Why Saving The First $10,000 Is Critical

When I started working out of college, I had one stream of income. My job.

Now that I’m in my forties, with twenty-plus years of work behind me, I have several streams of income. Most of them are passive but none of them are special.

And on the internet, there are thousands of “charlatans “experts” who will want to “teach” you about passive income. There is no course on passive income, it’s these three steps:

1. The only way to get passive income is to invest in assets that produce cashflow.
2. The only way to get cash to invest is to save your money.
3. And the only way to save money is if you spend less than you earn.

And so if you work backwards, the goal is to save your first $1,000. Then $10,000. Then $100,000.

Check out this brilliant Charlie Munger quote:

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.

If you don’t have $100,000 sitting in a brokerage account, your entire goal (financially) is to get to $100,000.

If you have no savings, $100,000 can seem unattainable. It’s a HUGE number.

So let’s break it down.

Step 1: Get to $1,000 in savings

Your first goal is to save up $1,000. Scratch and claw your way to $1,000. This means cutting the fat in your budget and trying to save as much as possible.

This is important because if you do not have $1,000 in savings, it means you do not have an emergency fund. Any small emergency can derail you for months if not years.

Need some ideas of where to start? Check out this list of 105 easy ways to save money.

You need to cut as much bullshit out of your budget to get to $1,000 so that one financial misstep or accident doesn’t set you back.

Step 2: Get to $10,000 in savings

Once you hit $1,000, great! Your next target is $10,000.

$10,000 is far but within reach. It’s also a sum that can be attained through the cutting of expenses, budgeting, and leaning on side hustles to earn extra cash. You can start doing things like switching banks to get a bank bonus and earn hundreds of dollars each time.

You can and should save your way to $10,000.

Then, invest that $10,000. (jump below to what to invest in – it’s a simple three fund portfolio)

If you get an 8% return each year, that first $10,000 will get you $800.

$800 sounds OK but not world changing, right?

But as you grow your assets more and more, compounding will be working on a larger number.

This is why it’s so important to save and invest. If you don’t, you will forever be trading your time for money. You want to build the habit now.

Step 3: Get to $50,000 in savings

Once you have $10,000 and are investing that money, it’s important to realize that it’s much harder to save your way to $50,000. You now have to lean more on the income side of the ledger and find ways to build that up.

This usually involves investing in yourself to help you earn more. It may mean starting a side business that has the potential to grow beyond being a mere hustle. You can still save your way to $50,000 but it’s much slower.

But at $50,000 and 8% return, your money is earning $4,000 a year. $50,000 becomes $54,000, which now gets you $4,320 a year. The interest keeps going up each year because your balance goes up.

If you start with $10,000 earning 8% a year, it takes about 10 years to get over $20,000.

But then only another 5 years to get over $30,000.

Then only 4 to get over $40,000.

The time it takes to add $10,000 gets shorter and shorter.

That’s the power of compounding and eventually your money starts to earn more than you do. This can be both scary and exciting. (I call it escaping financial gravity)

When it grows at 8%, over 30 years you’ll have 10x’d your money.

$10,000 becomes $100,000 – and that’s with no additional contributions and no extra work by you.

That’s why saving your first $10,000 is critical. You want to get that compounding clock started as soon as possible. The longer it works for you, the more your portfolio will grow.

Where do you put it?

First, make sure it’s in a high yield savings account so you’re earning interest. It won’t be a ton but it’s better than 0.01%, which is garbage.

Then, you want to put it in a brokerage account and invest it in a three fund portfolio:

• Domestic stock “total market” index fund
• International stock “total market” index fund
• Bond “total market” index fund

These are Vanguard’s versions but you can use anything low cost (Fidelity, Charles Schwab, etc.):

• Vanguard Total Stock Market Index Fund (VTSAX)
• Vanguard Total International Stock Index Fund (VTIAX)
• Vanguard Total Bond Market Fund (VBTLX)

Then, get out of the way.