The Personal Finance Podcast - Why Your First 100K is The Hardest (The Math That Explains Why)

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Starting point is 00:00:56 Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, we're going to talk about why your first 100K is the hardest. What's up, everybody, and welcome to the podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be talking about why your first 100K is the hardest. And we're going to go through the math that explains why your first 100K is the hardest. If you have any questions, hit me up on TikTok or Instagram at Master. Master Money Co and follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast, too. And if you want to help out the show, leave a five-star rating and review on Apple Podcasts and Spotify.

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Starting point is 00:02:26 and how to manage your personal finances. So make sure that you are subscribed to that master money newsletter. Now, today, we're going to be talking about why your first 100K is the hardest. You've heard me talk about you need to get to your first 100K as fast as you possibly can. And the reason for that is because you want money to start compounding. And it's really difficult. and we're going to talk about why it's really difficult to make your money compound if you don't have your first 100K. Now, what do I mean by first 100K? A lot of people have asked this question.

Starting point is 00:02:55 Our very first episode was talking about how I got my first 100K. So make sure you check it out. It's episode one, I believe. In fun-filled side note, on my first podcast episode, I thought you had to nail it perfectly every single time. So I recorded that first podcast episode 40 times before I actually released it. What a waste of time? Anyways, so what do I mean by your first 100K? Does it have to be in one account? Can it be spread across all accounts? It can be spread across all accounts. If you want simplicity, if you don't have your first 100K yet,

Starting point is 00:03:21 it's a lot easier to keep it in one account. But understanding if you're trying to accelerate your path to wealth, so you're maxing out a Roth IRA and maybe you have a brokerage account or a 401K, it's fine being spread across a couple accounts. What I mean, though, by your first 100K is your first 100K invested. It's your dollars that are invested into the market because money is not going to grow if it's not invested. Now, do you need an emergency fund ahead?

Starting point is 00:03:44 time before you start investing, I would build up that emergency fund, making sure you get your 401k match, then start building up that emergency fund over time. So making sure that you have that in place first. And if you don't know the order to stack up your money, make sure you listen to the episode about the stairway to wealth. It's called the stairway to wealth 2.0. So in this episode today, what we're going to be talking about, we're going to talk about how compound interest works. I'm going to talk about the math that explains why your first 100K is the hardest. I'm going to give you examples of why your first 100K is the hardest. And in addition, I'm going to talk about how to increase the speed to get to your first 100K. And as a bonus at the end, we're going to talk

Starting point is 00:04:22 about secrets to understanding wealth. Because if you're trying to get your first 100K, you're a few years into it, maybe five, six, seven years into it, or you're just getting started. So you want to get to your first 100K as fast as you possibly can. So I'm going to give you a couple of secrets on understanding how wealth is built at the end here. So I'm so excited to share this episode with you. Without further ado, let's get into. it. All right, so the first thing we're going to talk about is compound interest. And compound interest is by far the most amazing thing in the world. But we still get a lot of questions on how does compound interest actually work. So I want to talk about it shortly here just to make you understand

Starting point is 00:04:57 how it works. And then we're going to jump into some deeper dives as we go through this. So the way to understand compound interest, because a lot of people ask me questions on how does your money actually compound. So I'm going to make it as simple as you possibly can. So say you invest $1,000. And that thousand dollars gets a 10% interest rate that compounds annually. Well, 10% of $1,000 is what? $100. So at the end of that first year, a 10% interest rate that's an annual interest rate means that you're going to make $100 off every $1,000 that you have invested. So after the first year, your $1,000, if you invest that with a 10% rate of return, is going to be $1,100. So it's going to be $1,000 that you invested, plus $100 that you made an interest. But here's the amazing

Starting point is 00:05:41 thing about compound interest. Because if you leave that money invested and you continue to invest that money, what is going to happen here is that your $1,100 is going to compound now instead of yesterday's original $1,000. That's how compound interest works. So at the end of the second year, instead of making $100, you'd make an additional $110. So you'd have $1,210 because compound interest compounding at 10% annually. And over time, what's going to happen here is that this money is going to start growing faster and faster and faster because every single year that it compounds, the faster it can accelerate over time. So by the end of the 10th year, for example, you'd have 25-94, more than double what your initial savings was. So in 10 years, you can more than double your

