved in compound interest is the returns you can generate with your savings. This leads us to the sponsor of today's video: Fundrise.

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Now let's get back to the video. So now that we have established why hitting that 100,000 milestone as quickly as possible is so important, I want to spend the rest of this video talking about how you can get there. Specifically, how I apply the lessons from Charlie Munger to my own life and hit the 100,000 mark in my early 20s. Again, this is not to brag; instead, I want to provide a practical framework of things that I have learned that may help you out.

The equation to wealth building is simple math. The amount of money you can save in any given time period is simply the difference between what you earned on income and your expenses. Think of yourself as a business: revenue (what you earned) minus your expenses equals your profit. Just like a business, your goal should be to maximize the profit line. The greater this profit line is, the more you can save and the bigger you can make your snowball.

There are really only two ways you go about maximizing what you can save in any given period: maximizing your income and minimizing your expenses. These are the two variables you can change that will lead to having more money you can save. Now let's talk about the maximizing income side of the equation.

One of the biggest lessons that I learned from Charlie Munger is this concept of selling your time back to yourself. When Charlie was a young lawyer, he quickly realized that the law firm that he worked for was billing him out to clients at the rate of, let's say, 400 dollars an hour in today's money. Now, of course, Charlie himself was not getting paid the equivalent of 400 dollars an hour from the law firm, as the firm was taking a big cut.

However, it made Charlie realize that his time was extremely valuable. He needed to start allocating time each and every day to his most important client: himself. Early in the morning and late at night, Charlie worked for himself on things that would directly increase the amount of money he could make. He spent his time learning about investing and working on real estate deals.

One example of me selling my time back to myself is this YouTube channel. In addition to working as an investment analyst at an investment fund, I also run this YouTube channel. I spend about 60 hours a week at my quote "day job" as an investment analyst and then dedicate another 20 to 30 hours a week on this YouTube channel.

There's a natural overlap between what I learn at my job as a professional investor and the content and knowledge I can provide you with as a viewer of the channel. Now believe me, in terms of income, this channel makes virtually nothing compared to big YouTubers like Graham Stephan, Meet Kevin, or pretty much anyone with a large audience. However, why this is so powerful in helping me save money is that all of my expenses are covered by my income from my day job.

This means that after paying taxes on anything I earned through my YouTube channel, all the money that is left over goes into my investment account. This concept of selling your time back to yourself can be extremely powerful to help you make progress towards your first or even your next one hundred thousand dollars. This can come in many different forms based on your skill set. If you are a teacher, it could mean tutoring students on the side.

If you're a software engineer, it could mean doing projects on the side outside of work hours. Or if you know video editing, it could mean reaching out to your favorite YouTubers and asking if you can do editing for them. The possibilities are pretty broad. Now I want to transition to the other part of the wealth building equation: minimizing expenses.

When Charlie Munger was asked what the secret to a successful life is, he gave a list of around five to seven things. Towards the top of that list was to underspend your income. Charlie Munger's business partner, Warren Buffett, has taken minimizing expenses to the extreme. Buffett is worth over 100 billion dollars, but he still drives a car he bought in 2014, and his idea of a fancy restaurant is a restaurant with two dollar signs on Google.

When it comes to building wealth, it doesn't matter how much you earn; it matters how much you keep. If someone makes two hundred and fifty thousand dollars a year but spends two hundred and forty thousand dollars, they are left with ten thousand dollars that they can save and invest. However, if we have someone that is earning sixty thousand dollars a year and is only spending forty thousand dollars of it, they are able to save and invest twenty thousand dollars.

This means that the person that is earning sixty thousand dollars a year is actually building wealth at twice the rate of the two hundred fifty thousand dollar earner simply because the 60,000 earner is minimizing expenses better. This phenomenon, where people spend more money as they make more money, is called lifestyle inflation. This is where, as people make more money, they want to have a fancier apartment, a nicer car, and more expensive clothing.

Lifestyle inflation is the reason why, according to a recent study, nearly one out of every three people making 250,000 dollars a year is 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 one hundred thousand dollar milestone.

Let's say we have two people: John and Steve, the same guys from our earlier example. Steve recently graduated college and took a job with a starting salary of 65,000 dollars. Let's say that Steve is an extremely ambitious person that works very hard at his job. Through additional responsibilities and promotions, Steve is able to get annual raises of 8%.

However, as Steve makes more money, he also spends more money. His first year out of college, his living expenses are 60,000 dollars, allowing him to save 5,000 dollars. But every single year, Steve succumbs to lifestyle inflation. His income increases by eight percent a year, but so do his expenses at that same eight percent a year rate. As a result, Steve has only been able to increase how much he can save each year from five thousand dollars in year one to a little under ten thousand dollars at the end of year ten.

This is despite the fact that he went from making sixty five thousand dollars a year in year one to making 130,000 dollars a year in year 10. Over the 10-year period, Steve managed to save around 72,000 dollars, a solid amount of money, don't get me wrong. However, let's see how our friend John did.

Just like Steve, John also made 65,000 dollars the first year. He is also a great employee and was able to get eight percent annual raises. However, there is one big difference between John and the previous example of Steve: John was able to resist 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 two percent a year.

How much more money do you think he would have been able to save at the end of year 10 than his friend Steve? The answer is honestly shocking: John was able to save nearly 285,000 dollars in total—nearly four times that of Steve simply because John was able to resist the temptation to drastically increase his lifestyle as he made more money.

John and Steve made the exact 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 are watching this video, I can already tell you are a smart, ambitious, and motivated person. Likely, the biggest threat to you building wealth will be lifestyle inflation. Do everything you can to fight it.

Remember Charlie's advice on how underspending your income is a key to a happy and successful life. I hope you learned something from this video. Make sure to give this video a thumbs up and subscribe to the Investor Center because it is my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon.