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There is no one-size-fits-all rule for how much money you should have saved by each age. However, there are some general guidelines to determine what you should have saved and when based off of your financial goals. To determine how much money you should have saved by 25, follow the guidelines below.
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How Much Money Should I Have Saved by 25
The real answer to the question, “how much money should I have saved by 25?” depends on you and your financial goals.
Do you want to start a small business?
Maybe pay off all of your debt?
Or even retire early?
Once you know what your financial goals are and when you’d like to achieve them, you need to determine how much money you ultimately need by that date.
Then, you can work backwards to determine how much you need by each age to be tracking towards your goals.
For example, if your goal is to start a small business at 28 and know that the startup cost is $150,000, then you can perform a quick calculation.
By dividing the total by the amount of time you have left, you get rough idea of how much you should be saving each year.
In this scenario, over a short time frame, you’ll probably need to have somewhere between $37,500 – $50,000 at age 25 to ensure you’re tracking towards your goal.
You can calculate how much you need by each age using the same strategy listed above for short-term goals.
For long-term goals, you can use this handy compound interest calculator from Bankrate.
To calculate how much you should have saved by a certain age for a long-term goal using the Bankrate calculator, you’ll need the following information:
- the money you have saved now
- how long until you need the money (i.e. 3 years for the example above, it could be 20-30 years for retirement)
- an estimated rate of return
- how much you plan on saving each year (additional contributions).
Assuming the other variables don’t change, you can keep changing the additional contributions box until you reach the balance needed by the end of your saving period.
How Much Money Should You Have Saved by 25 for Retirement
One common answer to the question, “how much money should I have saved by age” has been created by Fidelity Investments and can be found here: How much do i need to retire? This answer is specifically for retirement and, unfortunately, doesn’t take into account other financial goals or when you start working.
They don’t specifically recommend a certain amount by age 25, but do recommend that you start saving money for retirement no later than 25.
The 25x Expenses Rule
The 25x expenses rule for retirement is a good rule of thumb used by the early retirement community and is based on the 4% safe withdrawal rate rule.
The 4% safe withdrawal rate rule states (assuming the stock market and economy behave similarly than they have in the past) that you can withdraw 4% of your principal balance each year and never run out of money in your retirement account.
For more information, please read: How Much of Your Salary Should You Save?
To use the 25x expenses rule for retirement, you simply look at how much you spend now annually and project how much you anticipate spending in retirement annually. Then you multiply that projected expenses in retirement by 25 to determine the ultimate amount you’ll need to retire.
Once you know the ultimate amount and have a general idea of when you’d like to retire you can create a spreadsheet that utilizes this information along with an estimated interest rate for compounding and anticipated contributions. Bankrate has a great calculator you can use for free.
For reference, the average annual return on the stock market from 1926 to 2018 is approximately 10%. The average annual return for the S&P 500 is approximately 8% (from 1957 – 2018).
Using the 25x Expenses Rule
For example, let’s say you anticipate spending $50,000/year in retirement. In this scenario, you’ll need $1,250,000 to retire.
Let’s say you’re 23, have $5,000 already saved and invested for retirement. You hope to retire by 50.
To determine a required annual contribution, you would simply input this information and try different annual contributions until it met the $1,250,000.
This would tell you how much you should be saving each year to keep up and how much you should have by 25.
For this example, I used 8% as the rate of return and it ends up requiring an annual contribution of approximately $13,000 and you should have approximately $35,000 saved by 25.
Set Short Term Goals to Stay on Track
Once you’ve determined your ultimate financial goals and how much you should be saving each year, break your goals down into short-term monthly and weekly goals.
Setting smaller goals and sticking to them creates good habits and makes it much easier to achieve your goals. For instance, saving a little money weekly is much easier than having to come up with a lump sum payment at the end of the year.
For example, let’s say you determine that you should be saving at least $15,000/year to achieve your financial goals.
The easiest way to tackle this goal is to break it down to goals associated with your pay frequency.
For this example, let’s say you are paid weekly. Your weekly goal will be to save approximately $289/week.
That sounds a lot easier than $15,000 all at once at the end of the year!
Don’t Forget About Your Emergency Fund
Something that you need to consider when determining how much to have saved by each age is an emergency fund. You need to establish an emergency fund as early as possible to protect yourself from events like job loss, major medical events, etc.
To learn more, please read: Emergency Fund Guide: What, Why & How Much Money to Save
Use Automatic Transfers When Possible
If possible, set up automatic transfers for your saving that come out of your paycheck before anything else does.
Also, put the money in a separate account that isn’t as easy to access as your normal checking or saving accounts.
This will force you to live on less as you’ll physically have less money to spend.
Utilize Tax Advantaged Accounts
If you can, try to save and invest in tax-advantaged products like a 401k, IRA, 457b, 529, HSA, etc.
This will make your savings go further as your money will grow tax-free as long as it’s in the account.
You don’t pay taxes until you start taking distributions at retirement.
For Roth accounts, it’s the opposite. You’ll pay taxes up front, but won’t be required to pay taxes when you start taking distributions.
Take Advantage of Free Money
If your employer offers a free match to your retirement account (usually a 401k), take advantage of this up to the match prior to saving for any other tax advantage accounts.
Invest Early and Often
Make sure to invest the money you’re saving for your long-term goals. Preferably invest in vehicles that have historically outpaced inflation like real estate and the stock market.
For your short-term goals, use liquid accounts like high yield saving or money market accounts. This will allow you to both earn a little money to combat inflation and give you the ability to cash out quickly when you need it.
Pay Off Debt as Early as Possible
Debt will hold a portion of your paycheck hostage until you pay it off.
Mathematically, paying down the debt with the highest interest first will get you ahead the fastest.
Either way works to accomplish the end goal. Do whatever motivates you and keeps you excited towards achieving your goals.
As Dave has taught people over the years, just because something makes sense analytically, it doesn’t necessarily mean it’s the most effective. Psychology plays a big role in how successful we are financially.
For help determining whether you should pay off debt or save, please read: Is It Best to Pay Off Debt or Save?
Save as Much as Possible and Do the Best You Can
Ultimately, you should be saving as much money as possible because it will only allow you to achieve your financial goals that much faster.
On the flip side, if you are struggling to meet your financial goals based on the short-term goals you’ve set for yourself, don’t beat yourself up.
Continue to do everything you can to reach your goals, but don’t let it discourage you and definitely don’t give up.
Every little bit will add up over time.
How Much Money Should I Have Saved by 25 – Conclusion
If you are in your 20s and you’re reading this blog post, you are already ahead of most people your age.
If you have student loans or other debt, you should pay this off first before saving a small amount for a starter emergency fund.
Next, you should be saving for a larger emergency fund, retirement, and a home if that’s one of your financial goals.
Invest as early as possible in tax advantaged accounts and in investment vehicles that outpace (preferably significantly) inflation.
Finally, do the best you can and before you know it, you’ll have reached your financial goals!
Do you have any tips for people just starting out saving money?