To some people reading this blog, or learning about investments in general, while they are in high school or college, it may seem like a daunting task to start building a serious amount of wealth. But for those readers, you’re in the best position, because you’re interested in building wealth so early.
This post showcases roughly what you need to do to attain a $150k stock/bond portfolio before you reach your 31st birthday, and to also have net worth stored away in retirement accounts and home equity. It’s a simplified and rough presentation, and only one of many ways to do it, but meant to be inspirational rather than thoroughly quantitative.
Can everyone do this? Only if you strive towards certain goals. The core of the process presented here is dependent on graduating from a fairly high paying major and landing a job within a typical entry level salary range for that major. I base this on the salary that one might expect with engineering, science, software, or certain business degrees- perhaps $50-60k starting out. A major with a lower entry level salary could work out with these as well, if student debt is avoided.
This isn’t to say that students shouldn’t pursue other majors if that’s where their interests are, but it is to say that if one has the goal of building wealth, the facts show that certain majors will give you a much better jump start than others. But, even those who major in lower income fields, with enough frugality, can amass some substantial wealth. Lastly, this presentation doesn’t make allowance for unfortunate events, such as if you had to put a lot of income towards helping parents while still in your 20s, or suffering a major setback in your own personal life. There’s no doubt, building wealth does require a certain component of luck. Most of the results are based on smart effort, but negative circumstances can certainly get in the way.
This also happens to be tailored towards Americans, as that’s the job market and currency I’m most familiar with, but the basics apply in many places.
Attaining a six figure net worth before age 31 comes around requires a combination of substantial income and lifestyle frugality. Before I present the numbers, here are a few tips to maximize wealth accumulation potential without sacrificing much of anything else.
-Get a job in high school, and try to save some of the income. Have fun of course, since you’re only young once, but it’s best to realize early on that a happy person is typically capable of being happy regardless of the amount she or he consumes, and an unhappy person will typically remain fairly unhappy regardless of how much she or he consumes. Spend money on experiences that truly provide value.
-Work very hard in college to keep your grades higher than average. This will increase your job prospects when you graduate.
-Find a job while school is in session. Whether it’s working in the computer lab, or being a Resident Assistant, if you can find ways to avoid accumulating too much student debt, you’re going to improve your ability to build wealth. Join clubs and groups too, but spending a portion of your time on income generation can be helpful. Certain jobs, like being a resident assistant, can greatly reduce your student loan debt while simultaneously getting you connected with the college experience.
-Try to secure internships. Not only are they a great experience, they typically pay fairly well, and you should be able to save a few thousand dollars in a summer of working, if you are frugal.
-Consider building assets even if you have student loans. It’s important to keep student loans to a minimum, but it’s perhaps even riskier to not have any assets saved away. Rather than focusing on purely debt avoidance, or purely asset-building, I propose a moderate approach of trying to minimize student loans, but also putting some cash away into an emergency fund, and even a starter dividend portfolio, while still in college.
-After you graduate, consider attaining streams of income outside of your primary job if you’re only working 40-50 hours per week. If you find ways to bring in a few thousand extra dollars per year, it can help significantly. For instance, if you make $40k in net income and have $25k in expenses, and save and invest the difference, then although pulling in another $5k in net income only increases your net income by 12.5%, it increases your savings rate by 33% if you keep your expenses static. This is something major to realize- boosting income or reducing expenses moderately has a larger effect on net savings that one might immediately realize.
-Start off frugally pretty quickly. It may be tempting to splurge when you start getting paid higher than you’ve ever been paid before, but there are a lot of ways to save money. You may be able to get furniture for little or no cost from relatives that have extra. If you don’t have a significant other that you live with, you might consider having a roommate for a few years after graduation. By having a roommate, you cut rent in half, and a lot of expenses like power, heat, and internet connection, are divided among more people. Only pay for services you really want; dropping cable tv or land phone lines, isn’t too difficult these days. Try cooking a lot of your own food, and focus on cheaper and healthier meals (moderate or low meat, less junk food, high veggies, nuts, and beans, etc.) Either go carless, or select an inexpensive but reliable used car.
-There are some pretty inexpensive ways to have fun. Go camping, go to the beach, spend time with friends, play sports and exercise, get a quality used acoustic guitar to entertain, and develop hobbies that produce and create rather than consume. Being frugal or a minimalist, especially in your early years, doesn’t mean a lack of fun. Spend money on things that are truly important to you and that create value, but don’t spend money on things to impress, or things to distract, or things that society simply expects you to do that don’t necessarily make sense. Not only will you likely strengthen good character traits, you’ll set yourself up so that you can play with some of your money later when it’s more abundant if you want to.
