The Ultimate Guide to Making Money

How much savings should you have at age 25, 35, and 45?

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Sri writes:

How does one know that he/she is doing great in terms of savings? Is there a magic number?

For example:
Age 35, single Savings: > US$100K = great
Age 35, single Savings: > US$200K = outstanding
Age 25, married, savings <10K = poor

My response to him:

Nope, no magic number. There are guidelines and comparisons like this and this–both are very good links that show you how others are doing), but if you’re reading iwillteachyoutoberich, they’re basically meaningless because (1) most people don’t know what they’re doing–do you want to benchmark against that?, and (2) it really all depends on your goals.

If you want to be a multi-millionaire by age 40—or better yet, you have some specific goals like “I want to start a foundation and give away 5% of my wealth every year” or “I want to take a 3-month vacation every year and travel with my kids”—you can plan for them. But if you just want to be better than everyone else in your same age bracket, you’re asking for trouble. It’s a never-ending cycle of keeping up with others…really for no good reason.

There is actually some pretty good data on this question, but I need to go to the library to find it. (Some of the best online data is where the Fed does a survey of consumer finances every 3 years and posts it in PDF here. I printed it out but, man, there are a lot of numbers. Actually, heh, it’s for households and doesn’t break out data for young people). I’ll dig up the data and post sometime when I get around to it.

Send me your questions any time by email.

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21 Comments

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  1. The book “The Millionaire Next Door” uses the formula of Annual Income * Age / 10 as what they call “expected” net worth. They call people who greatly exceed this formula “wealthy”.

  2. Hi Ramit, my husband and I have pondered this issue would love for you to post any data you find on your blog.

  3. That number indeed is going to be different for everyone, factoring in lifestyle and expectations.

    I’d say save early, save often, make it a priority, watch it grow exponentially through time, and by the age of 40 if you did those things you likely will be very surprised with whatever your number is.

  4. This part: ” (1) most people don’t know what they’re doing–do you want to benchmark against that?” had me laughing out loud, but it’s also true. Good response.

  5. Thanks Ramit for answering this question. I found the answer in one of the links that you provided above.

    This is in no way trying to keep up with the Jones’s. Think of this more as a way of SAT scores or any other standardized exams where you want to know where you currently stand.

    I think many things we do in life are compared to data.

    For example, the salary we earn….the quality of university we go to…..Our credit ratings…

    So I think its good to know what milestone we are at our current savings.

  6. I use the Millionaire Next Door formula that Jeremy referred to.

    For new grads, this puts them behind in wealth accumulation (because they’re lucky to graduate with a net worth of zero) but it also provides an incentive to “catch up” before the big expenses (kids, mortgage, etc) come.

  7. The Millionaire Next Door formula (MNDF) seems to say you are not saving much if you happen to be getting good raises and moving up in the world.

    Even if you do save a lot of money young, if you end up on a big salary you are then made relatively “poor”. On the other hand, if I save up a bit of cash, and then quit my job and get a minimum wage position, then you become relatively “rich”. Does that make sense to the rest of you? I think you need to measure it in terms of the cost of your lifestyle. I.e. if you have savings that meet the cost of your living for several years, then you must be fairly wealthy.

    Consider this, if I had 20x my annual cost of living saved up, and earned 5% interest (maybe a bit more to meet inflation) then I wouldn’t need to work a day more in my life.

  8. Savings relative to income doesn’t make sense as a measure; income relative to expenses does. As your income from savings approaches your expenses then you are reaching excape velocity (financial freedom as R Kiyosaki says).

    A student with 200K in the bank who like KD is closer to being free than a doctor with 500K, two houses, three cars, a boat, and enjoys fine dining.

  9. I like the idea of basing your success against a goal rather than against a magic formula. If you start comparing your achievements against a formula you might be doing well but if you compare to your goals you’ll see where you stand, you’ll know how much more you have left before you get to where you’re going. But when it comes to a formula it might be either too aggressive or not aggressive enough for your goals.

  10. First you have to get one thing clear – the difference between saving and investing. Savings is short-term, investing is for the long-term. The amount you invest should be reletive to your income. But Transcendental Success is right in that savings should be reletive to your expenses. 3-6 months expenses in a simple money market account will give you the ability to weather most any storm.

