How Much Do You Need to Make Per Year to Become Rich?

I think you need around $5M in net worth to start feeling rich in the US. In high cost of living areas like San Francisco, that’s the bare minimum. In less expensive areas, $5M is more than enough to feel unconstrained by monetary limits. 

You can FIRE with any arbitrary amount of money. [source] You just need to make sure your invested assets are in a certain proportion to yearly spending. Typically, people use a 25:1 as the right ratio, but there is a lot of debate about this. [source] If you do subscribe to the 4% rule, your magic retirement number becomes easy to calculate. If you spend $50,000 a year to live, then you need $1.25M to retire. That’s pretty simple stuff.

But let’s say you don’t just want to retire early. Let’s say you want to become rich. And let’s further assume you want to become rich when you are still young enough to enjoy it. To pull that off, you’ll need to hit a certain yearly income to have a shot.

When Should You Retire?

I don’t agree with everything that Sam writes over at Financial Samurai, but I think his ideal retirement age is spot-on: 40 years old. People who graduate from college typically do so at age 23. So by the time you’re 40, you’ve been in the workforce for 17 years. 

That’s a long time. I should know because I’m very close to that milestone myself! After 15-20 years doing essentially the same thing, most people are ready for a change. Those that can’t retire typically change jobs, industries, move to new cities, or do something else to avoid becoming bored.

I don’t know of any better way to avoid boredom than to quit your job, and pursue your passions. So let’s figure out the minimum bar to become rich by age 40.

What About Promotions?

If you are reading this blog, you’re probably ambitious. If you are young, ambitious, and competent, you’ll be able to rapidly increase your compensation early in your career. I was able to 5x my yearly earnings in a 5 year period when I set my mind to it. I’m definitely not the most ambitious or competent person. So if I can do it, you can too.

But variable earnings are hard to calculate. Instead, I’ll just assume that you start out underpaid and end as a grossly overpaid 40 year old. I will further assume that the amount you are under/overpaid is exactly equal. It makes the math easier. It’s also at least partially backed up by real-world wage data that suggests earnings peak in your 40s and 50s. [source].

The Median Household Spending Data

The average American household spends approximately $5,600 per month which works out to $67,000 per year. Obviously, you’ll spend a lot less if you live alone in a rural part of Ohio. You’ll spend a lot more if you are married with 3 kids in San Jose, CA. So your spending will depend on your specific lifestyle, but $67k is a reasonable starting point. From here, we can calculate what it costs the median person to live in each of America’s 10 biggest cities [source]:

You can enjoy an equal standard of living in Philadelphia as in New York for less than 50% the cost! Of course, wages are at least notionally adjusted for this cost of living. And there are far fewer jobs in Philadelphia that pay the same as finance in New York. The next step is to figure out how much you would have to earn to hit the $5M mark by age 40 in each of these ten cities.

How Much You You Need to Make Per Year to Become Rich by Age 40

Here are the variables I used to construct this table:

Average rate of return on invested assets: 5%

Number of years to compound: 17 (40-23)

Sources: AdvisorSmith, Bankrate, SmartAsset, DQYDJ

Two things immediately jump out at me from this table:

Income Taxes Are Important

It’s easier to become wealthy by age 40 in Texas. That’s because the state of Texas has no income tax. But Texas isn’t the only state in the US that has no income tax. Alaska, Florida, Nevada, South Dakota, Washington, and Wyoming all forego taxing your compensation.

Miami and Seattle are also large cities in states without income taxes. As such, they are attractive places to become rich too. Obviously there’s no free lunch here. There are no state property taxes in Austin, Texas where I live. But the property taxes here are very high. But when you’re young, renting, or living in a smaller home, the tradeoff makes a lot of sense.

You Have to Be in the Top 2% of Earners to Get Rich by Age 40

To get rich when you are still comparatively young, you have to earn a lot per year. There’s no getting around that. Even if you live in Houston, TX, you have to earn a top 2% national income to have a shot. If you want to live somewhere more expensive like NYC, the requisite $550,000/yr compensation is in the top 1%.

The Best Shortcut: HCOL Dragon Hoarding

Up to this point, I’ve focused on how to become rich by age 40 the normal way: saving money from a job. Short of inheriting generational wealth, that’s the least risky path for most people. 

But there’s another way that you can hack the system and get rich early without living like a pauper. That way involves breaking your career into two parts. While you’re young, you live in a high cost of living area. During this phase, you get promoted and save money. Then, when you’re a bit older, you move somewhere cheaper and leverage compounding to hit the target.

