How much money should you have at your age? (This could hurt)
People don’t often talk about how much money they have. It’s just not something that’s shared during dinner conversations or at lunch with co-workers.
So, it’s really hard to know how well you’re doing because there’s no benchmark. Also, everyone makes and spends different amounts, so it’s hard to compare.
But many people want to know two things: The first is: “How am I doing money-wise?” (It’s sort of like your GPA in college, a yard stick to measure yourself against).
The other question people have is, “Will I have enough for retirement?”
With this in mind, here’s a breakdown of how much money you should aim to have at your age. Please note, there are a few assumptions here: it counts on the fact that you had continuous income throughout your working life, uniform wage growth, and it assumes your life expectancy. OK, enough preamble, here we go:
You should aim to have 10 times your final salary in savings at 67.1
Now let’s back that bus up and show you what it means for different ages:
In your 20s:
Your main goal in your 20’s is just getting your net worth to a positive number.
You want to have your yearly salary saved. So, if you’re making $50,000, you should have $50,000 in the bank.
You should have 3 times your yearly salary saved up. (Another way to look at this is by net worth which is what’s left over when you subtract the amount you owe from the value of what you own. By age 40 you should aim for somewhere between $150,000 and $250,000).
You should have 6 times your yearly salary saved up. Or by way of net worth, this would look like $500,000 to $750,000.
You should strive to have 8 times your yearly salary saved up. Again, if measuring by net worth, you’re aiming for $1M+.
You should have 10 times your yearly salary saved up.
Falling Short? You’re Not Alone
Don’t get fired up if you don’t have these amounts, because according to a report from the Economic Policy Institute2, most people have only saved $95,776. (The median has only saved $5,000).3
Knowing how much wealth you personally need to accumulate in order to live comfortably is far more important than knowing what everyone else has.
How to Save More
But if you are motivated to save more money, here are a few ways to do it. It’s not how much you make that counts. But how you spend, save and invest it. We all have choices. Spending less earlier and saving it may mean having more to spend later.
1.) Live big in a small house.
A smaller house means smaller payments, lower taxes, lower utility and maintenance expenses. Plus, as you get older and the kids move out, you use less room anyway. Consider limiting your housing expenses to no more than 25% of your after tax pay on mortgage, tax, and home insurance. (Yes, lenders will gladly lend higher than that. While the underwriter’s rule is 28% of gross income, it is not uncommon to get loans approved at 35% or more of your gross income).
2.) Don’t go car crazy.
Americans love their metal. The shinier the better. But think about this: New Audi = $45,000. Certified Pre-owned Honda = $20,000. That $25,000 difference invested at 7% over 30 years is $190,000 come retirement. Just saying.4
3.) Don’t put spending on autopilot.
It’s the little things each day that add up. Restaurants, unused gym memberships, movie channels, etc. One way to control spending is to write out your expenses for one month. What can you do without? You can also use an app like mint.com to help. For example, set a monthly budget for amazon.com purchases, and mint will let you know when you’re going over.
Remember that net worth does not equal cash on hand. I prefer the that the bulk of your wealth be in liquid financial assets like cash and stocks. Investments that will generate passive income through interest and dividends is far superior to tying your wealth up in a less liquid, income-draining asset, such as a house.
It can be difficult to know how much money you’re “supposed” to have. And sometimes, it can be a little depressing to find out. But whatever number you’re reaching for, there are ways to help you get there. It may take serious discipline and some tweaks to your spending habits, but it can happen.
The choices we make with our money are flexible and individual, and that’s how they should stay. But the most important thing is to be aware of how they impact our long-term financial goals — by being aware of just how expensive they are in the context of our lifetime earning and spending.