Published on Wednesday, 13 September 2023
How Much Time Does It Take to Become Wealthy?
Have you ever wondered how long it would take you to become rich? Do you have a specific goal in mind, such as a certain net worth, income level, or lifestyle? Or are you just curious about the possibilities and opportunities that wealth can offer?
Table of Content
Everyone may have a different definition of "being rich". I'm going to use the following definition:
Being rich means receiving a passive income (P) that covers all your expenses.
In this context, the word passive means to have an income without working at all. Therefore, it must come from some sort of investment.
How much to invest?
It doesn't matter if you are an stock investor or a business owner. Your goal is always to have some gross annualized return (R) on your invested money (M). The amount of money M you need is
Note: R is represented in decimal form. For example, 5% is 0.05.
If you aim to a gross income of 50k Euro (P=50000) with an annualized return of 4% (R=0.04), you need 1.25 millions Euro.
That's no piece of cake! But now that we know how much money we need to potentially quit our job, it's also relevant to understand how many years are required to get such amount.
How much time do you need?
Let's consider a scenario where you work and save money each year with the goal of accumulating wealth with the assumption that the money you manage to save is invested at the end of each year.
Let's see how this amount compounds over time. For the described scenario, it applies
where A is the annualized invested sum, i.e. the amount of money you'll be able to save at the end of each year. All your saved money are invested once a year with a real net return r (i.e. after taxes and inflation-adjusted), for Y years.
You must wait ~48 years to accumulate (the future equivalent value of what now are) 1.25 millions Euro by saving 1k every month and investing once a year with a real net interest rate of 3% per year.
You must wait ~26 years to accumulate (the future equivalent value of what now are) 1.25 millions Euro by saving 2k every month and investing once a year with a real net interest rate of 5% per year.
A Simple Approximation Formula Based on Heuristics
Achieving a net return of 3% to 5% is not a trivial task, but it is certainly feasible. This is a realistic expectation for an informed and patient investor. However, if you are able to exceed this benchmark, more power to you!
Now, we can either find the reverse formula to compute Y (...BORING!) or simply select some numbers and start increasing Y from 1 until the target is hit. Finally, we can summarize the result in a table like this:
- The target is 1.25 millions EURO
- You are going to save in the range 1k to 3k monthly
- You can invest with an annualized real net return in the range 3% to 5%
Based on the previous tabular data, we can apply a variable substitution and scaling to use a linear approximation. While this approximation may not be exact, it is sufficiently close to the actual values to be useful.
where A' is the monthly savings in thousands (so if you save 1k per month, A' = 1) and r' is your annual return in percent (let's say you have a real net return of 3%, r' = 3).
So what to do next?
It's evident that there's a limit to how effectively we can invest money in the stock market. Investment gains get amplified with larger capital. Therefore, the most efficient way to reach our financial goals as quickly as possible is to follow those steps:
Identify the highest-paying jobs and gather information about the skills and qualifications needed for these roles. You can acquire these through online courses, reading books, or any other method that suits you. If you can't dedicate yourself to this full-time, consider taking up a job to sustain yourself in the meantime.
Once you've acquired the necessary skills, learn how to market yourself effectively to maximize your chances of being selected for these roles. Practical projects and university degrees are often highly valued.
Alternatively, if you have a viable business model in mind, you could consider starting your own business.
It's crucial to save as much money as possible by minimizing your living costs and avoiding unnecessary expenditure.
Acquire knowledge in investing and finance, enabling you to manage your own money when necessary.
Bottom line. The key is to start saving and investing as early as possible, and to increase your income and reduce your expenses as much as you can. By doing so, you can accelerate your wealth accumulation and enjoy the benefits of compounding interest.