Is your net worth at 30 on the right track? We talk about how to figure that out.
First, we talk about elements of net worth. What is important to include? What should you not include. Bridget doesn't include student loans most of the time, while John does. Judging from what they say, you can figure out what makes sense for you.
Why do we focus on net worth and not investments? We take a more holistic approach. There are benefits to savings accounts, owning a home, and other parts of net worth that many financial advisors don't count when they're talking about investment portfolios.
In ACP, or the Alliance of Comprehensive Planners, we call this the "building the foundation" stage of life. You're getting started. There are a lot of financial tasks to tackle.
Ideally, you'll stop living paycheck to paycheck, build up an emergency fund, pay off your credit cards, start contributing to your 401k and maybe saving up to buy a house.
Are you not saving by age 30? Well neither did Bridget! She reveals how much more she would have now if she had saved, and how she views the decision now.
Human capital is another important concept to think through in your 20s. Human capital comes down to your future earning potential. Developing your human capital in your 20s is generally a investment of time because you'll draw on this the rest of your life.
00:00 Welcome
00:31 Basics 01:00 Net worth includes...
02:15 What if you don’t get there by 30?
02:55 Income doubles in your 20s
03:44 What should be doing, financially, in your 20s?
04:45 Where we disagree with conventional wisdom
05:15 Human Capital
07:00 Bridget—I did not save until 29 and a half
Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
Thanks for watching and please subscribe!
TRANSCRIPT:
John: How much money should you have by the time you’re 30 years old? That's going to be our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Subscribe! Please help us out. We need you to subscribe. It helps us get more credibility on YouTube and helps you get notified when we release more episodes.
John: Yeah, that's great. Let's talk about how much money you should have at age 30. It's one of those things to me that you know what your friends have, what kind of cars they drive, all that, but where should you be and how do you know about this stuff? What do you say to people when they ask you about that?
Bridget: Well, when you're starting out, after you've got a job, graduated from college, but before you're 30, I say start trying to get about one times your annual income in net worth. Okay. So net worth includes your savings accounts, it includes your equity in your house or condo, and it includes 401K.
John: So, it's everything.
Bridget: Yeah, exactly.
John: How do you look at things like student loans? Does that count as negative when you think about the net worth? For example, age 28, out of school, I got some student loans, is that a subtraction when you think about it?
Bridget: I personally don't think of it that way.
John: Okay.
Bridget: I don't know. What do you think?
John: Usually I would include it in there, but I think that's one of those things that maybe is a little bit of a squiggly topic. You could choose to include it or not. And don't sweat too much.
Bridget: Don't worry about it too much. And it probably depends on the amount. If you just graduated from law school and you're 28 years old, you're going to be thinking about it a little differently. So, my goal is one times your annual income by the time you're 30.
John: Yeah. That's great. And that's really similar to how I think about it, too. And for the alliance Bridget and I belong to, the Alliance of Comprehensive Planners, one of the sort of fundamentals is building the foundation. Get up to that one times net worth.
And I don't look at this as if it's a hard and fast rule, thinking, “Oh, if I don't get there by 30, I’m screwed. No, this is questions of: “Am I on track for stuff?” You mentioned a lawyer. We've got a client who’s suddenly going to law school now. And Jeez, if you got an extra three years of college, you're probably going to be a little bit behind on that stuff, right? Those sorts of things. There's some flexibility with that.
Bridget: Right. And with attorneys, typically, it's paying out money, getting student loan debts, more money, more money, maybe kind of low paying internship, and then all of a sudden maybe a lot of money. And so, it can be hard to save. Or sometimes in your 20s, your income doubles.
You go from working at a low-level job and then you get a job, and it quickly doubles. So again, that makes it hard. If that happens when you're 29, it's going to be hard to have one times your new annual income in one year. So again, don't sweat that.
John: As we look at it, it's a guideline for things. A question of: “Hey, am I pointing in the right direction? Am I doing the right things?” If you think, “Geez, my income is around one times, but I had four extra years of school and a residency,” or “I changed jobs, but now my income doubled. Of course, I'm not there.” But that’s okay, it’s that sort of the guideline of things. That's what we look at it to sort of judge, “Hey, am I on track with things?”
And the nice thing about being in your 20s from a financial standpoint is that there's still a long runway. We got a long way to go. And so, you don't have to sweat it too much. You have to be thinking about some things, right? You have to be thinking about putting some money in emergency savings and put some money in the bank.
Bridget: Stop paycheck to paycheck living.
John: Yeah, right. Save 10% of your income.
Bridget: Right. Exactly.
John: Put money in your 401K plan, your retirement plan, get the company match. Okay. It doesn’t have to be fancy. It doesn't it have to be a lot, but you start to do those things and by the time you're 26, 28, 30 you go, “Oh, yeah. Net worth should be something approaching 1%. And now we're sort of on track with that.
