Investing 101: The Importance of Your First $100K

Charlie Munger, the billionaire investor, Warren Buffett’s right-hand man, and one of the wealthiest people in the world, said:

The first $100,000 is a b*tch, 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.

A few years ago, during the holidays, I announced to my family that I was going to invest $100,000 into the stock market so that I would retire a millionaire. They said something along the lines of “that’s ridiculous,” “that’s so unrealistic for most people” and within a matter of minutes they had moved on to the next, seemingly more interesting conversation.

Like I have done my entire life, I shrugged my shoulders, and internally told myself “I’ll show them.” I continued to read all thing personal finance, made contributions to my investment accounts, and just over a few years later—I’VE DONE IT: I’ve invested my first $100,000!

In this blog post, I will share with you the importance of your first 100k, I will cover the basics of investing, and will walk you through how you can get started on your investment journey.

Why Is Your First 100K so Important?

Investing your first $100,000 is a critical early milestone on the path to long-term wealth, but why is it such a pain to get there?

It is because most of this first $100,000 is purely based on how much you save. Before you get to this milestone, your investment returns are doing very little to help grow your net worth. So during this early stage of your investment journey, it is really on you to save and invest as much as you can.

Once you reach the $100,000 mark, compound interest begins to do a lot of the heavy lifting. For example:

If you save $10,000 per year, assuming an interest rate of 7%, it will take you about 7-8 years to save your first $100k.
If you continue saving $10,000 per year, you’ll reach your next $100,000 in about 5 years (3 years sooner!).
To reach the next $100,000 after that, it will take you less than 4 years and so on and so forth.

Breaking the Psychological Barriers

To build and maintain wealth you have to invest, there’s really no way around this. But investing can be a scary thing, specially if you’re not making that much money to begin with. Here are a couple things to keep in mind:

You Will Make Mistakes

If you’ve never invested before, it is unrealistic to expect that you will get it perfectly right the first time, and that is okay. Start small, you can really start by investing $1. As you get more comfortable you can increase the amount you invest. When you make a mistake, take note of it and understand what went wrong. After you’ve learned from your mistake, forgive yourself, and move on to your next investment. Consistency is the name of the game.

Be Patient

Investing is not a get-rich-quick scheme, at least not for most of us who can only start contributing small amounts. It is easier to start investing for retirement, because retirement will likely be far away and you will have plenty of time to accumulate wealth.

Understanding The Basics

What in the world is the stock market?

Let’s say your homegirl starts a clothing brand and she is killing it. She now wants to expand her business, but she needs money for additional inventory, to hire employees, for marketing, etc. To get the money she could get a loan from a bank, but then she’d be in debt and would have to pay that off with interest.

Instead, she could sell some shares (a.k.a. stocks—which are just tiny pieces of her company) to investors. This process is called an Initial Public Offering, or an IPO. Have you seen on TV, or social media, when some typically old white man rings a bell at the New York Stock Exchange and the crowd breaks out into celebration!? This is a CEO announcing to the world that they have gone “public.” This is exactly what Nike, Lululemon, Dior, and all those big brands have done.

After a company goes public, investors can buy and sell shares of that company. Companies choose to go public because unlike a loan, the money they get from the investors purchasing their share doesn’t have to be paid back. The investors make money only when the company makes money and investors risk losing money when companies don’t do well.

The stock market is where all this buying and selling happens. To be technical, the stock market is a group of exchanges where the buying, selling, and issuance (creation) of stocks takes place.

Basically, the stock market is the Amazon for stocks.

Not so scary, right?! And to think these folks try to intimidate us with their fancy and completely unnecessary words.

Ways to invest

You now understand the big picture, but how do you start using the stock market? There are many ways to invest, but let’s talk about some of the most common:

Individual Stock/Shares

You’ve likely heard people say “I own Apple stock,” or “I’m a Tesla holder” this means that they have purchased some stock of the company and are now one of that company’s shareholders. This type of investing can be risky because when you invest in a specific company you are essentially putting all your eggs in one basket. It can be fun to bet on companies you believe in, but make sure to also invest elsewhere!

Index Funds

If you’re like me, with no time (or desire) to do a ton of research on any one company and too afraid to invest your money in a company you don’t know enough about, then you’re an index fund/ETF girlie. Index funds are baskets of companies that you can invest in all at once. The most common index fund in the U.S. is the S&P 500, which is made up of the top 500 U.S. companies. There is also the Dow Jones Industrial Average, which follows the top 30 U.S. companies, and the NASDAQ, which follows the top 1,000 U.S. tech companies, and many others. Essentially, an “index” is just a list of companies that each of these “funds” or baskets follow.

One of the downfalls of index funds is that these often have investment minimums, sometimes in the thousands of dollars. But don’t get discouraged, keep on reading…

Exchange Traded Funds or ETFs

ETFs are similar to index funds and you can often invest in the exact same fund as an index using ETFs. One of the reasons why ETFs exists is because they have a lower barrier to entry—you can start investing with as little as $1. You can start investing in index funds and ETFs by making an account with a brokerage firm such as Vanguard, Charles Schwab, or SoFi. I personally use all three of these for different investment accounts, and use SoFi to invest in ETFs (by clicking on the link you can use my referral code).

How to Start Investing?

The easiest way to dip your toes into the investing waters is by contributing to your employer sponsored 401k plan. A 401k is a retirement investment account offered by employers that allows you to invest a portion of your paycheck without doing a whole lot of work. 401k plans are a great way to start investing for a few reasons:

Set it and Forget it

My favorite part about 401ks is that you can set it up once and forget about it. You can work with your HR team to determine what percentage of your paychecks you want to invest and the investment plan you want. Like clock work, this money will be automatically taken out of your check and invested. After a few paychecks, I promise you that you’ll likely forget that this money is being taken out.

Get the Company Match

Another great aspect of 401ks is that many employees offer a company match—this is free money! Most employers match your contributions up to 3-6%. It is recommended that you contribute to your 401k at least up the max match amount, because you don’t want to leave money on the table. This is part of your compensation package.

So let’s say you make $1,000 per pay check and you opt in to contribute 6% (or $60). Every time you contribute $60, your employer will also contribute $60 and you will be investing $120 per paycheck. If you get paid twice a month, you would have invested 2,880 dollar per year.

401ks are Tax-Deferred

A third advantage of a 401k is the tax benefits. The money that you contribute into this account is “tax-deferred.” This means you won’t be taxed on this money until you take it out in retirement when you’ll likely be working less and your tax bracket will be lower.

Note that one downfall to investing into a retirement account is that you have to wait until retirement age to make withdrawals. You can take money out of these accounts before you retire, but you will be penalized with fees.

Conclusion:

The keys to investing are to start early, because time is your greatest asset and to invest consistently. If you feel like you’re too late or behind, remember that there is no better time to start than now. Start investing today and watch your money grow!

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