Are you wondering how much you should have saved by age 25? You've come to the right place as Financial Samurai is the leading independent personal finance website since 2009.
By age 25, you should have saved at least 0.5X your annual expenses. The more the better. In other words, if you spend $50,000 a year, you should have about $25,000 in savings. If you spend $100,000 a year, you should have at least $50,000 in savings.
25 is an age where you should have landed a job in an industry you like. If not, 25 is an age where you are going to or finishing up graduate school for a brighter future.
Your ultimate goal is to achieve a net worth equal to at least 25X your annual expenses by the time you retire. Alternatively, you can also shoot for 20X your annual average income as a retirement net worth figure. In other words, for someone spending $50,000 a year, he should aim to have a net worth of $1.25 million or greater by retirement.
Perhaps even more important than how much savings you should have by age 25 is cherishing your youth. Although you may face a lot of uncertainty and wok may be a real grind, your youth and your health are even more valuable than money. Time goes by quick. Enjoy it will saving responsibly.
Savings Guide By Age 25
If you want to achieve financial independence, you've got to implement an aggressive savings routine. Don't let having a quarter life crisis prevent you from saving as much as possible by age 25 and after.
If you are serious about living life on your own terms, study my recommended savings chart carefully.
Your savings rate should increase the more you make. To do this, you've got to spend at a slower rate than the rate of your income increase.
Let's look at the methodology if you're asking how much savings should I have by age 25. Given I expect you to live long after 25, let's look at how much savings you should have by age as you get older too.
Minimum Savings Recommendation
I recommend everybody start off with 10% and raise their savings amount by 1% each month until it hurts. If you've ever had braces, you get the idea. Keep that savings rate constant until it no longer hurts, and start raising the rate by 1% a month again.
If you make more than $200,000, certainly shoot to save more if you can. You can theoretically achieve a 35%+ savings rate in two short years with this method. The minimum saving rate I recommend is 20%. Otherwise, you're going to find a difficult time achieving financial freedom before age 60.
Please note that I am making 401K and IRA contributions a priority over post-tax savings. The reasons are: 1) we have a tendency to raid our post tax savings, 2) tax free growth, 3) untouchable assets in case of litigation or bankruptcy, and 4) company match.
Obviously you need some post-tax savings to account for true emergencies. Ideally, my goal for everyone is to contribute as much in their pre-tax savings plans as possible and then save another 10-35% after tax.
The maximum 401k contribution for 2024 is $23,000. The maximum pre-tax contribution will probably increase by $500 every two years or so if history is any guidance.
Recommended Expense Coverage Ratio By Age 25
The below chart is an expense coverage ratio chart. It follows someone along a normal path of post college graduation until the typical retirement age of 62-67. I assume a 20-35% consistent after tax savings rate for 40+ years. I also assume a 0-2% yearly increase in principal due to inflation.
The other assumption is that the saver never loses money. The FDIC insures singles for $250,000 and couples for $500,000. Once you breach those amounts, it's only logical to open up another savings account to get another $250,000-$500,000 FDIC guarantee.
Expense Coverage Ratio = Savings / Annual Expenses
Note: Focus on the ratios, not the absolute dollar amount based on a $65,000 annual income. Take the expense coverage ratio and multiply by your current gross income to get an idea of how much you should have saved.
To summarize, here's how much you should have saved by age:
- By age 30: the equivalent of 1.5X your annual salary
- By age 40: 6 times your income
- By age 50: 10 times your income
- By age 60: 15 times your income
Important Note: Obviously no one ever knows what might happen to provide a boost or a drag to their finances. Maybe you get lucky with a great new job offer or invest in the next Apple Computer. Or maybe you get laid off at 40 and can't find work for two years. My chart above merely serves as a savings guideline. Work to build alternative income streams in the meantime.
Savings Discussion By Decade
Your 20s: You're in the accumulation phase of your life. You're looking for a good job that will hopefully pay you a reasonable salary. Not everybody is going to find their dream job right away. In fact, most of you will likely switch jobs several times before settling on something more meaningful.
Maybe you are in debt from student loans or a fancy car. Whatever the case, never forget to save at least 10-25% of your after tax income while working and paying off your debt. If you have the ability to save 10-25% after tax, after 401K and IRA contribution up to company match, even better.
Your 30s: You're still in the accumulation phase, but hopefully you've found what you want to do for a living. Perhaps grad school took you out of the workforce for 1-2 years. Or perhaps you got married and want to stay at home. Whatever the case may be, by the time you are 31, you need to have at least one years worth of living expenses covered.
If you've saved 25% of your after tax income for four years, you will reach one year of coverage. If you saved 50% of your after tax income a year for five years, you will have reached five years of coverage and so forth.
Savings In Your Middle Years
Your 40s: You're beginning to tire of doing the same old thing. Your soul is itching to take a leap of faith. But wait, you've got dependents counting on you to bring home the bacon! What are you going to do?
