The rich man's roommate
Be careful who you compare yourself with
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Psychologist Jordan Peterson once told his audience a story about a friend of his named Adeo Ressi. By any standards, Adeo is a wildly successful man. He started and sold two billion-dollar companies before the age of 30. His company, The Founder Institute, was having a terrific impact on the world by helping incubate start-ups in 180 cities all over the world. It’s a massive operation with a global impact. Adeo is also six foot seven (sigh…) and charismatic. He’s been a mainstay in Silicon Valley from the early days.
Yet, when Adeo spoke to Jordan Peterson, he was unhappy. He was upset and felt like he could have done more with his life. He wasn’t happy. He recalled his roommate with whom he used to host unofficial “night clubs” in college, and said, “I compare myself with my roommate, and I’ve hardly done anything in life you know.”
Well, his roommate was… Elon Musk.
Of course, Elon Musk had done better than Adeo – him and 7 billion other people. And it might seem ridiculous to compare yourself to the richest man in the world, but to Adeo, it was his roommate with whom he used to hang out all the time, and it felt like a natural comparison. This reveals an important fact: Your happiness is affected a lot by whom you compare yourself with, and sometimes that choice is made unconsciously. Also, as you move up in life, the people you compare yourself with tend to change, and unless you are conscious of it, you become involved in a self-imposed rat race.
Comparison can be good if it motivates you and fills you with ambition – but you need to be aware of what the right benchmark is. When I found out that 60% of Americans are living paycheck to paycheck – and over 50% of Americans earning $100,000 are doing the same – I knew something was wrong. Were people setting the wrong targets? I dived into the net worth that every age group has, and how you need to filter through the numbers to set the right target for yourself.
Behind the net worth numbers
First, net worth has more to do with how much you save than how much you earn. You can be a humble secretary and leave an estate of millions or be a vice-chairman at Merrill Lynch and blow it all.
Usually, when we hear about average net worth, it might seem like that’s the right target to aspire for. But if you take 9 broke guys and Elon Musk who has a net worth of $190 Billion, their “average net worth” would be close to $19 Billion – that doesn’t tell us anything about the real picture!
A better metric would be to look at the median net worth i.e the 50% mark – half of the population would have a net worth greater than this number, and half would be lesser than this. In addition, we’ll also be looking at what it takes to be in the top 1% of each age group according to net worth. Don’t worry if you aren’t hitting this number – it’s just to give an idea of what is possible.
Finally, numbers without context are useless. So we’ll be looking at what the actual priorities and life goals that people might have in each age group, and what you need to be focusing on. Net worth isn’t everything.
Feel free to skip to the age group that most interests you – Maybe you’re seeing how to sort out your current situation, see what you did wrong in the past, or plan for the future. But reading in sequence will give you a deeper insight into how your investing journey will evolve with time.
Early start: From 18 to 24
Those between the ages of 18 and 24 have an average net worth of $28,707 according to the Federal Reserve Consumer Finance Survey (that’s the one I’m looking at for all figures). But don’t get discouraged – that number is pulled up because of a few high earners who have extraordinary paychecks, like the cast of Stranger Things who earn an estimated $9.5 million. The top 1% in this age have a net worth of $435k!
The median net worth however is just $8,216 – Because most people in this age bracket are still studying or just beginning to save at the start of their careers. Liabilities on the other hand could be a lot because the average student loan debt is $37,574. It’s not surprising if a large chunk of this group has a negative net worth because they don’t have much, to begin with.
If you want to set yourself up for your 30s and 40s, follow these 4 steps:
Get yourself a credit card with no annual fee and start building credit. Since the age of your credit lines is an important factor for your credit score, getting started as soon as possible will boost your score and make it much easier to buy a house or get any type of loan in the future. (Check out my guide on how to get the perfect credit score here)
Open up a Roth IRA or contribute to a 401k. This takes only 20 minutes, but starting as soon as you can and saving 10-20% of your income makes retirement much easier for you.
Have an emergency fund of 2-6 months’ worth of expenses, in cash. Put it in a high-interest savings account and forget about it. This small measure will give you the freedom to take a risk whenever you want to – or act as a safety net.
Get invested in the markets. It can teach you enough about investing at a formative age to create a consistent habit.
Starting to save: Ages 25 to 29
The age group of 25 to 29 isn’t that different from the earlier category, with an average net worth of $49,387. But the median net worth actually went down for this category, to $7,511. This isn’t surprising. This is the age where you move out on your own and start dealing with the responsibilities of adult life – like paying your own rent and cell phone bills. If you’re in the top 1% though, you’ll see your net worth increase to $606k – almost 50% more than the top 1% of the previous category.
For most people, the priority at this age should be about finding a long-term career, identifying their strengths, and doubling down on them to maximize their income. Having a strict budget and understanding the amount you’ll need to save and invest in order to retire is also important.
Investing what you save as early as possible can give you a giant edge. If you want to have $1.5 million invested by the time you’re 65, you can achieve that by investing just $416 per month beginning at age 25 (at an 8% return). That’s just $14 a day. Waiting till you’re 35 to start investing reduces your potential earnings – and you’d need to save $1,000 a month to hit the target. The choice is yours – 1x now or 2x later?
Cleaning up your act: The thirties
The impact of what you do in your twenties will start showing up in your thirties. The median net worth of those in the age group of 30-34 is $35,111 and the average is $122k. To be in the top %, your net worth would need to be $956,944. That seems like a lot until you consider what happens at age 35-39: Median net worth jumps to $55k, the average net worth doubles to $274k and the top 1% have a net worth of $4 Million! What’s the reason for this drastic change?
