How can I tell if I’m financially ‘on track’ for my age?

Ask the experts. Laura Suter is on hand to answer your personal finance questions. If you'd like a question considered for a future edition send it in now.
I’m in my late 30s, earning what I’d call a decent salary, but I never really know if I’m doing well enough with my money. I save a bit each month, pay into my pension through work, and try not to overspend, but when I see friends buying houses, having children or talking about their investments, I start wondering if I’m behind. How can I tell if I’m financially on track for my age, and what should I be doing if I’m not?
Karly from Newport

Laura Suter, AJ Bell Director of Personal Finance, says:

I don’t think there is anyone out there who hasn’t at some point compared their life, finances and wealth with those around them – whether it’s colleagues, friends or family. I know I’ve certainly been guilty of this.

So, the first thing to say is that you’re far from alone in asking that. I think one of the most common anxieties people have about money isn’t about how much they have, but whether they’re doing it right. The adage that ‘comparison is the thief of joy’ is key here – don’t see colleagues buying a bigger house, friends posting luxury holiday photos on social media, or family members boasting about paying off their mortgage early and assume they’ve got it all sorted.

Being ‘on track’ financially is a slippery concept. It depends entirely on your goals, your circumstances, and what security or freedom means to you. That said, there are some sensible benchmarks that can help you check whether your finances are in good shape. And, just as importantly, where to focus your energy if you think you’re falling behind.

Step 1 – Start with the basics

The first thing to do before you even start thinking about investments, pensions or buying a home is to look at the foundations of your finances. That means being able to pay your bills comfortably, avoiding high-interest debt, and having a buffer against life’s surprises.

A good rule of thumb is to have three to six months’ worth of essential expenses in an easy-access savings account, which is your emergency fund. This safety net is money you can access immediately if you lose your job, face a big repair bill, or must cover an unexpected expense. If you’re self-employed or in a volatile industry, you might want to aim for the higher end of that range. Equally if you’re confident you could rapidly find work again you might be comfortable at the lower end.

It’s not glamorous or as Instagrammable as a fancy holiday, but without this buffer you’ll end up using credit cards or dipping into investments when things go wrong, which can have long-lasting effects.

Step 2 – Tackling debt

If you have any expensive debt, such as credit cards, overdrafts or high-interest personal loans, dealing with that should take priority over investing or saving for the future. The logic is simple: if your debt is costing you 20% a year in interest, no savings account or investment can reliably beat that return.

Focus on clearing the highest-interest debts first and try to automate repayments on your payday, so they happen before you have the chance to spend the money elsewhere. That said, it’s still worth maintaining a small emergency fund alongside debt repayments, otherwise you risk slipping straight back into borrowing when something unexpected crops up. There are different approaches to repaying debt, which you can look up online and I’ll try to cover in a future column.

Step 3 – The 50/30/20 guide

Once your essentials and debts are under control, you can look at your savings and investments. A useful (if rough) framework is the 50/30/20 rule:

•    Around 50% of your take-home pay should go on needs (rent, bills, food),
•    Around 30% should go on wants (holidays, hobbies, lifestyle),
•    Around 20% should go towards financial goals, such as savings, pensions and debt repayments.

Some people on lower salaries who are renting in expensive areas might find this balance tricky, but it’s good to aim towards this sort of allocation even if you’re not there yet. That 20% isn’t a magic number but it gives you a guideline to work around. If you’re not near it yet, start smaller and work upwards as your income rises.

If you’re just starting out with putting money into a pension many experts suggest aiming for a contribution (including your employer’s share and pension tax relief) of roughly half your age as a percentage of your salary. So, if you’re 30, around 15%; if you’re 40, about 20%. It’s a rough guide, not a rule, but it helps you gauge whether your future self is being looked after. But if you’ve been contributing to your pension for a while you can use a pension calculator to plug in how much is in your pot already, how much you and your employer are paying in each month, and how long until you plan to retire. To give an idea of what your pension will be you can use AJ Bell’s pension calculator.

If you’ve had multiple jobs (and frankly, haven’t we all), it’s also worth tracking down any lost pensions. The government’s free pension tracing service can help, or you can use AJ Bell’s find and combine service to track down lost pots. Consolidating old pensions can make your retirement savings easier to manage and often will be cheaper in terms of fees. 

Step 4 – Set your big goals

It’s a bit of a cliche, but starting to invest without a goal is a bit like driving a car with no plan of where you’re going. You need to think about what you’re saving for to help determine whether it’s best to stick to cash or invest, how much you should put away and how long it will take to achieve it.

Traditionally most people’s first goal would be getting on the property ladder. However, for some that’s becoming less realistic as property prices have soared and high rental costs make saving for a deposit trickier. If you’re saving for a deposit, focus less on comparing your timeline with others and more on setting an achievable target. For example, saving 10% of the property price you’re aiming for. Also look at using a Lifetime ISA to boost your deposit savings and make sure you’re getting the best interest rate if you’ve opted for cash.

If you’re not in a position to buy yet, that doesn’t mean you’re off course. Building savings, keeping debt low and developing a career that gives you long-term stability are all just as valuable. Financial progress isn’t always visible and renting while growing your pension or emergency fund can be a sensible choice.

Step 5 – Are you moving forward?

Everyone’s background, family wealth, earnings and life situation are different, which makes the definition of being on track impossible to determine. Someone might own a house but have no pension or emergency pot, another might have massive savings but live with their parents or have benefitted from inheritance. The key is progress, not perfection.

So instead think about your own situation and whether your financial position is improving year by year. Are your savings growing, your debts shrinking, and your goals for the future more certain? That’s what really matters.

If you’re able to handle a financial shock without panic, plan for the future with some confidence, and still enjoy your present life, you’re doing better than you think – and than many social media posts from your peers would have you believe.

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