Tuesday, February 13, 2018

Here's Why The First $100K Savings Is Really Important

Here's Why The First $100K Savings Is Very Important: 
"The first $100,000 is a bitch, but you gotta do it. 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" - Charlie Munger
The above quote is adapted from Charlie Munger who's a popular name in the investing world. He is vice chairman of Berkshire Hathaway, the conglomerate controlled by Warren Buffett. There is much truth in his words as I personally experienced it myself saving the first $100,000. It was real hard, very hard at the start. After that, its true that it gets easier.

To illustrate the point why saving the first $100K is very important, I've put the numbers into various charts to visualise how life actually pans out after we have saved the first $100,000. The scenarios are based on saving just $10,000 annual and investing at a 7% investment return.

How long does it take to save the first $100K?

The first $100K is the hardest. If we only save $10,000 annually and invest at 7% return, it takes about 8 years to reach the first $100K.

The journey beyond $100K

Let's look at what happens after we have saved the first $100K assuming we continue to save only $10,000 annually and invest at 7% interest rate.

From $100K to $200K, it takes about 6 years

From $200K to $300K, it takes less than 5 years

From $300K to $400K, it takes less than 4 years 

From $400K to $500K it takes about 3 years plus

And from $500K to $600K, it takes only less than 3 years

This is the summary of how our money compounds after the first $100K. As we can see, the line gets steeper indicating the the power of compound interest and also the importance of saving the first $100K.

There is another interesting fact we can see through the charts. The fact is investing is less important when we have less money as even if we can get 10% on just $10,000 savings, it is only $1000 returns. This doesn't add much to our wealth. But if we have $100K savings, the same 10% will increase our wealth by $10,000.

For my own financial journey, I set out a goal to save $100K when I started my blog back in 2013. I saved aggressively and managed to achieve it in less than 5 years. Did it get easier after that? Yes it did and I really can ease off a little bit and spend more without hurting too much.

For those who are still on your way to the first $100K, get it as early as you can. For those who have already got your first $100K, you can actually relax a bit.

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  1. Can you share some tips on how you achieved your first 100k?

    1. Hi,

      It is mainly true savings. Saving more than $20K a year to achieve it.

  2. Hi, Kind enough to share which investment gives 7% interest return ?

    1. Hi,

      Investment portfolio have to be built over the years. For myself, I invest mainly in stocks and buy stocks undervalued and sell them when they are overvalued. I also invest in dividend stocks which gives good and stable dividends.

  3. Hi, just to check does this 100k include cpf or just pure cash savings?

    1. Hi Jason,

      This is just pure savings excluding cpf since cpf can only take out at age 55.