Will I become rich?
First of all, what does it mean to be rich? Being rich means that you have assets that produces enough income for maintaining a lifestyle you want indefinitely and without you having to work. What does it mean in your case? You should figure it out. Nobody can do this for you, because being rich depends on the lifestyle you would like to have.
Suppose that you would like to have a lifestyle taking 75000$ per year. Assumption is that 75000$ include all your costs: mortgage, food, clothing, vacation, food for pets, books, dinners, CDs, concerts, computers, ipods, ... If you don't eat and you live on the streets this figure is much smaller. The next step is to calculate how much assets you should have in order to get this 75000$ per year. We could be moderately optimistic saying that on average stock market returns 10% per year. You should also consider that your assets are subject to inflation, and that you should guard your assets. Suppose that 2.5% annually is sufficient. This means that in ten years from today $100 000 dollars will worth less. For example, 1$ in 1850 worth about 25$ in 2007.
Let's return to our calculation. If an average stock market returns are 10% and if average inflation ratio is about 2.5% then you would have remaining 7.5% for maintaining your life style. You can now calculate the value of necessary assets like this 75000$/7.5% which is equal to 75000/(7.5/100) which yields one million. If you have return rate of Warren Buffet (around 30%) then you would need 200,000$ in assets.
It is necessary to underline that by assets I mean things that produces some kind of return-profit. For example, your house/apartment probably doesn't produce any income. Your house usually produces outcome (taxes, mortgages). Also, in this calculation there are no debts.
So, will I become rich? If you are very frugal and have a modest lifestyle the answer is probably yes but in your sixties. If you start earlier with investing you could achieve this earlier. If you earn more then an average person does, you could also achieve this earlier.
Suppose that you would like to have a lifestyle taking 75000$ per year. Assumption is that 75000$ include all your costs: mortgage, food, clothing, vacation, food for pets, books, dinners, CDs, concerts, computers, ipods, ... If you don't eat and you live on the streets this figure is much smaller. The next step is to calculate how much assets you should have in order to get this 75000$ per year. We could be moderately optimistic saying that on average stock market returns 10% per year. You should also consider that your assets are subject to inflation, and that you should guard your assets. Suppose that 2.5% annually is sufficient. This means that in ten years from today $100 000 dollars will worth less. For example, 1$ in 1850 worth about 25$ in 2007.
Let's return to our calculation. If an average stock market returns are 10% and if average inflation ratio is about 2.5% then you would have remaining 7.5% for maintaining your life style. You can now calculate the value of necessary assets like this 75000$/7.5% which is equal to 75000/(7.5/100) which yields one million. If you have return rate of Warren Buffet (around 30%) then you would need 200,000$ in assets.
It is necessary to underline that by assets I mean things that produces some kind of return-profit. For example, your house/apartment probably doesn't produce any income. Your house usually produces outcome (taxes, mortgages). Also, in this calculation there are no debts.
So, will I become rich? If you are very frugal and have a modest lifestyle the answer is probably yes but in your sixties. If you start earlier with investing you could achieve this earlier. If you earn more then an average person does, you could also achieve this earlier.
posted by Zoran Maksimovic at
5:10 AM
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