The fact that you've accumulated 3-10X worth of living expenses in your 40's means that you are coming ever close to being financially free. You've hopefully built up some passive income streams a long the way, and your capital accumulation of 3-10X your annual expenses is also spitting out some income.
Your 50s: You've accumulated 7-13X your annual living expenses as you can see the light at the end of the traditional retirement tunnel! After going through your mid-life crisis of buying a Porsche 911 or 100 pairs of Manolo's, you're back on track to save more than ever before!
You are 100% in tune with your spending habits. Therefore, you raise your savings rate by another 10% to supercharge your final lap.
Savings During Your Golden Years
Your 60s: Congrats! You've accumulated 10-20X+ your annual living expenses and no longer have to work! Maybe your knees don't work either, but that's another matter! Your nut has grown large enough where it's providing you thousands of dollars of income from interest or dividends.
Full Social Security benefits kick in at age 70 now (from 67). Social Security is bonus money since you never expected it to be there when you retired. You're also living debt free since you no longer have a mortgage. Social Security is a bonus of an extra $1,500 a month. You're budgeting a couple thousand a month for health care as you plan to live until 100.
Your 70s and beyond: Sure, you've been spending 65-80% of your annual income every year since you started working. But now it's time to spend 90-100% of all your income to enjoy life! They say the median life expectancy is about 79 for men and 82 for women. Let's just bake in living to 100 just to be safe by taking your nut, and dividing it by 30.
For example, let's say you live off $50,000 on average a year and have accumulated 20X that = $1,000,000. Take $1,000,000 divided by 30 = $33,300. You're getting another $18,000 a year in Social Security. While the $1 million should be throwing off at least $10,000 a year in interest at 1%.
Save As Much As You Can By 25
The only way to reach financial independence is if you save and learn to live within your means. National average money market accounts are yielding a pitiful 0.1%. Meanwhile, pre-pandemic, the average US personal savings rate was under 6%!
Please try and save at least 0.5X your annual salary by 25 and 1.5X your annual salary by 30. If the amount of money you're saving each year doesn't force you to make spending changes, you're not saving enough!
For the money you are comfortable risking, actively invest the rest of your after-tax savings. You can invest in the stock market, bonds, and real estate crowdfunding. Basically anything else that matches your risk tolerance.
If you can save and invest aggressively in your 20s, you'll be able to take advantage of compounding. Over a 20+-year period, you will be surprised by how much wealth you can accumulate.
Investing Is A Must In Your 20s
The point is to gradually expand your savings into investments where you feel most comfortable. Many people, including myself, love real estate because we can see what we are buying.
You've got time on your side. Save early and often. If the amount of money you are saving each month doesn't hurt, you're not saving enough!
For 13 years, I maxed out my 401k and saved an additional 20% – 70% of my after-401k and after-tax income. Then I left Corporate America for good in 2012 at the age of 34 and couldn't be happier.
Even after I left work, I still saved and invested at least 30% of my passive income and online income. Saving aggressively has just been a part of my life.
There's not one day where I regret having left. Freedom is priceless!
Recommendation To Building Wealth By 25 And Beyond
It's important to then track your investments to make sure you're comfortable with your positions. I highly recommend signing up for Empower. It is a free online wealth management tool that let's you easily monitor your finances.
Before Empower, I had to log into eight different systems to track 28 different accounts to manage my finances. Now, I can just log into one place to see how my stock accounts. I can also check how my net worth is progressing and whether my spending is within budget.
One of Empower's best features is their 401K Fee Analyzer. It is now saving me more than $1,700 in portfolio fees I had no idea I was paying. They also have a fantastic Investment Checkup feature that screens your portfolios for risk.
Finally, Empower came out with their incredible Retirement Planning Calculator. It uses your securely linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes. Definitely check to see how your finances are shaping up as it's free.
Please enjoy your 20s! While you do, don't forget to continue saving and investing aggressively so that you can one day be truly free.
Build Wealth Through Real Estate
Real estate is a core asset class that has proven to build long-term wealth for Americans. Real estate is also a tangible asset that provides utility and a steady stream of income. However, without parental help, it's difficult to buy a single family home or a condominium by age 25.
Therefore, take a look at my favorite real estate crowdfunding platform for younger investors: Fundrise.
Fundrise is a way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most 25-year-olds and under, Fundrise one solution for investing in real estate and earning passive income.
I've personally invested $953,000 in real estate crowdfunding. My goal is to take advantage of lower valuations in the heartland of America.
My real estate investments account for roughly 50% of my current passive income of ~$300,000. Real estate is what helped meet build a $1 million net worth by 30. Please don't waste your mid-20s. Now is the time to save and invest aggressively for your future. Give yourself the gift of compound returns to make a greater fortune in the future.