Saving is a life skill that many of us know we should be doing more of in order to be on track for a strong financial future. Most financial advisors recommend saving three times your gross salary as the best benchmark — but that could mean very different things for a lot of people. So how much should you have saved by 40? We’ll explore this question below.
Motives for Saving
When considering how much you should have saved by the time you are forty, the best place to start with the motivation behind your desire to save. Some of the best examples of motivations include paying off debts, retirement plans, and growing your estate.
Debts
The biggest motivation behind the desire to save money is often to make sure you’re debt-free by a certain point in your life. Paying down your mortgage is a great place to start. Mortgages are often taken out with the expectation that they won’t be paid off until you retire, or even after. But this can put a huge strain on your financial life as you grow older, so consider paying down your mortgage as fast as possible.
Most people carry debts of one form or another as well. Whether it’s credit card debt, student loans, or personal loans of some sort. Setting aside some money into your savings every month, especially if your debt has a fixed interest rate no matter how quickly you pay it off, can have a huge impact on your overall financial situation.
Retirement
Another motive that tends to be at the forefront of people’s minds when trying to save is in regards to their retirement plans. More specifically, how much money they can have saved by the time they’re ready to say goodbye to their jobs — and how comfortable they want their lives to be afterwards.
This is where the general rule of thumb comes into place from financial services like Fidelity. They make the point that typically, by the age of 40, it’s a good idea to have saved around three times your average yearly salary, in order to retire comfortably by the average age of 67 in America.
On the other side of the coin, it’s also a good thing to remember that more and more people are getting on board with the idea of FIRE, which is an acronym for Financial Independence and Retiring Early. This school of thought suggests that it’s important to save as much money as you realistically can, while still maintaining a reasonable quality of life so that you’re able to clear your debts and retire much earlier in life than most people would. That would mean you need a potential fund of around four times the average net salary by this point, as well as being debt-free. Being able to invest regularly makes this outcome a more realistic possibility.
Estate
Lastly, there’s also the subject of an estate that often fuels the thought processes of people in their 40’s into thinking about how much they should be saving, and this comes in the form of the estate they’ll leave behind after they pass. This can include anything from debts to assets.
Although it’s something that many don’t like to think about when the family is involved, planning the means of their estate is a consideration that a huge number of adults, especially parents, tend to do. Thinking about how much money they should have saved to provide for their children should anything happen, paying for education, or even just leaving them a solid inheritance is a big motivator for many savers.
If that is the case, it often comes down to a few different factors that give the decision some weight. It could be planning for retirement, as well as the worst afterwards. It may be providing for a widow with children, especially if they don’t work or you don’t have life insurance. Whatever your reasoning is, it may mean that you should think about saving more than is typically suggested.
Means
One factor moving away from motive that is massively important on the topic of how much money you should have saved by 40 years old, is the means behind the savings as well. This is something that far too many people are too quick to forget about before they jump to conclusions and research.
What is meant by this is that you can only save as much as you earn, minus absolute necessities and then the money used to have a reasonable quality of daily life. Saving 3x your gross salary is all well and good if you’re in a position to do that, but for many Americans out there, it’s just not possible by 40. Maybe children cost more than anticipated, or maybe COVID has had a huge financial impact. Whatever the case may be, this can happen to just about anyone at any time — and saving as much as experts recommend just may not be an option.
For those far younger than their 40s, take this into consideration when you’re starting out in a new career or deciding to make a big purchase. All in all, it comes down to your financial situation at the time, and your capabilities to save as best you can. It’s always good to have an aim and a benchmark, but it certainly isn’t the be-all and end-all. If you’re looking for a smart way to save your money, consider Cashero. We offer up to 100x the average bank rate, with no minimum balances and you can take out your money whenever you want.
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