Forget billionaire Charlie Munger’s rule about saving your first $100K — why everything changes at the $20K mark

If you’re trying to build wealth, your first six figures in savings is a huge milestone. That’s according to the late billionaire Charlie Munger.

“It’s a b—-, but you gotta do it,” Munger told investors at an annual Berkshire Hathaway meeting two decades ago. “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.”

Munger was focused on the six-figure milestone because he believed that’s where the real power of compounding is unlocked. Once you cross this critical threshold, your money earns more money at a meaningful scale.

Yet, for countless families, the numbers show that even a much lower milestone — like $20,000 — could be the game-changer. Here’s what makes it so powerful.

Munger’s $100,000 benchmark has math on its side. But in reality, most families struggle to set aside six figures as they battle stagnant wages and rapidly rising costs of living.

In fact, 21% of Americans have no emergency savings at all, and 37% say they would struggle to cover an unexpected $400 bill, according to a 2024 survey of 1,192 Americans from Empower (1). In other words, many families are operating with no safety net.

The dearth of savings is particularly acute for younger Americans. According to a 2024 report by Fidelity Investments, the median net worth of adults under the age of 35 is just $39,000 (2). That’s well under half of Munger’s $100,000 benchmark.

Fortunately, your personal finances could start changing at a much lower threshold. If you’re young or lack savings, getting to $20,000 could be a real game changer because it helps you shift your thinking.

A lack of savings severely limits your flexibility. In this situation, your top priority has to be survival, which means you don’t have the flexibility to leave your job in pursuit of a better one, take time off to get educated or take on investments with significant risk.

In other words, you have little to no wriggle room, and that has real consequences on the way you think and process the world around you. According to a survey of Vanguard customers, people with no emergency savings spend nearly twice as much time thinking about money issues every week than those with at least $2,000 in savings.

The study also found that going from no savings to $2,000 in savings improved financial well-being by 21%. Those who progressed further and saved up three to six months of living expenses in an emergency fund say another 13% bump in well-being (3).

Read more: 30% of US drivers switched car insurance in the last five years. Here’s how much they saved — and how you can cut your own bills ASAP

American households spent roughly $77,280 per year in 2023, according to the Bureau of Labor Statistics (4). That means a $20,000 emergency fund should cover just over three months of living expenses for the typical family.

Once you hit this benchmark, you can think about taking some time off work to invest in education or pursue a better paying job. You won’t need to focus as much on surviving, and can start focusing on growth and investments instead.

A $20,000 savings fund also unlocks some compound growth opportunities.

Although it would be great to have $100,000 invested in growing assets, even $20,000 should unlock noticeable growth.

The S&P 500 has delivered a compounded annual growth rate of 10% since 1957 (5). Socking away the first $20,000 you don’t need for other savings goals into a low-cost index fund that tracks this index and adding $1,000 per month could get you to the $100,000 threshold in just under five years, if the market remains at historic, favourable levels. (A year like 2022, in which the S&P was down nearly 20% year-over-year, could throw a wrench into that dream — investing always carries risk) (7).

In other words, Munger’s magic number is potentially within reach once you’re at the $20,000 milestone. For anyone starting from scratch, getting to this milestone can offer breathing room that goes well beyond simple math.

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Empower (1); (Fidelity 2); Vanguard (3); BLS (4); Business Insider (5); SEC (6); S&P Global (7)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.