Starting point is 00:06:25 initial savings. And we're going to talk about in this episode here in a second, how you can do that math really quickly to figure out how fast does my money double. And so that's the cool thing about this. Now, you can imagine, that's just with $1,000. You can imagine as you start to contribute every single month, maybe you contribute $100 a month or $200 a month or an additional $1,000 every month, how fast this can start to accelerate? Because what money does is it snowballs over time. And so what you want to do is get as many dollars as possible working for you because the faster that you can do that, the faster you don't have to work anymore. The more dollars that are working for you means that you're spending less time working. And that's the amazing power

Starting point is 00:07:04 of investing your dollars. So let's figure out how do we calculate, compound interest returns quickly. Well, enter the rule of 72. You may have remembered the rule of 72 when Brian Ferraldi was on this podcast. We talked about it briefly on that episode as well, because the rule of 72 is a very simple concept. And I want you to remember this. Because the rule of 72 tells you how fast you can double your investment in value based on your interest rate. So what we're going to do here is you can look at the rule of 72 and say, how long will it take me to double my money? and you can do it by years or you can do it by rate of return. So the first way to do it is you can divide 72 by the expected rate of return.

Starting point is 00:07:43 So for example, if you get a 10% rate of return and we keep our 10% rate of return example, it would take you 7.2 years to figure out that you would double your money in 7.2 years. So with that 10% rate of return, that's a number that's very easy to calculate in your head, 7.2. And you can say to yourself, okay, if I get a 10% rate of return and I'm investing $1,000, that $1,000 will turn into $2,000 in 7.2 years. This is a very simple calculation that you should be utilizing when you're trying to figure out your investment returns

Starting point is 00:08:12 just to have a rough number of where you could be. Now, the best way to calculate your investment returns is use a compound interest calculator or use an investment calculator. We've developed our own that's going to be releasing when our website releases, which should be just the next couple of weeks here. So we're really excited to share that with you. But in addition, there are some other great ones out there as well. You can Google investment calculator and be able to utilize

Starting point is 00:08:32 those as well. That's the fastest way to do it as well. So what we're going to do is I'm going to dive into why your first 100K is the hardest. And then after you get your first 100K, why you can ease on the gas a little bit. So let's jump into that next. All right. So it is so important to get to your first 100K. And here's why. Because after your first 100K, compound interest begins to work for you. But why is it so hard to get to your first 100K? So let's break it down. The reason why we all love investing and the reason why I talk about investing so much as you want to get your money to start working for you. But the issue is getting from zero to 100K, the majority of your growth when you're within that range comes from your

Starting point is 00:09:11 savings rate, which is the hardest way to build wealth is with your savings rate. You can think of it this way. If you just put $1,000 a month into a savings account, it's going to take you a very long time. It's going to take you 100 months to be able to save $100,000. So you want to reduce that as much as you possibly can. Your savings rate is by far the hardest way. to build wealth. And to show this as an example of how hard it truly is, here's an example of different investment returns with your savings rate when you're trying to save your first $100K. So if you earn a 1% annual investment return, you need to save $20,000 per year to reach $100K in five years. And if you earn a 12% annual investment return, you still need to save at least

Starting point is 00:09:52 $15,000 per year to reach $100K in five years or less. Now, you can see how amazing the differential is. $5,000 difference with a 11% rate of return differential there. That is how hard it is to save your first 100K. No matter what your investment returns are, it's still going to have to be powered by your savings rate. And this is what is so important to understand because what a lot of people do is when they start investing, they think, my money's not moving fast enough. And this is a difficult thing for new investors because you think nothing's really happening.

Starting point is 00:10:25 What's the point of making all of these sacrifices if I'm not truly building well? This is the psychology that you have to get past because understanding this math, and this is the entire purpose of this episode, I do not want you to get discouraged when you first start investing. Specifically, if you start investing in the market goes down, you need to stay the course over time. The reason why is it's very difficult for your first five, six, seven, ten years, depending on how long it takes you to get to that first 100K. Now, does something magical happen after you hit your first 100K? No.

