Why I Invest

Personally, I invest because I think it's one of the ways to become wealthy. Currently, I'm mainly investing in stocks, and I'll probably invest in other assets if I reach my goals or find better options. So how much money do I need to make from investing in stocks to be considered rich?! Since I don't pay much attention to stock trading because of my robot assistant, I started thinking more about my fundamental goals.

Checking My Expected Net Worth

The book "The Millionaire Next Door" mentions the amount of money based on the wealth equation that can be used as a reference.

Multiply your annual realized pre-tax income from all income sources excluding inherited wealth by your age.
Divide the result by 10.
This number is your expected net worth.

It's a simple but very powerful criterion. If this result is in the top 25%, you are a PAW (person who has accumulated a lot of wealth), and if it is in the bottom 25%, you are a UAW (person who has accumulated less wealth than expected). It's hard to know whether the result is in the top 25% or bottom 25%, but if the result is more than double the expected value, it is within the top 25%, and conversely, if it is less than 0.5 times the expected value, it is within the bottom 25%, and you can judge your current situation. This standard was much higher than I expected, which shocked me, but it was a chance for me to pull myself together.

The definition of net worth is defined as the current asset value minus liabilities. Generally, the house you live in is excluded from assets (including the mortgage debt), so my current net worth is about 0.2 billion won. Most of my assets went into buying a house, resulting in a very meager amount. Calculating this far, I can only see that I'm at the bottom of the UAW. Fortunately, the book doesn't just end with a reality check but also tells you the next step.

How to Increase Your Net Worth

The emphasized method is saving, saving, saving. It says that you can only increase your net worth by saving. Actually, the first thing that came to mind for how to increase your net worth was to increase your realized income. Because if your realized income increases, your expected net worth also increases, it should not be an increase in employment income that is heavily taxed, and you should be wary of excessive spending to maintain the same lifestyle as you earn more. By saving, you can increase your assets for investment and steadily increase them to become wealthy. Unfortunately, this is not a way to become rich immediately. However, through this step, I was able to simulate when I could become rich, how much I needed to save to become rich, and how well I needed to invest.

Let me list the things I assumed.

You have an annual income until you are 65 years old. This condition actually has the effect that the lower your annual income is, the lower your expected value is if an increase in wealth through investment is guaranteed. The book emphasizes that most PAWs didn't have a large annual income, but for increased difficulty, I assumed a 5% increase in annual income up to 100 million won, and a constant income thereafter. (You actually have to work 3 more years to pay off the 30-year mortgage. ㅋㅋㅋ)
You need to generate a 10% annual compound return for 27 years with an initial investment of 100 million won. If your profits are reduced by taxes or you can't achieve the actual rate of return, you have to make up for it with other income to make compounding possible.
Then, your net worth at the age of 60 will be about 640 million won, and you can become rich. However, the PAW mentioned earlier needs to achieve double the expected value, so you can't be a PAW within 65 years with this assumption. You'll need to hang on for another 8 years or so to become a PAW with the same assumption.

While I think the assumption is ridiculous, I started to believe that I could become rich if time passes as it is. Also, if I can make the results of the assumed variables better every moment, I can become rich much faster. Even if you make good investments consistently and achieve a return on investment far higher than 10%, you can accelerate it, and if you increase your annual income and invest most of that income, your investment will become much larger, so you can leverage the compounding effect even more.

As a result, I have identified a few things I need to do to become rich.

I need to create household cash flow by saving.
If all family members agree and work together, we can save more than we do now.
I need to find an investment that can yield over 10% annually for about 30 years.
To do that, I need to study a lot and make mistakes that don't cost me much.
I need to create a structure where I can invest most of my income when I increase it.
Increasing your salary from your main job has limitations in terms of input and output, and it is not a good income structure because you have to pay taxes first.
So, I need to prepare to earn business income.
It won't be easy, but this time I have a clearer goal. I'm going to take action, not just think about it.

Fighting until the day I become rich!!