Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth. Making the first million was the next big hurdle. To do that a person must consistently underspend his income. Getting wealthy, he explains, is like rolling a snowball. It helps to start on top of a long hill—start early and try to roll that snowball for a very long time. It helps to live a long life.
As if Munger needed any confirmation from me, but I’m here to tell you that the first $100,000 is definitely the most difficult aspect of building wealth.
The First $100K
I hit my first $100K in portfolio market value in March 2013. It took me approximately three years to get to that point, starting with $5,000 that I deposited into my brand new Scottrade account in January 2010.
What did it take to get from $5,000 to $100,000 in three years?
I lived below my means day in and day out for years on end. I moved to a cheaper apartment that was located on the bus line. I sold my car and started taking the bus to work – quite an ironic sight for someone working at a car dealership. I ate ramen noodles and PB&J sandwiches over and over again.
Meanwhile, I also put myself in a position to become promoted at work and generate additional income. And I would come home after working for 10 hours at the car dealership to run Dividend Mantra, communicate with and inspire fellow freedom fighters, study stocks, and try to create additional income above and beyond what my day job provided.
I thought about escaping the miserable rat race every single day.
And, perhaps most importantly, I religiously invested all the excess capital generated by living below my means into high-quality dividend growth stocks that rewarded me as a part-owner with growing dividends that allowed me to continue rolling my snowball at an ever-greater velocity.
Sticking To The Plan
What have I been up to since hitting that first $100K?
What else would I be up to other than sticking to the long-term plan?
I still live without a car, even though I could afford a new Toyota Corolla about 11 times over. One for every day of the week and then some! Shall I drive my Monday Corolla or Tuesday Corolla up to the McStore to buy something I don’t need? Wait, what day is it? I should probably consult my calendar finished in gold leaf.
I still live in the modest two-bedroom apartment that we moved into back in late 2011. No granite countertops, stainless steel appliances, or crown molding. But, shockingly, it stillprovides shelter and safety while also cooling us in the summer and warming us in the winter.
And although I’m not eating ramen noodles anymore (my body told me when enough was enough), I’m also not eating steak and lobster daily.
The Second $100K
What has all this modest living, saving, and intelligent investing done for me?
Well, my Freedom Fund closed over $200,000 in total market value for the first time ever on June 18, 2015.
That means I went from $100K to $200K in two years and three months.
Now, it’s important to keep perspective here. The broader market has been on a tear over the entirety of this period – the S&P 500 has basically doubled since January 2010. And a rising tide lifts all boats, meaning my wealth – and these numbers – have been positively impacted by that.
However, my actual dividend income and dividend income growth have been negativelyimpacted by that move up. Higher stock prices means lower yields, which means I can buy less dividend income with the same dollar. My purchasing power thus is lower in terms of how much freedom I’m buying with every stock purchase. So I’m further away from my long-term goal of financial independence by living solely off of growing dividend income than I otherwise would be if the S&P 500 were still at, say, 1,500 points. But you take the good with the bad. Such is life. First world problems are certainly the best kinds of problems to have.
And I’ve certainly also picked my fair share of duds along the way which have needlessly delayed my progress. But hindsight is 20/20, unfortunately.
Nonetheless, this is a real-time and real-life journey. No backtesting. No hypotheticals. No what ifs, couldas, shouldas, or wouldas. Real-life progress, for better or worse.
And I think that’s what I really love about showing how financial independence unfolds in real-time with all the victories and setbacks that occur. It shows that it’s possible without nailing the perfect investment. Mistakes can be made. We can fall down. But as long as we get back up and keep climbing, we can reach the top of that mountain.
And I’ve been climbing, guys. For five straight years, I’ve been climbing. I know the view at the summit will be incredible. And because of that climbing, the portfolio is now hovering $200,000. It’s incredible! I truly feel like I’ve won the lottery.
The portfolio has hit $200K even though I grew up in a ghetto of east Detroit. I lost my birth parents years ago. Dropped out of college. Wasted an inheritance. Knew nothing about personal finance or investing until I was almost 28 years old. And worked in an industry that couldn’t be further away from Wall Street if I tried.
But I believed in myself. I saw the mountain in front of me and decided to start climbing. What makes me any less able than anyone else? Why can’t I reach financial independence if I’m absolutely willing to do what’s necessary to achieve it?
Why can’t I?
Why can’t you?
Why can’t all of us?
The first $100K is out there waiting for you. And so is the next $100K. And then every $100K thereafter will become easier and easier as the income that the underlying base of assets generates grows through dividend increases and dividend reinvestment, as well as from outside excess capital you inject by living below your means. The snowball will roll faster and faster until it you can’t keep up with it anymore. Success begets success. Cash flow begets more cash flow. And wealth certainly begets more wealth – a 10% return on $200,000 is $20,000; a 10% return on $100,000 is half that.
However, the psychological aspect of building wealth is just as important. While the money and growth can be quantified, your emotional state can’t. But I can tell you that it definitely gets easier over time. The more you save, the more you want to save. The more you invest and buy stocks, the more you want to invest and buy stocks. Once you see the needle start to move, you believe in it more and more. You believe in yourself more and more. And you believe in the plan more and more. This is like a secret weapon. And the positivity compounds just like money. The good habits compound themselves as well, putting the snowball rolling on autopilot.
But, like Munger said, it helps to start early and roll for a long time. I didn’t start particularly early. I was almost 28 years old before I even opened a brokerage account. But here I am at 33 years old, controlling a portfolio worth $200,000 that’s chock-full of high-quality businesses across the spectrum of industries. I’m a real estate tycoon. An oil baron. A retail giant. A railroad mogul. An industrial magnate. A bank king.
And these businesses will funnel ever-growing cash flow into my portfolio, which begets more cash flow in the future. That passive dividend income should exceed $7,000 this year. And I haven’t even been rolling the snowball all that long.
Imagine what’s possible in five or ten years? Imagine what’s possible for you in five years? Imagine what’s possible when you believe in yourself, ignore the noise, live simply, chase your dreams, and climb that mountain?
What has your experience been? Was the first $100K the hardest? Are you rolling your own snowball? Are you climbing the mountain?
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