Starting point is 00:10:55 But what's happening there is you're getting to a point where it's really going to start a, accelerating. And what I want you to do is not get discouraged as you start investing your dollars. And seeing a 1% and a 12% interest rate means you're almost saving close to the same amount every single year. Now, sure, $5,000 per year is a big difference. But in terms of the grand scheme of things, when you're investing that much money, it's not that much money when you're working that hard to get to the same result within five years. So understanding this, there's no way to get around it. It doesn't matter what your return is. There is no way to get around the slog and the grind that is your first 100K.

Starting point is 00:11:31 This is why your boy always talks about increasing your income, because your income is what's going to catapult your savings rate, and it's what is going to accelerate the path to your savings rate. So when you're in your 20s, I want you to just focus on increasing that income. That is what is going to make the biggest difference overall of anything else. Focusing on what the optimal investments are and focusing on how to buy individual stocks and focusing on if you should buy crypto or anything else, it doesn't matter because you've got to save those big bank rolls, my friends.

Starting point is 00:11:59 You have to save that cash so that you can get to that first 100K. Doesn't matter what your rate of return is. Unless you have something that's a 10,000% rate of return, it's not going to make a difference for you. When you were doing normal investments like everybody else in this world is, there's no magic bullet that's going to get you to your first 100K faster. If it happens, you got extremely lucky and you're doing speculative investing. Otherwise, good, sound investments that have been historically proven

Starting point is 00:12:24 all have consistent returns over time. So you got to make sure you heed the advice, that you're listening to, specifically on places like TikTok or YouTube or wherever else, there's a lot of bad advice out there. And understanding the math behind this makes you realize I'm not behind. These people are lying to me. And there's a lot of things that are going on right now, but you've got to understand the math of your first 100 K.

Starting point is 00:12:43 That's the entire purpose of this episode. Because too many people early on get discouraged as they're investing your dollars. You don't have to get discouraged. What you have to do is understand this math, maintain the course, because I'm going to show you how fast this can accelerate once you get to 100, 200, 300, 300, $100K, and in a million, you're going to see this path truly accelerate. Think about this for a second. Once you have your first million dollars invested, it's going to be making out a 10% rate of return 100K per year.

Starting point is 00:13:09 And it's going to compound over time like that. So this is where it starts to accelerate, and you can get to $2 million way faster than it took you to get to your first $100K just by compound interest, working its magic. So that is why when you're young, I want you to be as frugal as possible, but I also want you to be able to increase your income over time. What does that do? You increase your income, you reduce your expenses, and it creates a gap. And that gap means that that's more money that you can save and invest towards your first 100K so you can hit that number. Now, what do I mean by frugal?

Starting point is 00:13:38 Because we haven't really dove deep into frugality on this podcast because I don't really want you focusing on the small things, the $3 problems. I want you to focus on the $30,000 problems. But I do think early on, if you don't have a lot of responsibility and you don't have a lot of things going on, maybe you're single or maybe you're dating, or maybe you just got married, if you're young, being frugal is truly beneficial, especially if you're not making a lot of money, because you can save more of those dollars and those dollars are so much more valuable over time if you can save and invest those dollars. Now, frugal is not cheap. And this is what I want to

Starting point is 00:14:11 explain to you in this episode. Frugal and cheap are two very different things. When I first started getting my finances together, I was frugal. I was very frugal. Now, I'm like the opposite of frugal. The reason is I started off frugal so I could get to a point where I could coast if I wanted to. I knew the math behind it, and that's why I did it this way. But frugal means that you're focusing on the long-term consequences of financial decisions. If you spend all your money or you go into debt in your 20s, you're causing yourself financial harm, and it's going to really hurt you over time. Because every dollar you invest is so valuable in your 20s and 30s.

