Chart of the Week: From Your First $100,000 to $1 Million

Einstein once called compound interest the Eighth Wonder of the World. And when it comes to wealth building, it deserves that title, because its ability to grow your net worth over time usually amazes people the first time they come to understand it. In my book Automatic Wealth, I devoted more than a chapter to its power, including a number of examples that did a good job of demonstrating its potential. 

This week, Sean has found other graphic ways of demonstrating an aspect of this power that, although I understood it intuitively, I’d never thought about articulating in that book or others. If you are not a huge fan of compound interest, this will make you one. – MF 

Did you know that $100,000 is actually 25% of $1,000,000?

It’s true.

The reason this feels illogical is because most people think linearly. 1 becomes 2 becomes 3 becomes 4.

But with compounding, the logic is exponential in nature. 1 becomes 2 becomes 4 becomes 8.

And once we start thinking exponentially, we see just how powerful of a tool this concept is for building wealth.

The blog “Four Pillar Freedom” has an excellent example of how compounding works.

If you invest $10,000 every year and earn a 7% annual interest rate, your portfolio will grow to $100,000 in 7.84 years:

And if you continue to do this, you’ll get the next $100,000 in 5.1 years.

Do you see where this is going?

With the power of compounding, the amount of money you have invested over a long enough time determines how fast your money can grow.

But what few people realize is that it also shrinks the amount of time you need to generate the same amount of money.

By investing $10,000 per year at 7% interest, it would take 22 years to get to $500,000.

But to go from $500,000 to $1 million? It only takes 8.5 years.

All in all, if you can save $10,000 per month and generate 7% returns…

Which, by the way, you can beat pretty easily if you invest in a basket of large cap stocks that have a history of growth and rewarding shareholders over time…

It will take you a little less than 31 years to earn that first $1 million.

It took you 7.84 years to get your first $100,000. That’s a little more than 25% of 31 years.

You get that first $100,000? You’re already a quarter of the way there.

But as the late Charlie Munger said, “That first $100,000 is a b*tch.”

– Sean MacIntyre

Click here to watch Sean’s recent video about the most valuable mental trick he learned from Charlie Munger about building wealth.