Have you ever thought about how your wealth or income stack up to others your age?
It’s natural to want to compare nest eggs and to wonder how much the wealthiest of the wealthiest in our age groups earn, right? Well, we’ve got the answers!
We’re going to talk about how much money you need to earn in order to be in the top 1% for your age.
Net Worth Defined
Let’s start by talking about what net worth really means. You might think that your net worth is defined by how much money is in your bank account, how much money your house and car are worth, or how much money you have invested in stocks. All of these are partially right, but they leave out one annoying (but important) detail: debt. To calculate your net worth, use the following equation:
Net Worth = Total Assets – Total Debt
Unfortunately, your debt can seriously change your net worth. For example, you might own a house that’s worth $300,000. But if you still owe the bank $250,000 on your mortgage, you have to subtract that number out, which means that’s only $50,000 going towards your net worth.
When you calculate your total assets, take into account the total value of everything you own. That means checking accounts, savings accounts, investments, real estate, cars, cash, jewelry, and even household items that still hold any value. When calculating debt, think about student loans, car loans, mortgages, personal loans, and any other money you owe the bank, a business, or another person.
Now, before we talk about how high your net worth has to be for you to be in the top 1% of your age group, let’s talk about HOW these top one-percenters got there…and what you can do to increase your net worth as well!
Here are some of the most important tips that will increase your net worth exponentially over time.
Make a Budget
This is step one. You won’t be able to build the retirement fund you want if you don’t know how much you’re earning, spending, and saving! Ideally, you want to be saving at least 20% of your income and putting it towards retirement. We highly recommend the 50/20/30 rule, which states that your essential expenses (rent, gas, insurance, etc.) should add up to no more than 50% of your income. Then, you should put 20% towards savings (emergency fund, Roth IRA, 401(k), etc.), and the remaining 30% is for your personal use.
If you’ve taken a look at your earnings and spending habits and noticed that your expenses seem to be too high for your income, it may be time to make some tough decisions. Is your rent alone more than 50% of your income? It might be time to downsize to a smaller living space and take on a roommate. Are your personal expenses looking way out of proportion? It might be time to cancel some entertainment subscriptions, start making your morning coffee at home, or going out to eat less. Do you have your expenses in check but they still seem to be too high for your income? You might want to consider getting a second job or running a side hustle to pull in some extra cash.
Open a Roth IRA
Now that you’re saving 20% of your income, it’s time to do something useful with it! A Roth IRA is one of the most valuable tools a young investor can have in their tool belt. The magic of the Roth IRA happens due to the fact that you’re allowed to make your contributions with after-tax dollars. You make your contributions without the tax deduction you get when you contribute to a traditional IRA, and then your money is allowed to grow completely tax-free. That’s right; you pay absolutely no taxes on the money in your Roth IRA when you withdraw it in retirement.
The Roth IRA makes perfect sense for young individuals who plan on being in a higher tax bracket in retirement than the one they’re in now. That way, you can pay your taxes now while your tax bracket is still lower and not have to worry about it when you retire! It’s very important that you open your Roth IRA as soon as possible; you can only contribute $6000 a year to it and there are also restrictions that prevent you from contributing once your income reaches a certain level.
Invest in Index Funds
Now that you’ve got yourself a Roth IRA, it’s time to decide what exactly you want to invest in! If you don’t have the time, experience, or interest necessary to pick individual investments for yourself, we highly recommend investing in index funds. Index funds are the cheaper, quicker, and more easily accessible cousin of the typical mutual fund. Instead of being expensive, actively-managed funds that you can only trade at certain times, index funds are managed passively and are often traded on the market like regular stocks in ETF form. These funds are tied to a specific benchmark index and they aim to mimic or “track” this benchmark. Index funds usually have very low fees compared to mutual funds.
You can find an index fund for just about any sector, security, or investment strategy you desire. Do you have a strong interest in the tech industry? There’s an index fund for that. Do you want to gain some exposure in the bond market? There’s an index fund for that. Do you want to make a one-stop investment in a portfolio that is perfectly diversified into large-cap domestic equities, small-cap domestic equities, foreign investments, and bonds? You guessed it – there’s an index fund for that.