The table above assumes a lot of things. But one of the most important assumptions is that your compensation, cost of living, and tax rate cannot be broken apart. Basically, my model assumes that you live, work, and play in a single city for 17 years. Further, I assume that you maintain a median standard of living the entire time. 

That’s a pretty weird assumption. My first year after graduating college, I lived on less than $10,000. I was alve to do that because I was single, had no children, had 2 roommates, didn’t need good health insurance, and didn’t have expensive tastes. Last year, my wife and I spent well over $100,000 on our lifestyle. We have 3 kids, a new home, and a couple of hobbies each. Clearly, how much you spend depends in large part on your phase of life. 

Be Bold, Start Cold

In hiking there’s a fun phrase I picked up from a guide early on: “be bold, start cold.” When you first start hiking in the morning, it tends to be cold and your body hasn’t warmed up. It’s tempting to put on a couple of layers of clothing to warm up before starting out. But that would be a mistake. 

Even after a short 10-15 minutes of hiking, your core temperature will increase substantially. You’ll find yourself having to stop and laboriously rearrange your pack to accommodate the extra layers of clothing. A seasoned hiker knows this. And so seasoned hikers endure being a bit cold for the first 10-20 minutes to save time and effort.

The same tactic can be used in your career. It’s nice to go see Broadway shows, own a fancy car, and take exclusive vacations. But if you can forego those expenses early in your career (going cold), you get repaid double: you save more and those savings have longer to compound.

Temporal Arbitrage

The term arbitrage just means buying something at a low price and then finding a buyer willing to pay more for that thing. But it doesn’t have to apply just to the price of a product. You can also arbitrage compensation and cost of living. 

The truest form of wage and cost of living arbitrage actually just occurred. During the pandemic, many people decamped expensive cities and moved to cheaper parts of the country. Companies were slow to react and adjust worker’s wages. So for a brief window, people were able to live in cheap places, but get paid like they lived in expensive places. I personally know a couple of people who were able to save six figures by doing this. 

Of course, all good things must come to an end. Companies got wise and forced workers to either return to their home office or have their compensation adjusted down. This arbitrage opportunity has already disappeared. 

But just because things are getting back to the pre-pandemic normal doesn’t mean you still can’t hack the system. The easiest way to do this is to start your career in a big city, keep your expenses very low, and then eventually move to a lower-cost-of-living area when you get a bit older. This is taking advantage of one phase of your career to fund another.

Embrace Your Inner Smaug

Let’s think through how this would work. You start your career in NYC in finance and rapidly move your way up to the target $550,000 compensation. 

But instead of living a median lifestyle spending $150,000 per year, you pinch pennies. You share an apartment with 3 other recent grads, don’t own a car, don’t eat out, and invest all of your savings in an ETF. After grinding it out for 7 years, you quit your insanely stressful finance job and move to Philadelphia, PA.

Once you’ve landed in Philly, you increase your spending to that city’s median household spending of $67,000. You’ll feel like you are living like a king. Between the lower cost of living and the lower tax rate, you could afford to take less than half of your NYC salary and still become rich at age 40. Here’s what that looks like:

A yearly pre-tax income of $175,000 is still high, but it’s only top 6% vs top 1%. If that sounds like it’s not a big difference, take a look at the shape of the national income curve:

In this scenario, by the time you are 40, you’ll have just over $5M in net worth. At a 5% rate of return, your investments will be out-earning your yearly compensation by $75,000. You will also feel great. After toughing it out in cold, hard NYC, pinching pennies, you’ll be able to let your hair down a bit. 

What’s Next?

There are, of course, other ways to reach a net worth of $5M by age 40, but I think they’re less likely to be successful than the dragon hoarding approach I’ve outlined above. 

I should know because I tried one of them. I founded 2 startups that occupied me for the first 7 years of my career. My first company turned into a profitable lifestyle business, but hasn’t experienced a liquidity event. My second company is doing well and has proven to be substantially more profitable, but hasn’t been sold either. I feel really proud to have built two profitable businesses. But they left me at age 30 with a paltry amount in my savings account just around the time my wife and I wanted to start a family.

As the old saying goes, do as I say, not as I did. At the age of 30, I got a “real” job and started saving aggressively to make up for lost time.

If you learn from my example, you can dramatically increase your chances of becoming rich by age 40. If you live to be 80 years old, you’ll have half of your life to pursue the things that you find meaningful. And during that time, you won’t have to worry about what anyone else thinks. That’s a pretty great place to be. 

Happy overthinking!