-Use tax-advantaged accounts if possible. If you’re offered a matching 401(k) or similar at work, at least contribute enough to get full matching. Consider adding to an IRA as well. (Or the equivalent of these vehicles in other countries.)
So you’ve graduated college, and you’ve landed a job with reasonable pay. You may have some student debt, but hopefully you’ve kept it to a manageable sum, and you may already have a few grand or even over ten grand in liquid assets that you’ve built from high school through college. In addition, you may or may not have found a way to pull in another few thousand dollars per year. Plus, you have adopted a frugal lifestyle.
-This table assumes 8 years of investment growth at a 7% rate of return after taxes. The 7% rate of return is fairly conservative, and in reality, will be a lot more volatile than in this table, which is why I’ve kept it conservative. Some years may go up 50%, while other years may drop 50%. But by focusing on buying dividend growth companies at reasonable prices, and keeping your portfolio at a certain ratio of bonds/stocks (like 30/70), you can smooth out your volatility and hopefully get a 7% rate of return after taxes.
-It begins at the end of your 22nd year, where you start out without a dividend portfolio and without adding any that year (although as was previously mentioned, you may already have a few grand in liquid assets). During the 23rd year, only $12k is added to the stock/bond portfolio because depending on your initial asset position, starting a healthy emergency fund is wise, so it’s assumed that several grand goes to strengthening what you already have.
-It is assumed that in your late twenties, you purchase your first home with a 20% down payment (either a small condo for a single person or a frugal couple, or a modest home for a couple). If it wasn’t for this, I’d have increased the “fresh capital” column for years 25-28 to more than they are. Instead, it’s assumed that in these years, you’re building up for a down payment in addition to this.
-This post is about how to really have a $150,000 portfolio. Over the 8 year process, if 2.5% annual inflation is assumed, then you’ll need approximately $182,000 in future dollars to have $150,000 worth of today’s dollars. So, $182,000 is the real target, because we’re really going for $150,000 in today’s dollars.
|Age||Fresh Capital to Portfolio||Equity/Bond Portfolio Worth|
At end of year 30, you have over $182k.
So, you’ve got $182k in the equity/bond account, and on top of this, you’ve got a sizable cash reserve and some home equity. Tens of thousands worth. Hopefully student debt is paid off. In addition, this table doesn’t expressly include 401(k) or IRA contributions (this article was intended as a taxable portfolio that you control completely), so you may and should have a sizable chunk in those other places too. For example, if you put a combined $5k-$7k away in your 401(k) after matching each year (meaning only $2.5k-$3.5k from you), and compound at 10% per year tax free or tax-advantaged, you’ll have $65,000 or so in your 401(k). It’s a similar story for your IRA.
Summing all of this together, it’s not out of the question to have over a quarter million dollars in net worth at age 30, even without a trust fund or college fully paid for by parents. To do it, you would do well to focus early on building wealth, get a job you like with decent pay, live frugally but fully, contribute to retirement plans, to your taxable account, and possibly towards home equity.
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$16,500/year in one’s 401K from 22 for 8 years plus company match and profit sharing is a wonderful thing, isn’t it? Weird why more people just don’t contribute / max out their 401K.
Thanks for your comments on my site in the Socialism/Communism explanation section!
Put savings on auto-pilot! That’s one thing which at that time, I didn’t think much of it, but have to say has paid off very well.
Time is your friend.
Good stuff! I only wish I would have read something like this about 10 years ago. I’ll have a portfolio nowhere near this size by next year. I’m trying to make up ground for lost time, but time is a wonderful asset when you’re not fighting it.
If only I could build a time machine…
Make a healthy salary, spend as little as possible and invest properly. A classic recipe that produces the tastiest dish of all time.
I absolutely loved this post because one of the milestones I’ve been trying so hard to reach is obtaining a net worth of $150,000 by age 30 and a net worth of $3,000,000 by age 60. I just surpassed the $75,000 mark last month and will need to step up my game if I’m to meet the former goal by February of 2014 and the later decades from today.
The one point which I have been thinking about extensively over the past few months is the fact my dividend portfolio really won’t begin to perform as planned for decades to come due to the power of compounding. Once my dividends begin to compound upon each other over and over, I’ll truly appreciate the power of this incredible wealth builder.
