Note: As of July 28, 2023, the Wealthfront Cash Account has a 4.80% APY. Read more about it here
Saving advice is everywhere –– but how much is enough? The goal of asking, “How much money should I save?” isn’t just to hit a number suggested by someone else. Instead, it’s about asking yourself questions like which financial goals matter most to you, what stage of life you’re in, and how you can set yourself up to build long-term wealth.
In this post, we’ll break down how to think about saving for the future at ages 25, 30, 35, and 40. We hope this advice gives you a helpful framework for building the financial future you want.
How much money should you have saved by 25?
In your early 20s, you’re probably just getting your finances in order. As you do this, your priority should be establishing an emergency fund. An emergency fund is the cornerstone of any good financial plan, and it can help you avoid taking on debt if you have an unexpected expense. Setting aside this money can give you much more flexibility if you experience a job loss or encounter an unexpected medical expense, for example. Ideally, your emergency fund should be 3-6 months’ worth of your living expenses, kept in a liquid account like the Wealthfront Cash Account, which is an ideal place to hold cash until you’re ready to invest. If 3-6 months of expenses sound daunting, it’s okay to start small. Any emergency fund is better than none and will likely give you significant peace of mind.
Several factors dictate precisely how big your emergency fund should be: your age, profession, investable assets, and the likelihood you’ll face unexpected financial responsibilities.
Ultimately, your ideal emergency fund will be personal to you and your situation, but if you can have one saved by age 25 (or at least have made progress in this direction), you’ll be setting yourself up for financial success down the road.
Once you have 3-6 months of expenses in an emergency fund, you should consider investing for the long term. A great place to invest is in a diversified portfolio of low-cost index funds.
The benefit of investing in your early 20s is that your money has decades to grow and potentially benefit from the power of compounding –– this is when your earnings are reinvested over time so they can earn money, too. Compounding can have a dramatic effect on how your wealth grows over time. The longer your time horizon, the larger the impact –– so as a young investor, time is truly on your side.
How much money should you have saved by 30?
If you’ve accumulated debt, your late 20s are a good time to prioritize paying off that debt. If you can save enough to make a significant dent in your debt by age 30, you’ll be well-positioned to continue to build wealth into your 30s and beyond.
Not all debt is created equal, and it makes sense to tackle any debt with a higher interest rate first because debts compound just like your investments do. As a rule of thumb, credit card debt tends to have the highest interest rate, and you should pay that off each month whenever possible.
For loans with interest rates lower than credit cards, like student loan debt, it’s worth running the numbers to see what the actual cost of this debt is after any tax deductions to decide whether to pay it off or invest since loans with less than a 6% fixed interest rate may be worth keeping while you focus on investing. If the rate is lower than the average after-tax rate of return on a diversified portfolio, investing may be a stronger move than paying more than your minimum debt payments.
If you are fortunate enough to be debt-free in your late 20s, you should double down on investing. As we mentioned above, compounding can increase the rate at which your wealth grows over time, and starting early is a huge advantage.
As you invest more of your income, you’ll need to decide what investment account to use. Broadly speaking, your options will fall into two camps: taxable and tax-advantaged accounts like retirement accounts. Taxable accounts are quite liquid and flexible, whereas tax-advantaged accounts are less flexible but offer special tax benefits as an incentive to save for a specific goal like retirement or education.
In your late 20s, you might have significant uncertainty associated with some of your long-term plans. When in doubt, it’s wise to choose a taxable investment account –– you won’t get any tax advantages for opening it, but as long as you hold your investments for at least a year, your realized gains will be taxed at the lower, long-term capital gains rate instead of being taxed at the higher ordinary income rate. Unlike a tax-advantaged account, you won’t have to worry about contribution limits or withdrawal penalties. Plus, taxable accounts allow you to benefit from tax-loss harvesting, a tax-minimization strategy that takes advantage of market volatility with the potential to lower your tax bill.
How much money should you have saved by 35?
When you hit your early 30s, you might start to think about buying a house. Not surprisingly, the average age of homebuyers is 36, so you’ll be in good company. If this is the case, you should set a goal to save for a downpayment by age 35.
If you plan to buy a home in under 3-5 years, you should keep your down payment in a high-yield account like Wealthfront’s Cash Account to help your money grow without taking any market risk. You’ll want this money to grow steadily instead of being subjected to the day-to-day fluctuations of the market. If you can save up the standard down payment of 20% or more of the purchase price, you can reap benefits like a lower interest rate on your mortgage.
You should also pick an account with as much FDIC insurance as possible to save for your down payment. The Wealthfront Cash Account offers up to $5 million in FDIC insurance through our partner banks and is again a great option.
For longer-term savings goals that are more than 3-5 years in the future, a taxable investment account can give you liquidity, flexibility, and greater growth potential over the long term than you’d get if you kept your money in cash. You may find single-stock bets appealing, but they make the most sense as 10% or less of your portfolio – diversified portfolios can offer less risk than stock picking, but you can still enjoy this riskier form of investing in moderation.