Well, this is the time when your career and income really begin to pick up, and the fruits of compounding your career capital start paying off – if you’re fortunate enough to exit or sell a business or benefit from an IPO, or have a series of well-timed investments, then this will usually be the point when the windfall prizes are raked in. In terms of actionable steps, you can do these:
Get rid of any bad debt. Pay off loans over a 6-7% interest rate, and clear your credit card debt and personal loans. A mortgage is the only allowed option.
Save at least 20% of your income. With a steady habit of saving and investing, this is totally doable – this has a twofold advantage. You get to save more for retirement, even as you get used to living on lesser.
If you want to stay on track for retirement, your net worth should be 4x your annual expenses, or 2x your annual income, by the age of 35. MrMoneyMustache has a perfect chart on his blog that demonstrates how much you need to save in order to retire. Saving 10% of your income, you could retire after 51 years. But by saving 40%, you could retire in 22 years! Your saving capacity could increase with age, so take advantage of it.
Home run: The forties
Things start speeding up in your 30s, but they really accelerate in your 40s. The median net worth in the 40-49 group is $164,196 and the average is $761,560. To be in the top 1%, you’ll need to cross the $10 Million mark! But it’s at this point that the story mentioned at the beginning is the most relevant. The people in the top 1% are 13x richer than the median earner – comparing yourself with them will just make you miserable, or make you spend on the wrong things.
As to what the right things are, now’s the time to have some home equity. At this age bracket, the highest component that contributes to net worth isn’t income or savings or expenses, but your home. 70% of US homeowners were 45 years or older in 2023, and they had a net worth 40x higher than that of renters – at $225k to $6,300. So investing smartly in a home could make all the difference.
The reason is that a mortgage forces you to build home equity every month, and homes generally have appreciated in value. Maybe there is a bias towards people who are already better in terms of financial literacy. But either way: Consider buying a home by this age. It isn’t required, but it’ll give you more stability and freedom from the whims of your landlord.
This is also the time you hit your “peak earnings years”. And that means:
You should max out your 401k if you want to retire by 65.
Invest at least 5-7x your annual spending.
For a 30-year retirement, you’ll need to have anywhere between 25 to 33x your annual spending invested, in order for that money to last while you withdraw for expenses. So if you spend $35,000 a year during retirement, you will need $875k to $1.15 Million in your portfolio and in your 40s, this invested amount is more important to focus on than your net worth.
Following through: The fifties
The median net worth in this age group is $171,320 and the average net worth is $1.16 Million. The top 1% has a net worth of $17.54 million. By now, you’re probably noticing that the rise in the median and average net worth isn’t very impressive but the top 1% grows in value by leaps and bounds. The invested assets of the top 1% continue to snowball and create more value.
But as far as what you need to do, it’s simple:
Stick to the plan of saving 5-7x your annual expenses – The median person usually falls behind on this because they aren’t sticking to their plan.
Remember, net worth is an indicator of your total assets that include your car, house, and other assets that you don’t really liquidate or earn yield off. You need to have true investable assets.
Track your expenses aggressively to get an idea of how much you need to retire comfortably – and make sure you work towards filling the gap. This could mean moving to a different location, cutting back on expenses, and planning for a time when you won’t be working anymore.
Also, you should be about halfway through paying off the mortgage on your primary residence. Once that’s done, it’ll take a huge load off your expenses and give you some margin for error. This isn’t about facing the certainty of life without income – it’s to give you the option of not working, be it voluntary or out of necessity.
Retirement: In your 60s
If you were looking at the trend, you won’t be surprised that when you hit your 60s, the median net worth is $271,805, and the average is $1.2 Million. If you want to be in the top 1%, your net worth needs to be around $16 Million. But what will surprise you is that everything is downhill from here. Every age bracket from here has a lower net worth – be it median, average, or top 1% – because people are finally spending what they saved up for.
But here are a few things that’ll happen in this age:
You’ll most likely have paid off your mortgage and have an asset to fall back on if you decide to sell everything and move to Florida.
Spending declines after 65. This might sound depressing, but it’s the truth. Health deteriorates, and motivation to travel reduces, and you’ll start saving a lot more when you don’t really need to.
It’s the time when you can withdraw from your retirement accounts. Profits earned in a Roth IRA can be taken out tax and penalty-free after 59.5, and you can also start collecting social security and take money out of your 401k. So go ahead and splurge on that Lamborghini! (Just kidding)
Hopefully, that gives you a better picture of where you stand and what you need to be doing if you are falling behind. Maybe now you realize that net worth is an external indicator and a more reliable indicator of achieving financial independence is to simply look at how much you have invested relative to your spending.
It doesn’t really matter if you make $200,000 per year if you’re spending $200,000 on luxuries. In that case, the person making $80,000 per year and saving $40,000 is way further ahead, despite making less. It’s all about starting this as soon as you can, even if you’re behind, and then working within your means to understand what you need to do to reach your future goals.
Stay safe, stay invested and I will see you next week – Graham Stephan.
Which bracket do you fall in and what are your financial goals? How are you staying on track? Let me know in the comments below.
Hours of effort and research went into making this ten-minute read. If you found it insightful, please help me out by clicking the like button and sharing this article.
Thank you Graham :)
Fascinating info Graham. Thank you!