    Besides savings or investments is not how you measure success (assuming all you look at is numbers). Net worth is how you do that. What you own minus what you owe.

  11. Gregg, you bring up an interesting point but I would counter it by saying that investment skills should be improving as quickly as employment skills. Throw in compounding, and yes, the more income I have, the higher my expected net worth.

    Sure, it makes more sense to base the calc on expenses but honestly, what hurts the most psyche wise is that difference in income.

  12. I disagree, I don’t think it makes any sense to base it on your expenses. Obviously you need to keep those low, but looking at your overall net worth, and factoring it for your age takes into account both your income minus expenses and also the amount of time you may have been in the workforce (though by a very rough estimate). But, the point is that it takes the value of compounding over time into account.

  13. The amount of time you have been in the workforce has no bearing on your savings or investment requirements — although certainly it has bearing on your ability to save.

    Design your ideal world. Your expenses in that world tell you exactly how much income you need from all sources. Depending what you are doing in that world tells you how much you need to be paid by your job or if you don’t have one, how much you need to be making from your investments. Work backwards from there until today and you can measure yourself.
    Measuring yourself against all the other morons in the world just makes a mediocre person feel good.

  14. “but looking at your overall net worth, and factoring it for your age takes into account both your income minus expenses and also the amount of time you may have been in the workforce”

    Lets clarify here. Income minus expenses is not the same as own minus owe. Own: add up everything you own – house, cars, cash, items of value. Owe: add up all of your debts – mortgage, car loans, student loans, personal loans, 2nd mortgage, credit card debts… you get it. Now subtract the two. Thats it. Done. Income and expenses are not in there. Time in the workforce doesn’t matter, and neither does what your broke neighbor is doing. The MND method for reviewing your expected net worth is fine, but thats not a substitution for the actual calculation.

  15. To Alexandra on response on number 2.

    The website at cnn has some great calculators on how long it will take you and your husband to become a millionarie if you save and invest.

    If you go to http://www.cnn.com, clink on theBusiness section, then click on Real Estate, you will find a heading for calculators.

    They are all fun to play with.

    Of course, if you had started with Google as a private company, you will a multimillionarie by now.

  16. “Most people don’t know what they’re doing” — precisely the reason for various benchmarks and comparisons. The more you don’t want to work when you’re ‘old’, the more planning you will do to escape early. What financial freedom essentially provides is choice. You can choose to be generous in your giving, choose to vacation with your family, and choose the lifestyle which suits you. I don’t this all this necessarily means gucci/prada/porsche. But it does mean living below your means and saving while you’re ‘young.’ Nice Blog.

  17. Sure, benchmarks are nice, but you have to look at the bigger picture – “What do you want out of your life?”

    Punching numbers into calculators can give you a figure, but what does that figure mean? Do you want to retire at 40, 50, 60? Do you want to travel, do you want to buy a bigger house, or move into a smaller house. In general, you need to determine what kind of lifestyle you want to live. Forget “keeping up with the Jonses,” instead assess what YOU want out of life. From there you work backwards using the formulas that are available to come up with a figure so that you can start planning out how much you will invest for your retirement on a monthly basis.

  18. While I like comparing my situation to others every now and then, it seems that the most important measure of whether someone is on track with their net worth is whether they have identified the number they’ll need at some point in their future (most often retirement) and then calculate that back to see what they will have had to amass at any particular age.

  19. >>

    This is crap…my husband and I both make a good living and have 1 child. Using the formula, we should have $500,000 saved ($188k + $312k) at our ripe old age of 35. Where I live, a nice 2500sf 4bdrm home costs $200k and a “good” salary for an individual is $50k. You do the math but there’s no way anyone our age with our incomes could have that much saved already and not live in a cardboard box.

  20. Live for the day brothers / sisters dont buy in to he commerical system, that why we are where we are!!! have enough to be happy, after all happiness is what life is about not pension funds.

  21. You don’t have to “buy into the commercial system” to recognize and understand it’s power over everyday life and plan for the future. Maybe you can be happy living only in today, but most people need some sense of security about tomorrow. Proper financial planning can provide that sense of security, but then I guess so can good drugs, religion, self-delusion, etc.