Over the last year or so, I’ve been reading a few pages of Charlie Munger’s book, “Poor Charlie’s Almanack” every week. This is the type of book you take in a little at a time as you swirl the lessons around your life. As you hopefully know, Charlie Munger has been Warren Buffett’s partner for decades.  Munger’s fortune is estimated at $2 billion. He is definitely someone to pay attention to and learn from.

Munger once said…

“The first $100,000 is a bitch.”

He was talking about saving your first $100,000. This first $100,000 is a bitch because it has to come primarily from your earnings. You’ve got to go to work collecting many paychecks setting aside a portion of each check for years. Once you’ve finally saved $100,000 things get a little easier. The reason why is because your $100,000 is now earning some real money for you. The money earned by your first $100,000 adds to your savings escalating your wealth at a faster rate.

What he is really getting at is the income collected from your savings. How much money is your money making for you? With the typical investment in stocks or bonds, you’ll need $100,000 saved to see real results.

I’m going to re-write Munger’s comment around Dividend Real Estate:

“The first mortgage-free single-family rental home is a bitch.”

The reason why getting the first mortgage-free single family rental home is a bitch is because you’ve got to save 100% of the price to buy the home out of your paychecks. Once you’ve got this first home under your belt, your new tenant will now be going to work each week to send your retirement account another monthly deposit. Once you’ve got this first home, you’ve got two families saving for your retirement. Depending on how much you save each month, this first home may double your retirement savings.

Let’s assume someone making $75,000 a year saves 10% in their retirement savings account. This retirement savings is roughly $625 a month for a total of $7,500 a year. After a few years (8 to be exact), this person saves $60,000 and uses this first $60,000 to buy a single-family home for cash. This home is purchased inside their retirement account. The rental home is owned by their retirement account. The rental income goes directly into their retirement account.

When they sign a lease with their new tenant, they’ve doubled their monthly savings.  The single-family rental home rents for $1,000 per month. After saving $375 a month for taxes, insurance and a reserve for repairs, this person will now have an additional $625 each month added to their retirement savings.

Now this person’s retirement account is growing by $1,250 each month and $15,000 annually. Half of this is coming from their 10% savings and half is coming from the tenant’s rent checks. In just 4 years, they’ll have enough saved to buy another $60,000 home for cash. Once they’ve got this second rental home in their retirement account, they’ll be saving $1,875 a month as three families go to work each month to save for their future retirement. This process compounds at an accelerated rate as the money makes more and more money.

It all starts with the first home.

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