How to Amass the First $100,000 of Your Portfolio

No statement has better summed up the emotional and practical struggles confronting average people attempting to build a better life for themselves and their families than a saying attributed to a very successful investor. Charlie Munger—vice chairman of Berkshire Hathaway and one of the wealthiest people in the world, with a fortune of about $2 billion as of February 2020—is said to have quipped about starting out in the investing world: “The first $100,000 is a bitch.”

There are many reasons why Munger's lament is true. One is the federal tax code, which requires a significant chunk of working people's income—particularly those who are self-employed—to be given to the government. Another is the high levels of debt many people face.

Yet another problem is lack of experience and knowledge when you're just starting out as a money earner. Imagine the hours, effort, and heartache you could save yourself if it were possible to go back in time and pass on your wisdom about money—and life in general—to your teenage self.

This article is part of "A Complete Beginner's Guide to Saving Money" and offers some tips on how to put aside your first $100,000 in investment capital, free and clear. For further advice, you can always consider consulting a financial planner.

Know the Tax Code

Cash in an envelope
Saving money and investing money are not the same thing. Saving money refers to building cash or liquidity reserves that can be accessed on short notice. Investing money is the process of putting on capital today, possibly tying it up for extended periods of time, for the primary purpose of generating capital gains, dividends, rents, or other sources of investment income. Image Credit: Peter Dazeley / Getty Images

You don't have to be a tax expert to start investing, but you should know how much of your income will go to the government.

Income of $137,700 or less is subject to a 6.2% payroll tax for Social Security in 2020; the threshold increases to $142,800 in 2021. Income of all levels is subject to a 1.45% payroll tax for Medicare. For each worker on the payroll, employers pay an additional 6.2% for Social Security and 1.45% for Medicare. And those who are self-employed must cover the 15.3% ([6.2% x 2] + [1.45% x 2]) total tax on their own.

The good news is, half of your payroll taxes are deductible from your income taxes, but the net effect is that many Americans still pay far more than their stated income tax bracket would have them believe. As you get wealthier, the tax burden as a percentage of disposable income begins to decrease despite being higher in absolute dollars. In other words, if you make $800,000 and pay $350,000 in taxes, you will feel a big bite but your standard of living will still be high. But if you make $20,000 and pay $2,800 in taxes, your standard of living and ability to save are greatly affected.

The Internal Revenue Code enables you to invest pre-tax or tax-deductible money into a traditional IRA or 401(k) plan every year to save for your retirement. For example, if you contribute $5,000 to a 401(k) and you’re in the 24% bracket, you won’t have to pay $1,200 in federal income taxes on that money because, for now at least, the government acts as though it never existed. If you were to use that same amount of money—only after taxes this time—to pay bills, you would have at most only 76 cents on the dollar.

Go After Free Money

If your employer offers 401(k) matching, take advantage of it. If you were to get dollar-for-dollar matching on your contributions amounting to, say, 5% of your earnings and you make $30,000 per year, you would get $1,500 in a bonus match deposited into your account.

You got $1,500 from your employer, you invested $5,000, and you saved $1,250 in taxes on that investment. So by putting $5,000 in your 401(k), you have a total of $6,500 of capital working for you. That's $2,750 more than you would have if you had taken $5,000 from your paychecks, paid taxes on it, and put the money in a brokerage account.

Create Income Just for Investments

One way to save more money is to grow your income. If you have a talent or skill, maybe you could freelance on the side to pick up a couple hundred dollars per month. If you make an hourly wage, perhaps you could put in some overtime. You could invest your extra earnings in, say, blue chip stocks and acquire sizable positions over several years. And with dollar-cost averaging, you could lower the average price you pay per share when compared with buying large numbers of shares at one time.

By bringing in more money rather than just reducing expenses, you’re funding your investments without greatly affecting your day-to-day life. That’s important because you’ll likely be more willing to stay the course given that you won’t feel deprived.

For most people, wealth is built a few dollars at a time. If you can save just $10 a day for investment, you would have more than $200,000 over 25 years at a 6% rate of return.

Manage the Liability Side of Your Balance Sheet

Growing your income is important, but you can't lose sight of the other side of your personal balance sheet: liabilities. It makes absolutely no sense to invest money in stocks or bonds if you are paying 20% interest on accumulated debt on credit cards. Focus on paying off high-interest debt before you think of committing any of your funds to investments.

On the other hand, if your interest rate on a student loan or mortgage is very low, it would probably be a mistake to focus on paying off that debt. After factoring in inflation, missed tax savings, and the opportunity cost of not investing in more attractive assets, paying off this debt at the expense of investing could result in hundreds of thousands of dollars of lost wealth over a long period of time.

Reinvest All Dividends

One of the most important things you can do to increase your returns in the stock market is reinvesting your dividends rather than taking the cash. It might be tempting to spend a dividend check on something fun, but plowing dividends back into the stock that paid them is often the smartest move you can make.

This advice applies to companies with a long track record of paying dividends and, even better, increasing them regularly. If a company has recently cut its dividend, you might consider selling the stock altogether and investing the proceeds in a company with a better dividend-paying history.

Keep Costs Low and Consider Indexing

While you're trying to reach that $100,000 milestone, it's important to keep your costs of investing low. That's why it might make sense to begin putting your money in a rock-bottom-fee index fund offered by an industry giant such as Vanguard or Fidelity.

Index funds track the performance of a benchmark such as the Standard & Poor's 500 Index. Because it costs less for the fund manager to simply mimic an index rather than actively picking stocks, index funds have very low annual expenses: They should be less than 0.15% of your assets and may be as low as .015%.

You can sign up for a plan on a fund company's website that automatically and periodically invests money from your bank account into the fund. And you won't have to be concerned that big annual fees will eat away at your gains.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. Social Security Administration. "Fact Sheet: 2021 Social Security Changes," Page 1. Accessed Oct. 23, 2020.

  2. IRS. "Self-Employment Tax (Social Security and Medicare Taxes)." Accessed Oct. 23, 2020.