Starting point is 00:14:44 You want to make sure that you are doing that. You avoid being wasteful when you're frugal, meaning that you're not just wasting money on things that you don't care about. You're spending money on things that bring you value and cutting out the things that don't bring you value. So you're conscious of the impact of every single dollar that you spend. Let me give you a great way to think about this. If you're spending your money, and let's say you want to buy a $100 shirt, and you make $20 an hour, for example. If you make $20 an hour and you buy a $100 shirt, that took you five hours to earn that shirt.

Starting point is 00:15:15 Is that shirt worth five hours in the cubicle that you have to work every single day to be able to afford that shirt? That's the question you got to ask yourself. And that's what I would ask myself all the time early on starting off. is this worth this amount? If it's not, then you've got to move on to the next thing and say, hey, this is not worth my time. This tradeoff is not worth it. I need to move on so I can take these dollars

Starting point is 00:15:36 and allow them to work for me for the rest of my life because that's what you're doing. Every dollar you invest, you're allowing that to work for you and spit off more cash for the rest of your life. That's the tradeoff that you're making here. So you have a shirt that you like, or you can trade that $100 off

Starting point is 00:15:51 so we can earn $10 every single year for you for the rest of your life. That's what you've got to think through when you do it. Now the key here is what I just talked about. You have to spend your money on things that you value. If there are certain things that you value, I want you to spend as much as you possibly can on those things you value and then cut out everything else

Starting point is 00:16:07 that you don't value. If you're making random Amazon purchases all day long and you don't even like the stuff that's coming in those boxes, you just like to shop on Amazon, I'm talking to myself here. That means that you need to cut out those random purchases. And you need to spend those dollars on things that bring you value. This is where money is spent and money is earned and money is utilized and utility is made to make you happy.

Starting point is 00:16:30 And no, money does not bring happiness. I'm going to explain that right now, but it can increase your happiness because it brings a sense of security. It reduces your anxiety. It reduces your stress. All of these other things. You've got to figure out the optimal way to utilize your money and that's what frugality is all about. It's thinking through your purchasing decisions. And then you use the extra cash and you save it and invest it.

Starting point is 00:16:49 That is how it works. That's why you've got to be frugal as young as possible. you're just getting into your finances, you're 40 or 50, it's never too late. Listen to me. It is never too late to start investing your dollars. But you got to do it now. You've got to make these decisions now so that you can get those dollars working for you. Now, Warren Buffett's business partner, his name is Charlie Munger. And Charlie Munger has a book called Poor Charlie's Almanac. It is not a cheap book. I think it's like a hundred plus dollars to buy. I have a copy at my house. And in that book, he talks about getting your first 100K. And he says that the

Starting point is 00:17:21 first 100k is by far the hardest amount of money he's ever made. He's a multi-billionaire. And he said this, and I'm going to quote it verbatim, 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 $100,000. After that, you can ease off the gas a little bit. This is one of the greatest investors of all time, and he may be the greatest investor of all time tied with Warren Buffett. So understanding that your first 100,000, is that important. Charlie Munger, the greatest investor of all time and saying how important it truly is. You've got to get to that first 100,000 so that you can get your dollars working for you. So let me show you some examples of why your first 100K is a grind.

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Starting point is 00:20:43 Play. Post. Taste. View and enjoy via rail, love the way. All right, so the first example we're going to talk about here is here's how long it it would take to get your first 100K investing $5,000 per year. So what we're going to do is we're going to take $5,000 per year or $416 per month and give it an 8% rate of return.

Starting point is 00:21:06 Now, you know I always say this if you follow me on TikTok or wherever else. I always say this. The market has returned 10%, over 10% to investors. I'm adjusting this down to 8% because I think it's best. better for a lot of people to be conservative when you're running these numbers. But I like to show the math at 10%. The reason why is because it helps motivate people to get to that point. But in addition, the market has historically returned 10%.

Starting point is 00:21:29 Sure, you can adjust it down for inflation. But what I like to do is I like to adjust those numbers based on the inflation rate every single year and your contribution goes up by the inflation rate. That way you keep your same buying power. A little hack for you. Here's what's going to happen. If you invest $5,000 per year or $416 per month with an 8% rate of return, it would take you 12 years to get to your first 100K.