Bridget: Yeah, and then start saving for a house if you want one, if that's something you're interested in. Some people don't want one, and so don't get one if you don't want one.
John: Right. And that's the thing for me about including net worth. We're not talking about investments yet. Investments are important. And when at some point you're going to live off the investment. But now saving money for a house, buying a house, that's increasing your net worth. The way real estate has been going recently, that's been adding to a lot of net worth, so that all factors into having that great foundation.
Bridget: Right. Exactly. And so, I think a lot of times advisors can overly focus on contributing to your 401K, max it out, et cetera, et cetera. Whereas we take more of a holistic approach. We think that making sure you have adequate emergency funds is really important. That will actually improve the quality of your life.
For example, not living paycheck to paycheck improves the quality of your life. Saving for a house or having a house that makes people feel good, and there can be a lot of meaning there, and it can contribute more to your neighborhood etc. So those items are not to be discounted.
Also, a lot of times when you're in your 20s, there's a concept of human capital, which means that you can be developing your skillset and perhaps your education. So, I know when I was in my 20s, I went and got a master's in Liberal studies, which seemed kind of crazy at the time, but it was something I was really interested in. I had an accounting degree, so I had a technical degree that I could work on.
But then now I can see how that has informed my life a lot and informed my career and helped me a lot along the way. So, I believe that spending money on your human capital and maybe saving less because of that is just fine in your 20s. That's my two cents.
John: And you think about that as an investment, right, where you're investing in yourself and that investment is going to pay dividends for the next 20, 30, 40 years of your life. It's not an expense. It's not buying a Ferrari or something like that, where it's going to go down in value sort of thing. I think the other thing that's interesting, as we talk here, in that holistic view, of course, that's what you and I believe in, and we talk about it with people.
But one of the things about building net worth and focusing on that is paying off debt. What if you have credit card debt? What if you have some of those student loan debts? And as you pay those things off, that's increasing. It's not increasing your portfolio; it's increasing your net worth, and it's increasing your foundation for the future. So paying off debt, yeah, it's not saving money and you need to save, but it's also building the net worth, which is really important.
Bridget: Well, and building that muscle, that saving muscle is important. I would say make sure you start building that muscle. The other thing I want to mention is I did not do this. I did not save money in my 20s. Now I'm 58 now as we're filming this, and I did not save money in my 20s. And I wanted to have 20s fun, which led to things like uncertainty and unemployment.
And I actually had a lot of fun. And I traveled a lot. It was a lot of fun. And I did not save money. And I thought, “I'll save money when I'm 30.” And I actually started when I was 29 and a half because my company had a good 401K plan. And so, I gave in and said, “I'll start saving some money.”
I have recently gone back and tried to figure out how much I missed out on. And I took my Social Security statements and said, “Okay, what if I had saved 10% all these years? After ten years, how much would I have now? And it turned out to be about $300,000, which is not chump change, right? That's not chump change.
John: Right.
Bridget: I would like that money.
John: Yeah, right.
Bridget: That’s just one of the many decisions I made. And the thing is I knew that I would actually start saving money when I was 30, that it wasn't an excuse to not save any money. So that's the thing. And I've looked it up and the average age to start saving money is actually 30.
John: Is that right?
Bridget: But I think sometimes people don't think of saving money for a house or getting a savings account going as saving money…
John: Or paying off debt.
Bridget: Right. Exactly. So, I just want to tell people that if they haven't started saving and they're 29 or they're 29 and they just doubled their income, it's okay. But you have to start saving. You probably need to either save more aggressively or spend less when you're retired or just have less in the future. You'll need to start.
John: Yeah. That's a great segue into maybe another episode about, all right, if by the time you're 30, you want to have net worth around one times your income, what about by the time you're 40? There're ways to catch up and how to do that stuff, so that's maybe a great way to wrap things up. How much money should you have by the time you're 30? Something around one times net worth is a great benchmark to think about.
And the good news, as Bridget just said, if you're not there, there's time, there's things to do. Don't stress. And next time we'll talk about what to do in your 30s and how to think about what you should have by age 40. So with that, I'm John Scherer, and again, I run a fee-only financial planning practice in Middleton, Wisconsin. I'm here with Bridget Sullivan Mermel, who runs a fee-only financial planning practice in Chicago, Illinois.
And as I mentioned before, Bridget and I are both members of the Alliance of Comprehensive Planners, a nationwide group of tax focused, holistic financial planners. And if you like what you hear on our show, check out acplanners.org to find an adviser in your area.
Bridget: And don't forget to subscribe. And with that, thanks for listening and we'll see you next time.
John: Great!
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.