Buying an index fund ETF is a great way to achieve some diversification without buying tons of individual securities. For example, if you invest in an index fund that tracks the S&P 500, you are mirroring the S&P 500 Index exactly. You are invested in all 500 companies on the index with the same weights as the actual S&P 500. That’s a lot of diversification just for buying one security! If you do want to invest in an S&P 500 ETF, you can start with IVV (from iShares), SPY (from SPDR), or VOO (from Vanguard). You can access all three of these ETFs and many more by CREATING AN ACCOUNT ON ROBINHOOD!
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Get a Credit Card
If you’re comfortable with the way you’ve been budgeting and saving, then it might be time to take on the responsibility of having a credit card. Credit cards can be a great way to spend money securely while building credit, but credit card debt can be EXTREMELY dangerous if you let it get out of hand. With insanely high interest rates and late fees, there is no reason you should ever carry a balance on a credit card unless it’s absolutely necessary. You should view a credit card as a simple tool that you’ll use to help you build credit, not as a way to spend money you don’t have now and pay it back later.
When it comes to building your credit with your credit card, there are two important things you’ll want to pay attention to. Firstly and most importantly, always pay your credit card balance off in full, every month, every time. This is one of the most important factors that affects your credit score. Your credit score will take a hit if you make even one late payment. Secondly, pay attention to how much of your line of credit you’re using. Ideally, credit rating agencies like to see you using no more than 30% of your available credit every month. So, if you have a credit card with a $1000 limit, use it to spend $300 or less every month, and then be sure to pay it off in full.
If you’re not sure where to start or you’re overwhelmed by the seemingly infinite amount of credit cards out there, you can use Credit Karma to help you make a decision. Credit Karma will tell you your credit score (without using up your official credit report request), recommend credit cards for you based on your credit score, and even give you tips on how to improve your credit! CLICK HERE TO GET STARTED WITH CREDIT KARMA!
Top 1% Net Worth By Age
Be honest with me here: did you skip the middle of this article and scroll right down here to find out the juicy details? If so, good for you; you were on a hunt for some information and you found it! But simply knowing how much other people are worth won’t do you any good. It’s important to know HOW to build wealth and achieve your financial goals, and that’s the kind of information we included above. Be sure to scroll up and learn how to start increasing your net worth!
Without further ado, it’s time to talk about how much your net worth needs to be for you to be in the top 1% for your age group!
Let’s start with an average net worth. According to The College Investor, the average net worth of a 22 year old is…-$39,915. That’s right, NEGATIVE. How is this possible? Well, many 22 year old come out of college with massive student debt. On top of that, if they decide to buy a car or a house via a loan, then the “debt” part of their net worth will go up even more. As you can see, debt can put a huge damper on your net worth. But there is hope; as you start paying off your debt (thus gaining equity in your assets) and putting more money into your savings and retirement accounts, you’ll see your net worth climb! Here are the rest of the stats:
- Average net worth of a 25 year old: -$23,704
- Average net worth of a 30 year old: -$1043
- Average net worth of a 35 year old: $25,517
- Average net worth of a 39 year old: $69,761
Those statistics were just averages. Now, let’s get into the fun stuff! Here is the top 1% net worth by age group, courtesy of DQYDJ:
- Top 1% net worth for ages 18-24: $435,076.59
- Top 1% net worth for ages 25-29: $606,188.36
- Top 1% net worth for ages 30-34: $956,944.74
- Top 1% net worth for ages 35-39: $4,034,486.45
- Top 1% net worth for ages 40-44: $7,909,636.79
- Top 1% net worth for ages 45-49: $10,494,100.10
Sounds easy enough, right?
Just kidding; these net worth levels are insanely high for these ages and might seem completely unattainable. But don’t lose hope! While it might not be realistic to expect to be worth $400,000 by the time you’re 24, you can follow the steps we talked about earlier in the article to make sure you can have the retirement you want.
Well, there you have it – we know that there are some crazy high earners out there and while your net worth might not be in the top 1% for your age right now, you certainly do have access to the tools that will help you get there down the road!