Why the secret to getting rich depends on saving your first $100,000

In a marathon shareholder meeting 27 years ago – Charlie Munger, the legendary offsider of legendary investor Warren Buffett – dropped a truth bomb.

It is really hard to get rich if you start from nothing. But three things will help you do it.

“If you have a standing start at zero, getting together $100,000 is a long struggle for most people,” Munger told shareholders in a wide-ranging five-hour question-and-answer session at Berkshire Hathaway’s 1998 shareholder meeting (you can watch it on YouTube, replete with references to some companies as “soggy cigar butts”, but we’ll get back to those later).

The struggle comes because when you begin from a standing start, simply covering rent, buying food and paying the bills is going to soak up much of your income.

But Munger goes on to explain that the “people who get there relatively quickly are helped if they’re passionate about being rational, very eager and opportunistic, and steadily underspend their income grossly. I think those three factors are very helpful”.

Summing those up, that’s being rational, being opportunistic (by things like establishing side hustles) and saving like a champion.

That’s certainly the strategy that property buyers’ agent Rasti Vaibhav and his wife Rupali Rastogi used to get there before they built a leveraged multimillion-dollar property portfolio.

Let’s unpack Munger’s three ways to get $100,000 a bit more, starting with the hardest.

How to budget to save the most of your income

This means pain if you want to get there quickly.

 
Take the following scenarios:If you earn $100,000, and you save $1000 a month by shoving it under your mattress (or you put it in a standard transaction bank account), you’ll have $100,000 in eight years and four months.If you put that $1000 a month into a low-cost index fund – one of Buffett’s recommendations in the same meeting – that earns Morningstar’s projected rate for Australian shares of 7.9 per cent a year, you’ll have $100,000 in six and a half years .


 And if you get slightly more aggressive, and put all your salary increases of 3.3 per cent a year (the average wage increase over the past year) into your savings, you’ll get there in six years and one month.

But if you “grossly underspend” – say you double your savings goal to $2000 a month in the first year, which will cut your post-tax spending money each year to just $53,212 ($4434 a month), and put all your pay rises into saving – you’ll get there in three years and six months. 
    
That’s a house deposit on a single income in three years.

Rasti, who trained as an architect in India before getting in to IT in Singapore and then moved to Australia in his 20s, paints a picture of what that level of saving looks like.

“When we came here, we had to set up everything. We bought everything second-hand, we looked for the fuel vouchers to save four cents a litre, we waited for that discounted pizza offer. That’s how we actually lived on a very, very, very basic level.”    

He and Rupali, an IT computer engineer, were also disciplined, using spreadsheets to track every cent they spent on a weekly and monthly basis.

Leverage knowledge to profit off side hustles

This means being on the lookout for ways to earn more, like creating a side hustle, listening out for investment ideas and acting on ideas that you have assessed rationally. That’s another thing Rasti did. His first side hustle, as they lived on Rupali’s salary at Westpac while he retrained again to get an MBA, was leveraged sharemarket investing in products like contracts for difference and foreign exchange. These are risky side hustles, but they offer high returns. Rasti says he began them by trialling a dummy portfolio with no money down for three months before making small investments in them.“Even while I was doing an MBA, it was like, ‘OK, what can I do as a side hustle?’” That involved offering to work for companies on a trial basis while he was studying.“I knocked on so many doors … finding a job was hard for me, so I would just lob up to companies and offer to do side projects for the companies, with the intent of learning. Of course, I learned, but being generous, they actually even paid me the value of the work that I did with them.” The combination of scrimping and side hustles got the couple a total of about $80,000 in savings in three years. Then they did something that may seem counterintuitive. They spent most of it on more education.

Invest in your own education and training

Rasti and Rupali always had a goal, and they knew they needed education to achieve it.That meant, in his case, learning about how to build a leveraged property portfolio of 18 homes that, now that they are in their 40s, throws off enough income to support them. Spending more on education was a rational extension of their process of delaying gratification.“The key thing we learned is really to invest in ourselves. We actually deliberately invested in our own education,”  Rasti says.“That was our motivation to make it big … we knew what we were in for. It’s what a proper vision can really do. And it was more delayed gratification,” he says.“So from $80,000, we were left with only about $32,000 or $33,000.” That MBA ended up helping Vaibhav get a job as an equities analyst at Westpac and then in funds management at AMP Capital and the couple bought their first property in Australia: an investment in Newcastle. While their property portfolio is still growing, they still have never bought a house to live in.“We came under huge pressure to buy our own home,” Rasti says, but adds if you live in a home you own, you do not get the benefits of tax deducting the money you use to buy it.“We never bought our own home because that debt is bad debt.“The whole thing was really learning about the leverage of money and the leverage of education.”

How compound interest earns passive income

The key to all those scenarios is that once you have $100,000 invested (and if you still assume a return of 7.9 per cent), you get $7900 a year for doing nothing. The next year, if you reinvested the $7900, you’d get $8524. The year after that, you’d get $9198, and so on.That is the concept of the “magic of compound interest” right there – something being rational will help you understand. In no time at all, your investments will be earning far more than you could ever save in a year.Effectively, once you reach $100,000, your existing pile of cash saves much more than you do. The gap only grows over time.

Is $100k today the same as Charlie Munger’s number?

At this point, the sharp-eyed among you might be saying, however, that Munger wasn’t really talking about $100,000. He was talking about $US100,000. And he said it 27 years ago.If you factor that in, Munger’s real target is $328,000 (we got there by taking the average exchange rate for 1998 – when $1 was only worth US63¢ – and inflation).

But the good news here is, if you are an Australian PAYE taxpayer, you are already saving that, and much more. Thanks to the 12 per cent superannuation levy, if you earn $100,000, you save $7444.92 in your first year.
And, assuming historical earnings rates, you will get to $328,000 in 18 years by just leaving your super alone.
Rasti also values his super for the long term, but “by itself it is not enough to build wealth. What we did personally is to take a more active approach to building wealth”.

As Buffett said at the same shareholder meeting when asked about how Berkshire Hathaway built such a pile of money: “We started building this little snowball on top of a very long hill.

“So we started at a very early age in rolling the snowball down. And of course, the nature of compound interest is it behaves like a snowball of sticky snow and the trick is to have a very long hill, which means either starting very young or living to be very old.”

For the record, Buffett describes companies with a low return on equity – not something Rasti and Rupali ever suffered from, given their saving habits – as soggy cigar butts.

Buffett says he used to look for “a really pathetic company, that it sells so cheap that you think there is one good free puff left in it. We used to pick up a lot of soggy cigar butts. I had a whole portfolio full of them”.

But they don’t work like compound interest.