Critical milestone
Charlie Munger, the late billionaire investor, Berkshire Hathaway's former vice-chairman and Warren Buffett's longtime business partner, once said that breaching the six-figure barrier was a critical milestone for anyone looking to build wealth.
“It’s a b—, but you gotta do it,” he said during an annual meeting with Berkshire Hathaway shareholders. “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.”
The reason this milestone is important is the same reason investors like Munger and Buffett are wealthy: compound interest. Put simply, your money grows faster when you already have money to deploy.
For example, Mia has spotted an investment opportunity that delivers 7% annual growth. She deploys $10,000 a year into this investment and wants to reach $1 million in net assets as soon as she can. It would take her nearly eight years to reach $100,000 in accumulated assets, but only five years to reach $200,000, and only four years to reach $300,000.
The leap between every $100,000 gets shorter after the first one. Consequently, it would take Mia a total of 31 years to go from $0 to $1 million, but 26% of that time would have been spent accumulating the first $100,000 alone.
This is why Villasenor’s field goal puts him on an accelerated path. With the first and toughest hurdle out of the way, he can invest $10,000 every year in the same opportunity as Mia but it would take only 23 years for him to get to millionaire status.
Like him, if you’ve managed to accumulate your first six-figure nest egg, here’s how you can invest it wisely.
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Learn MoreWhat to do with your first $100K
After you’ve crossed the first milestone, you can probably aim for safer investments. A diversified portfolio in a tax-shielded account such as the IRA or 401(k) plan could be a pragmatic approach.
Passively investing in a broad, low-cost index fund could be another pragmatic move. Vanguard’s S&P 500 Index fund, for example, has delivered a compounded annual growth rate of 15.93% over the past five years and 13.33% over the past ten years.
With an eye on risk and disciplined investments, you could turn your first breakthrough $100,000 into a sizable financial safety net within just a few years.
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