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Why the First Million is the Hardest

May 20th, 2007 at 12:33 am

I don't know where the expression comes from originally, but I'm sure most people have heard that "the first million is the hardest". The funny thing is that when you're starting out on the road to accumulating wealth, it somehow seems to be a bit of a put down - you think it's just a throw-away line of the mega-rich, along the lines of "Let them eat cake!" Of course, it's easier to save once you have a million dollars and are living on easy street!

However, once you get closer to having $1m net worth you realise that this truism, like so many in personal finance, does actually encapsulate some fundamental truths.

Some reasons why it really is true that "the first million is the hardest":
* When you start out, your income is generally at the lowest point of your working life. So even saving 25% of your gross income will only build up your net worth very slowly. For example, I started full time work on a salary of under $20K, so saving 25% of my gross salary only added $5,000 to my net worth over one year.
* When you start out you generally know very little about investing. Even if you study some economics and financial analysis subjects in High School or University, you often won't gain a practical knowledge until you've been "hands on" investing for several years. When I started saving I was focused on bank savings accounts, and slowly progressed through government savings bonds, term deposits, and later into shares and property investment.
* When you're starting out you have smaller amounts to invest. This makes many avenues of investing unavailable or uneconomic. Although things are much better these days than when I started out - the advent of the internet and discount brokers has made many more types of investment accessible to beginners.
* Once you have a substantial investment portfolio built up, the "passive income" flowing from your investments becomes a large component of your "savings" in relation to your salary income. However, this only holds true if you stick to "reinvesting" your investment income, rather than using it to supplement your lifestyle spending.
* Some aspects of financial planning such as asset diversification and efficient asset allocation ("efficient frontier") only become applicable when you have larger amounts to invest.
* Any "emergency" that causes you to dig into you savings will have a much larger impact on your net worth when you are starting out. Conversely it is much more important to pay for various types of insurance when you are starting out - for example, starting a family it is important to have life insurance in case the main bread winner dies unexpectedly. Later on, the expensive of life insurance may be avoidable if you have paid off the mortgage, the kids have left home, and you have built up an investment portfolio.

Looking back to when I started out saving it was incredibly hard for very little result. For example, in High School I would work 9 hours at a market garden weeding or sorting and rebagging potatoes (ie. removing the stinking rotten ones, washing off the others and rebagging the remainder for sale). I earned around $10 for the whole days work, and spend $1 on lunch and $1.20 on busfares to and from work. In the end a whole day of my life resulted in adding less than $8 to my net worth. However, that initially stage of developing my finances provided a basic understanding of the value of money, and provided the "seed capital" required to start saving and investing. If you try to take a shortcut from McDonalds worker to property tycoon you are liable to end up another Casey Serin.

Enough Wealth

2 Responses to “Why the First Million is the Hardest”

  1. scfr Says:

    Excellent post; I couldn't agree more.
    It's important for those just starting out to find folks who will encourage them and keep reminding them that while their initial efforts may seem "small" they will really pay off down the road!

  2. Ima saver Says:

    My first job, I got paid $3 a day for 9 hours. They took out 9 cents in taxes and I bought lunch for 24 cents. It is hard to save when you make so little, but I did.

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