At Wealthfront, we’re big proponents of investing in a globally diversified portfolio of low-cost index funds like our Automated Investing Account. And as we mentioned above, if you have a taxable account, you can benefit from tax-loss harvesting. Wealthfront offers this at no extra cost for our Automated Investing Account portfolios, and you can see the results of our Tax-Loss Harvesting service here.
How much money should you have saved by 40?
By your late 30s, you’ve probably figured out a lot of the big financial milestones –– hopefully, you have a good emergency fund, you’ve tackled your debt, and you’ve got a plan to save and invest for your long-term and short-term goals. As you approach 40, you likely don’t need to hit a concrete savings goal as much as you need to keep up the good habits you’ve built over the years to build long-term wealth.
Now is also the time to ramp up your investment contributions. In your late 30s, your investment contributions should hold steady at the very least, and if possible, it’s great to increase the amount you’re investing each month. If you plan to retire in your 60s, your investments will still have two decades or more to compound.
In your late 30s, you may also be thinking about the next generation. By this point, you likely know how many children you want to have, which means you can start saving for their education if that’s something you plan to help them with. You can even open and superfund a 529 account, a special tax-advantaged account designed to help you save for a child’s education early in your child’s life to maximize time for it to grow.
If you have children of your own or other important children in your life like nieces and nephews, now is also a great time to start teaching them about money. This way, by the time those kids enter their 20s, they’ll be well-equipped to make their own saving and investing decisions.
Save for the future at Wealthfront
One of the big reasons to save in your 20s and 30s is to take advantage of the potential for that money to grow through compounding, essentially going to work for you and reducing how much you have to save overall.
For short-term savings that help you make purchases in the next couple of years, or for a place to hold money until you’re ready to invest it, consider a Wealthfront Cash Account with a high 4.80% APY with up to $5 million of FDIC insurance through our partner banks.
For your long-term savings, Wealthfront’s award-winning Automated Investing Account lets you choose your level of risk and take advantage of our full suite of automation features designed to maximize your after-tax returns and make investing effortless. You can even transfer money from your Cash Account to an Automated Investing Account within minutes during market hours. Wealthfront also offers Stock Investing Accounts that allow you to discover and invest in individual stocks with zero commissions. We want to support you as you build long-term wealth on your terms, and we’re proud to offer you the accounts you need to do just that.
Cash Account is offered by Wealthfront Brokerage LLC (“Wealthfront Brokerage”), a Member of FINRA/SIPC. Neither Wealthfront Brokerage nor any of its affiliates are a bank, and Cash Account is not a checking or savings account. We convey funds to partner banks who accept and maintain deposits, provide the interest rate, and provide FDIC insurance. Investment management and advisory services–which are not FDIC insured–are provided by Wealthfront Advisers LLC (“Wealthfront Advisers”), an SEC-registered investment adviser, and financial planning tools are provided by Wealthfront Software LLC (“Wealthfront”).
The cash balance in the Cash Account is swept to one or more banks (the “program banks”) where it earns a variable rate of interest and is eligible for FDIC insurance. FDIC insurance is not provided until the funds arrive at the program banks. FDIC insurance coverage is limited to $250,000 per qualified customer account per banking institution. Wealthfront uses more than one program bank to ensure FDIC coverage of up to $5 million for your cash deposits. For more information on FDIC insurance coverage, please visit www.FDIC.gov. Customers are responsible for monitoring their total assets at each of the program banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. The deposits at program banks are not covered by SIPC.
The Annual Percentage Yield (APY) for the Cash Account may change at any time, before or after the Cash Account is opened. The APY for the Wealthfront Cash Account represents the weighted average of the APY on the aggregate deposit balances of all clients at the program banks. Deposit balances are not allocated equally among the participating program banks.
The Wealthfront 529 College Savings Plan (the “Plan”) is administered by the Board of Trustees of the College Savings Plans of Nevada (the “Board”), chaired by the Nevada State Treasurer. Ascensus Broker Dealer Services, Inc. (“ABD”) serves as the Program Manager. Wealthfront Advisers LLC, an SEC-registered investment adviser, serves as the investment adviser to the Plan. Wealthfront Brokerage LLC serves as the distributor and the underwriter of the Plan. Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program.
You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision. Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.
For more information about the Plan, download the Plan Description and Participation Agreement or request one by calling 844-995-8437 or emailing email@example.com. Investment objectives, risks, charges, expenses, and other important information are included in the Plan Description and Participation Agreement; please read and consider it carefully before investing. An investment in the Plan is not insured or guaranteed by the FDIC or any federal or state government or agency. You could lose all or portion of your investment.
The information contained in this communication is provided for general informational purposes only, and should not be construed as investment or tax advice. Nothing in this communication should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. Any links provided to other server sites are offered as a matter of convenience and are not intended to imply that Wealthfront Advisers, Wealthfront Brokerage or any affiliate endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise.
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About the author(s)
Tony Molina is a Product Evangelist at Wealthfront. He is a Certified Public Accountant (CPA) and holds Series 66 and Series 7 licenses from FINRA. View all posts by Tony Molina, CPA