How Much Money Should I Have Before I Turn 40????
<div class="user-question">Hi Frich! This might seem like a random question but --- how much savings should I have by the age of 40???</div>
Hey there! Your question actually is quite a loaded one because everyone's financial situation is different and savings vs net worth are very, very different.
Still, you truly cannot have one without the other. So let's break it down and explore what it means to have savings, net worth, and how to manage your debt by the age of 40.
First, let's clarify some key financial terms:
1️⃣ Cash Savings: This is the money you have readily available in your bank accounts. It's important to have enough cash savings for emergencies or short-term goals. Typically the goal is to have 3 months of salary saved or 3 months worth of expenses saved. If you are more risk averse or have more liabilities (like kids, medical expenses, aging parents, etc.) it's ok to have 6 months cash savings but NEVER put all your money in a savings account.
2️⃣ Net Worth: This is the total value of all your assets (such as cash savings, investments, and real estate) minus your liabilities (debts). It's a broader measure of your overall financial health. How much you have saved (in savings) should never equal your net worth!
3️⃣ Debt: This includes any money you owe, such as student loans (good debt), credit card balances (bad debt), or a mortgage (good debt). Debt can decrease your net worth because it's a liability that must be repaid. However, not all debt is bad and should not be treated equally. Here are some examples of good vs bad debt:
4️⃣ Assets: These are resources you own that have economic value, like cash, investments (stocks, businesses, crypto, etc), and property. Building assets over time is crucial for increasing your net worth.
Keeping this in mind, let’s walk through the different ways you can save money and accumulate investments by the age of 40.
1️⃣ Cash Savings: Experts suggest having three to six months' worth of living expenses saved in an emergency fund.
2️⃣ Invest Wisely: Don't put all your money in a savings account. While it's safe, the interest rates are low. Diversify your investments to grow your wealth over time:
- Stock Market: Consider low-cost index funds or mutual funds for long-term growth. Cherry-picking stocks is going to be very difficult if you don't have the time to do proper research.
<div class="frich-tip">About 20.9% of 40-year-olds invest in the stock market. My opinion? I think 20% is way too low. The earlier you start, the more your money can grow. So I encourage you to start investing now, even though only a small amount of people in your age range do it.</div>
- Retirement Accounts: Contribute to 401(k)s or IRAs for tax benefits and long-term savings. The average balance a 40-year-old has in their retirement accounts is $91,281. This number can differ depending on how high your salary is and if you get a match from your employer (meaning they will deposit the same amount as you into your 401(k)).
<div class="frich-tip">It’s good to max out your 401(k) especially if your employer is also contributing because it’s basically free money. If you have employer matching and you make around $34k a year, I would aim to have 4x-5x your yearly salary which is around ~$120k.</div>
- Real Estate: Owning property can be a good way to build wealth, though it requires significant initial investment and ongoing maintenance. Roughly 60% of 40-year-olds own a property or two. This may be different depending on where you live, but this is an average estimate to give you some comparison.
3️⃣ Managing Debt: Pay off high-interest debts like credit card balances as soon as possible. This will free up more money for savings and investments. The average debt of a 40-year-old is -$61,036.
Now, if you don’t purchase a house you may not have a mortgage and therefore will not have meaningful debt, so keep in mind that debt is a sliding scale.
4️⃣ Net worth: By age 40, aim to have saved at least three times your annual salary in cash savings and investments combined. In your case you'd want to aim to have a net worth of about 34k x 3 = 102k.
Btw - here's how others are doing
The average net worth of a 22-year-old is about -$39,915. That's right, negative! How is this possible? Many 22-year-olds graduate with substantial student debt (this is good debt to have as you can probably get lower rates on this debt and it's an investment in your future).
These factors show how debt can significantly impact your net worth. But there's hope! As you start paying off your debt and building equity in your assets, you'll see your net worth grow as you put more money into savings and retirement accounts.
Typical Net Worth by Age
💰 Average net worth of a 25-year-old: -$23,704
💰 Average net worth of a 30-year-old: -$1,043
💰 Average net worth of a 35-year-old: $25,517
💰 Average net worth of a 40-year-old: $69,761
Top 1% Net Worth by Age Group
If you’re feeling ambitious, let's take a look at the top 1% net worth by age group ⬇️
💰 Ages 18-24: $435,076
💰 Ages 25-29: $606,188
💰 Ages 30-34: $956,944
💰 Ages 35-39: $4,034,486
💰 Ages 40-44: $7,909,636
💰 Ages 45-49: $10,494,100
Remember, everyone's financial journey is unique. The key is to start early, be consistent with your savings and investments, and continually educate yourself about personal finance. By understanding the difference between cash savings, net worth, and debt, and by diversifying your investments, you'll be well on your way to achieving financial stability and success by age 40 and beyond!
xx, Kristina
