We receive the following question quite a bit
“How much should I make and how much should I be worth by age X”
First lets start with income and second move on to your net worth. Before we jump into what we believe is “a good goal” we’re going to start with a philosophical backdrop.
Income to Obtain Happiness: Nowadays everyone is citing a study that claims the following: Happiness flat-lines after $70K a year. From experience, this is entirely false. There are a few people who will not see an increase in happiness after they clear this figure however, lets go ahead and use the following as a high level view of income derived happiness.
“Income derived happiness occurs when you no longer feel the need to chase income”
What does this mean? As soon as you reach $X per month, incremental income will only come when you personally feel the need to work harder. For some this might be $2K a month and for others $20K a month. We recommend a life of minimalism so we view the $20K marker as extreme. That is not up to us. It is up to you to determine a level that makes you content.
Net worth Derived Happiness: Once you have locked into your monthly income that derives the most happiness, the final goal is to have a net worth that supports this income. If you’re an extremely ambitious person with a lot of talent, your annual income to derive maximum happiness will likely be high. As high as $200,000+. (@financialsamura)
It will be quite difficult to run up to this number in a short period of time so we breakout net worth derived happiness as follows:
Level 1: Replacement of Utilities and miscellaneous expenses
Level 2: Replacement of Utilities + Miscellaneous + Food expense
Level 3: Replacement of Rent and Utilities
Level 4: Replacement of Rent and Food
Level 5: Replacement of Rent + Food + Utilties
Level 6: Replacement of Rent + Food + Utilities + Entertainment
With the philosophical overview out of the way, you find that a lot of the numbers will depend on your lifestyle. Some people will splurge on cars and jewellery; others may splurge on international travel. Again. The choice is up to you. However… We have received this question many times so we are going to go ahead and put cold hard numbers on the screen at this point.
Lets start with income.
How much should I make?: For both income and net worth, you should take into account your current age and where you live. Please note that our opinion is heavily biased towards large metropolitan cities.
Age 22-25: If you’ve made intelligent decisions while you were in college we are going to peg the number at $80K per year. If you can average an income of $80K, this is roughly $4,200 after tax on a monthly basis and you have the opportunity to save ~$1,200 a month. Since you are making smart decisions, you’re making a lot of money for your age. The career you choose will likely see income acceleration at a young age. A good proxy? ($60K, $80K, $100K+). A good employee will get a relatively large bump once he is promoted 3-4 years on the job.
Age 26-30: Running off of the same assumption, when you get into your mid to late twenties the expected increase is quite large. You followed the rules appropriately and now make quite a bit more on an annual basis. We will go ahead and ear mark $160K+ as a sizable increase at this age. This is a large jump. We expect your income to doubleover the course of 5 years as you built out other streams of income, invested wisely and continued to pay close attention to your career.
Age 31-35: You’re hitting your stride now. You’ve got a good handle of your niche, you’re not as worried about running on all cylinders and you’re in cost cutting and alternative investment mode to keep your brain sharp. At this point if you’re in the ~$250K ballpark, we say you’re doing well for yourself.
Age 35-40: At this point we’re going to give you some good luck, you are able to make that last jump to a heavy revenue generation role. You’re not working anywhere near as hard as you did in your 20s but each hour counts. You’re clearing $325K+ per year.
Age 40+: Generally speaking, at 40+ your income has peaked. There are always exceptions and we hope you’re one of them. With that said we’ll say anything above $350K and you’re coasting.
So there you have it. For an astute reader the message is clear: “Learn in your twenties to earn in your thirties”. To obtain these marks you need to start off on the best foot possible, this means prioritizing your life over what everyone else is doing… Drinking and partying 4 days a week. You can still have fun and we guarantee you, if you’re on the path laid out above, you’ll be sitting pretty without a care in the world by 32-34 years of age.
Before we move on, for those that are interested in how we determined the ear marks we simply estimated the top 5% in terms of income within a major city (it is estimated to be between $275-400K and we took a number slightly above the mid-point).
How much should I be worth? Now the fun stuff. Anyone who has ever accumulated a large hoard of cash knows one thing. Life is not about how much income you have, it is about how many assets you own that produce income. If you had to choose between a $250K a year job or a set of assets that produce $4K per month in guaranteed returns…
You run, no you SPRINT, straight to the assets.
Lets go ahead and break down your networth (ie: income producing assets) into buckets as well.
Age 25:Assuming you played your cards right in college, you’re going to be debt free before you’re 24. Even with debt payments you should have maxed out your 401K (free money from the match and $17K total). With this in mind, you can accumulate at least $60K in total net worth by the time you are 25.
Age 30:At this age, you’re still burning the candle at both ends. Everyone thinks you’re a bit too high strung. This is perfect, because you are actually maximizing your social time and no longer feel stressed out. In fact, you feel relaxed at work and have a wonderful social life, even though people assume you’re unhappy. They couldn’t be more wrong. While they make these incorrect assumptions, you’re throwing 50%+ of your income into assets. $80K+ per year gets you to ~$400K by 30. Everyone else is getting married, buying cars and spending. You’re reinvesting and clearing out 2 days a week for fun.
Age 35:You’re feeling comfortable at this point. Once you get to ~$500K in net worth, you realize you can survive 10+ years unemployed… If needed. You will spend more of your raise (not all of it) on entertainment, travel or hobbies (golf is quite popular). While your income likely rose by ~$50-70K, you’re going to continue saving $80-100K a year. You are smart enough to realize life is short, so you can spend your time having more fun in your mid 30s as your value as a man is quite high. By the end of this your net worth can range from as low as $500K to as high as $1.0M+
Age 40:Why are you reading this? You’re a millionaire, you can do what you want at this point.
Concluding Remarks: For those of you that are highly motivated (we’re looking at you direct hires to Hedge Funds) these numbers are likely low. Finally, no matter who you are we believe there are still many ways to obtain these net worth figures. You need to put in the time.
