How much should I save by 25?

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

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.

Adam Woods

Adam Woods is a physicist. His research interests include building software to run and build geomagnetic models. Adam got interested in personal finance in the great recession when it became obvious an interest was necessary.

After harassing his friends and family (and a short intervention) he took to the web where he blogs about finance, investment, politics, and economics.

Adam is currently located in Boulder, Colorado where he can generally be found hiking, biking, or running a D&D campaign. He can also be contacted at adamwoods137@gmail.com.