Starting point is 00:21:49 But here's the amazing thing about this is, 59% of that first 100K in this scenario would be your savings rate. And 41% would be interest. Now, what you're going to see is the longer it takes you to get there, the lesser savings rate is. But you don't want it to take longer because it's going to take you forever to compound over time.

Starting point is 00:22:07 Now, once you got at this same exact pace, once you got to your first million, this completely flips. So remember, your first 100K is 59% savings rate, 41% interest. When you got to your first million, it would be 82% interest, and 18% would be your savings rate. That's the massive flip that happens once your money starts to compound. But you can see here, the majority is your savings rate, and then it flips to the significant

Starting point is 00:22:32 minority being your savings rate once you get to your first million. Here's second example. Let's say you invested $10,000 per year or $833 per month with an 8% rate of return. It would take you 7.5 years to get to your first. 100k. So you double it up and it would take you seven and a half years to get to your first 100k. And 73% of that would be your savings rate and 27% of it would be interest. And the crazy thing is once you hit your first million, it's exactly flipped. So once you hit your first million, 73% would be interest and 23% would be savings rate. It's completely flipped when you get your

Starting point is 00:23:06 first million because compound interest starts to accelerate and it starts to make that much faster. Example three. Let's do it with a Roth IRA and you maxed out your Roth IRA every single a year. A lot of people that listen to this podcast max out their Roth IRA. You know we love the Roth IRA here, especially if you're not a super high earner because you can get those dollars to grow tax free and the growth as a majority. Let me show you the growth here. So if you invest it $6,000 a year, $116 per week, it would take you 10.1 years to hit your first $100.000. So that's how much you would have to invest to max out your Roth IRA. If you're maxing out your Roth IRA and you're getting a 10% rate of return, this is great for you to know if you're maxing out your Roth, it would take you 10.1

Starting point is 00:23:41 years to hit your first $100K. 57% of that would be your savings rate. and 43% would be compound interest. And after 30 years, you'd have $1.1 million to use tax-free, all from $116 a week. I would take that any day of the week. And of that $1.1 million, over $800,000 of that is tax-free growth. It's the growth of your money over time. Here's the fourth example. Let's say, for example, that you invested $15,000 a year.

Starting point is 00:24:06 You're investing more than $1,000 per month or $12.50 a month, to be exact. It would take you 5.2 years to get your first $100K. 74% of that would be your savings rate and 26% of that would be interest. And in 21 years, if you invested $15,000 a year, you'd be a millionaire at $1.56 million. And it would flip. 70% would be from your interest and 30% would be from savings. So your first five years, your savings rate's powering it. After your first five years, you're getting closer and closer to being able to allow compound interest to start working for you.

Starting point is 00:24:42 So this is the amazing power of this. Now, like I said, the most important thing to get your first 100K is making sure you're increasing your income. You do that by negotiating your salary at your job, getting a better job that pays more. You can do that by doing side hustles. We have a bunch of episodes talking about that. But making sure that you get your first 100K invest, it is incredibly powerful. Now, what I want to do is talk about some of the secrets to understanding wealth.

Starting point is 00:25:02 And this is some of the wealth psychology that you need to understand, especially if you're new to trying to save up your first 100K so that you don't get discouraged over time. So lastly, I'm going to give you a couple of things that you need to think through so that when you grow your wealth, I want you to understand human behavior in psychology. Because this is a lot of hurdles that people have to go through. And understanding human behavior in psychology is one of the biggest things to understand when you build wealth. We have a couple of episodes on it. We're going to have more coming up because it's so incredibly powerful. But I just want you to understand these four things as you're new to investing your dollars.

Starting point is 00:25:34 The first one is most people don't care about your failures. So a lot of people are scared to start a business on the same. they're scared to ask for a promotion, which is the biggest one that I want to talk about here. They're scared to ask for new clients. They're scared to raise their rates. They're scared to do of all these things because they're scared to fail. But guess what? Nobody actually cares about your failures because everybody is so involved in themselves.

