From zero to £100k - the key to investing wealth

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

That’s why Charlie stresses the importance of being thrifty - walking instead of getting a cab and buying discounted items. Whatever grand claims are made for investing being able to make you rich, it doesn’t happen quickly and most of what you build up at the start will have to come from what you can save yourself. It’ll be your sacrifices and hard work that provide the bulk of that first £100,000. But after that, some miraculous things can happen.

So - how much do you need to be saving to get there?

Take a look at this chart.

This shows a hypothetical savings journey of 10 years - where savings grow from zero to £100,000. We’ve assumed here that the money contributed grows by 5% a year after fees. That could be cash interest, but a level of return like that is probably more likely to come from investments. It’s the minimum many investors would hope to achieve over the long term, with obviously the risk that the value of investments can fall.

Now - if this was invested money, the bars wouldn’t rise in nice gradual increases like this. It would be uneven, probably with some falls along the way, but this represents the long-term return, averaged out.

The bars in blue show the money this person has contributed for themselves, while the orange shows what they’ve gained through investment returns. As you can see - and as Charlie Munger suggested in his quote about the first £100,000 - most of the total is driven by contributions, not investment growth.

That’s a good reminder of the dedication, and perhaps the sacrifice, you will need to get your investment journey going.

And the contributions needed to achieve this? This comes out at £645 a month, every month, across those ten years. If you're able to put in more - say £1,000 a month - that timeline would shorten to about seven years. If you could only put in £500 it would take longer - between 12 and 13 years. Similarly, a better rate of return would shorten this as well.

Where things get more interesting, however, is when we look over longer time periods.

Take a look at this chart. It’s basically the same thing - same 5% return, same £645 a month - but over not ten years but 30 years.

You can see that first £100,000 - which is reached after ten years.

But move up to the second hundred thousand and that’s achieved in just over six and a half years. The third hundred thousand is reached in 5 years, and so on until you reach the fifth hundred thousand which takes less than three and a half years.

And look at how that total is made up - by the time you reach £500,000 in savings, most of it has come not from your contributions but from investment returns.

Now think back to that first hundred thousand - and that Charlie Munger quote. By contrast to what is happening by then end, it really is a ‘bleep’ to reach that first hundred thousand of savings, but getting there if you can means you unlock potentially much greater benefits down the line.

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