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saving money, saving money advice, saving goals

How much should I save by 25?

The answer here is obvious. It depends, or variously as much as you can.

grumpy

Alright.  Probably what you care about is how much your peers have saved by this point? Well according to the US census bureau the median person between the ages of 25-34 has $6,676, in Net Worth.  This is possibly due to a significant amount of student debt overhang.  The problem with this is that the number is either too low or too high depending on the context of your individual situation.

Let’s say you graduated with a high school diploma and skipped college going straight to work.  That gives you roughly 7 working years by the time you are 25.  If you obtain a job making roughly $12 per hour, or ~$24,000 annually you need to save roughly 20% of that (~$4,800).  Over 7 years that adds up to $33,600.  You don’t have any reason to have student debt, a car payment, etc so that should leave you with a net worth of $33,600.  If you’ve been clever with your retirement accounts the way taxes work could have netted you an additional $1,000 per year, putting you at $40,000.  If the money has been invested over the last seven years in an S&P 500 index fund then you should have something more like $55,000, so that’s your answer.  You should have $55,000.

If you went to college and ended up with the median student debt of $15,500 and the median income of $50,000 you’ll wake up 22 with a net worth of -$15,500 and the interest clock ticking.  Fortunately you should be able to pay that off in two years saving about $10,000 per year.  The amount of debt interest adds at this point isn’t super significant for small payoff periods (like a few years).  You should end up 24 with between $2,000 and $4,000 of net worth and no debt.  That just leaves one year to catch up to the high-school diploma, but you won’t, you save only $10,000 this year.  You should have $13,000, adjusted by whatever your student debt actually was.  

Interesting point, it’s actually a little hard for the dude with the college degree to catch up with the high school degree dude. Assuming that each of your investments earn 10% in the future and you each save 20% of your income, high-school dude saves about $5000 and earns another $5000 from investments for a total of $10,000 being added to his net worth annually.  College guy saves about $10,000, but is only earning $1,300 from his investments, adding $11,300 to his net worth annually.  Sure, college guy catches high-school dude eventually, but it’s sure harder than you’d think.  

If high school dude had saved just a little bit more, or had an extra year of work college guy might never have caught him. Investment earnings matter!

How do you make sure you do all of this saving and investing sensibly?  Well, first off you’ll want a Roth IRA (contribution limit currently $5,500).  High school dude has been almost maxing his for the last 7 years.  College guy just got started, and needs to also be putting the money in a 401k. Now these are generally accepted guidelines to retire at 65 and they also depend on investment returns in the future looking a lot like the investment returns of the past.  That may or may not be true, adjust your savings accordingly.

brokeGIRLrich

6 thoughts on “How much should I save by 25?”

  1. Hi Adam,

    Great article! I, myself, am a 26 year-old former “College Gal” with a net worth over $100K. I will be the first to say that the vast majority of my peers are not in the same boat (in fact, several of my friends are still in negative net worth territory four years after graduating), but I took a few key steps that put me well above where I would have been had I not pursued an undergraduate degree. I took a semester off from school to work full time, worked my tail off while school was in session, lived well below my means, and paid off all of my loans the week that I graduated. Over the course of the two years following graduation, I paid cash for a car and purchased a condo so that I could stop throwing money away on rent. I truly believe that those three actions (paying off debt, buying a car outright, and purchasing a reasonably-priced residence) are steps that can be taken by any recent college graduate that will give them an above-average net worth quicker than they would expect.

    Cheers!
    Natalie

  2. Mel @ brokeGIRLrich

    Love this – and love how you point out that a college degree is not necessarily the end all be all!

    1. That’s absolutely true. Getting a college degree is *generally* a really good investment, but it isn’t for everyone, and it is definitely possible to come out *far* ahead economically and in life satisfaction without a college degree.

  3. Well, I’m way behind, lol. The bulk of my debt is student loan debt from my MBA, which I don’t regret at all, thankfully. However, it means it’ll be a while before we even hit net worth 0.

    1. An MBA can absolutely be worth it. The key is saving the extra money that mba earns you. Frankly degrees can be some of the best investments. The reason why they don’t appear to be as no-brainery in our example is that we assume that the savings rate is the same.

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