Starting point is 00:25:56 And so understanding this and trying to figure out how you can earn more dollars by negotiating your salary, by going to your boss and saying, hey, what can I do to increase the amount that I'm making every single year? I will do whatever you take. We have meetings every couple of months. We figure out, am I on track to make more money so that we can do this? And you want to communicate with your boss all the time about this kind of stuff. You want them to know that you want that promotion all the time. You want to be in their ear telling them, I want to make more money.

Starting point is 00:26:22 How can I help you? How can I benefit this company so that I can earn more dollars? It's not going to just magically happen they're going to hand it to you. You know what they're going to hand you? A 3% raise. And what happens when you get a 3% raise with an inflation rate like now? You just gave yourself a demotion because you're making less money because of the inflation rate if you get a 3% raise.

Starting point is 00:26:38 So making sure you understand how to do this is so incredibly powerful. The second thing, most people don't care about your lifestyle. Think about it this way, and this is one thing that it took me a little while to figure this out. Say, for example, you see somebody in a really cool car. Do you think that person is really cool? Or do you think about how cool it would be if you were in that car? You don't care about the person in the car. You care about how cool it would be if you were driving that car.

Starting point is 00:27:01 And the same thing happens where you should not be buying luxury vehicles and things like that unless you really value them. and it makes you super happy. But you should not be buying luxury vehicles when you're trying to get to your first 100K. Nobody cares. Everybody cares about themselves. Nobody cares about what you look like

Starting point is 00:27:16 within those luxury vehicles. The next one. Humans adapt really quickly. What do I mean by that? What I mean by that, whatever lifestyle you choose, if you choose to be frugal like we just talked about, or you choose to have a lavish lifestyle,

Starting point is 00:27:28 humans adapt quickly to either direction. So if you're frugal, you're going to get used to it and you're going to be able to live that lifestyle for a longer period of time. If you start with a lavish lifestyle and start spinning all of your money, everything that you make, and you don't know how to reduce that lifestyle, you're going to adapt to it pretty quickly. Both are going to feel normal. You just have to pick which direction you want to go.

Starting point is 00:27:47 And the last thing I just want to point out, especially if you're new to investing, it is nearly impossible to time the market and outperform the market. We've talked with a stat a million times in this podcast. 90% of professional investors do not outperform the market. And of the 10% that do, they are not the same year in and year out. And so if a professional investor cannot outperform the market, don't try to outperform the market either. So what do we like to invest in? We like to invest in dividend stocks, real estate.

Starting point is 00:28:12 And number one, my favorite is low-cost index funds and ETFs, which is why we've released Index Fund Pro, which is coming out very soon here. And when Index Fund Pro releases, we're going to release it to our email list first. And it's going to be our flagship course to teach you how to invest. We're going to go through every single step on how to invest. So I'm really excited to share this with you guys because we're going to take it. you step by step on how to invest. But in addition, with index fund pro, let's say, for example, you're just starting out, you're just barely making ends meet. We're also going to have an investing for beginners course that's going to be completely free. It's going to be an hour long.

Starting point is 00:28:45 You're going to be able to take it and figure out, hey, how do I buy my first stock or investment or how do I buy my first ETF or index fund? So that's going to be coming up very shortly as well before index fund pro comes out. So I'm really excited to share that with you guys so that you can understand all this stuff and understand how this works. So it's a quick webinar that we have. So we're really, really excited for this. Can't wait to share it all with you guys. And our main focus is teach as many people as possible how to build wealth. And that's how we're going to be doing it.

Starting point is 00:29:10 So thank you guys so much for listening to this episode. I truly appreciate it. I hope this helps you not get discouraged on how long it's taking you to invest your dollars. If you have any questions, as always, please reach out to me. And don't forget to leave a five-star rating and review on whatever podcast player you are listening to because it really truly does help. I can't thank you guys enough for doing that. Thank you guys so much for listening this episode, and we will see you on the next episode.

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The Personal Finance Podcast - Why Your First 100K is The Hardest (The Math That Explains Why)

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