Personal finance experts outline certain benchmarks for your net worth at each age. As you know now, reaching F.I.R.E. is a numbers game. The basic rule of thumb is to eventually save and invest 20-25 times your annual salary in order to generate that income using the 4% rule withdrawal rate. Now, at 25 years old with only a couple years of formal work behind you, you would probably have a low net worth. At this age it’s best to get the basics right. Work on tackling the school debt, sticking to a budget and beginning the automatic investment contributions.
Hopefully by 35 you would begin to see some gains and many experts say you would want a net worth of $40k and more if possible.
But here is a fun game to try if you are in your 40’s. Try to get your net worth to equal or exceed what you have earned to that point. It could look something like this:
From 22-30 you earned about $45k/year
From 31-35 you earned about $60k/year
From 36-42 you earned about $75k/year
So over the course of your working career thus far you had earned an approximate total of about gross $1,050,000. Now take off about 15-20% for taxes, the inevitable! So you made about $850,000 over the first 20 years of work.
The game I’m proposing is try to have accumulated a net worth close to this number so in a funny way you kept all the money you ever earned. Let me walk you through a possibility:
– If you contributed 15% or more of your pay from day one. With a 5% match, 7% return and compound interest, a person could have over $500,000 after 20 years.
– Let’s say in year 5 you purchased the median cost home of about $200,000. If the house appreciated at 3% per year over 15 years, the value would be about $300,000 with about $150,000 left on the mortgage note. That would equal about $150,000 in home equity.
– Let’s say you had saved an additional $40,000 in an emergency fund, had a car worth $15,000 and collectibles worth $5,000.
If you kept other debts under control, by age 42 you could have an approximate net worth of $710,000! Pretty darn impressive for making a total of $850,000 over those years. It would be ideal if the net worth equaled the money earned or even exceeded it, but we are making conservative estimates to be realistic.
As you can see this is a fun numbers game and actually in the realm of the possible for many people. I’m not saying this would be easy, especially in world of temptation and easy debt, but it is possible on a median income that many people can achieve.
Play your own numbers game and see how you stack up compared to how much you have earned over the years. This could be a good indication of whether your on track or need to ramp up the savings!