Great post (as always), Matt!
Great post! I always wonder where I stand, in comparison to my peers. I’ve always been a saver but just now becoming more aware of it and the fact that the rest of the world does not have the same mentality. Most of my savings has been through automatic 401k contributions (since the age of 21, fresh out of college) and now TSP contributions; $175K of my $260K net worth is in retirement accounts (at the age of 32). I’m going to make a move to invest more in taxable, dividend producing accounts, as I am dreaming of an early retirement and having that passive dividend income is key to my plan.
I think maxing out a 401(k) is an extremely good idea, in most cases. But in younger years, when earnings are less, I wouldn’t consider it unreasonable not to max it, and instead to contribute to Roth IRA and taxable accounts in addition to the 401(k). The reason is flexibility; some investors like having streams of income that are completely controlled by them, and able to be tapped at any time for early retirement or income diversification or something like that. But at some point, the 401(k) should definitely be maxed annually. Maxing it from the onset isn’t a bad idea either.
Mantra and Money Cone,
Great points. Some of the best advice is the simple, timeless advice.
Sounds like you’re way ahead of the curve, and on track to meet your goals if you keep it up. When you say $3 mil by age 60, do you mean in today’s dollars or in dollars of that year? I’d say that $3 million in today’s dollars (in other words, indexed for inflation, much higher) would be really healthy target, whereas $3 million in absolute terms (non-indexed) may be on the low end.
Those are some solid numbers. Over a quarter million by age 32- right in line with my post. If my numbers alone weren’t enough to convince young readers, hopefully tangible examples like yours help fill in the gap! By referring to TSP, you’re referring to the Thrift Savings Plan, right? The government version of a 401(k)?
Good question. I suppose I’ve been shooting for $3 million in year 2065 dollars, but you make a good point that inflation will erode much of the value by that time. I also haven’t factored in the addition of a significant other who will likely add to that value significantly.
I guess it’s all about how you look at it, though. I plan to have a house paid off and live a relatively modest life. I eat as healthy as possible and exercise. Hopefully I’ll be able to avoid the need for expensive surgeries or medical interventions. Even though I don’t plan on Social Security being around at that time, it’s possible that $3 million might be enough for me to make it through retirement.
At least we know one thing for sure: most Americans these days don’t even have 15% of what they need to retire, even when approaching retirement age! My bet is $3 million will be an above average number for American citizens even 30 to 40 years from now. Guess we’ll have to see…
The Dividend Pig
I love seeing examples of successful saving – gives me more motivation to keep on going! I don’t think I’ll hit 150k by age 31, but at my current rate I believe I can hit 75k if the market helps me out with some gains in the next few years.
Good luck to everyone!
Excellent post Dividend Monk. Educational posts like this can go a long way.
I posted a similar article a while back. I used a $500 winning and an investment in a dividend paying stock as an example.
I am 28, am have managed to hit exactly 250K without any help from Mr. Market. I have been working in a low six-figure job since I was 23 and saved nearly 50K every year. Thankfully most of my wealth has been in cash for the last 4 years and that saved me a lot of sleepless nights.
Looking to allocate more to equities over time esp. dividend growth stocks. It is now clear to me a simple linear growth of wealth isn’t going to cut it. Compounding is key.
Hi Dividend Monk,
You have opened my eyes. I thought compound interest is magic. Little do I know that compound dividends is like compound interest on steroids! ^^
I think one of the keys to getting a fast start on building wealth is to avoid the advice that you often hear from the “pros,” such as Jim Cramer, which is that you should be aggressive when you’re young, meaning that you should place an overweight on risky investments. I wasted some of my early investing years by doing exactly that. Fortunately, the amounts of money I had available for investment back then were fairly small, so what I lost didn’t actually hurt me much in the long run. Nonetheless, I view my losses as an expensive lesson.
The keys to building wealth are frugality, discipline, diversification, and TIME. Simply put, focus on advancing your career (your cash-generation engine), save as much as you can, take advantage of employer matching in your 401(k), systematically investment globally in the broad markets and across investment classes, keep your fees low, and reinvest your dividends. Then, be patient and let the power of compounding over time work for you. Once I relaxed and took this approach, my wealth started to build very quickly. After 5 years of wasted investing and 25 years of serious investing, I can fortunately now look at my portfolio, scratch my head, and ask with self-satisfaction and pleasure, “Where did all of this come from?” It’s a good feeling, and it really wasn’t hard.