Students graduating college in 2019 are averaging just over $37,000 in student debt. The average starting salary for an engineer out of school is just over $62,000 – just over $66,000 for Electrical Engineers, and the average student loan debt for engineers is roughly in-line with the average non-engineer student loan debt, at approx., $37,000.
The starting salary is up quite a bit for Electrical Engineers, about $10,000, from when I graduated college (2010). When I started, the average starting salary for engineers was approximately $52,000.
In this post, I investigate a realistic path an engineer can follow to pay off student debt and save over $100,000 before they turn 30. To do so, I’ll review a few items that need to be planned out.
A Few Tax Considerations
If an engineer were to max out their 401(k), they would pay $6,800 in federal income taxes instead of just over $11,200. Therefore, an engineer saving for retirement would take home an additional $3,400 instead of handing it over to Uncle Sam.
Making $62,000 right out of college puts an engineer right at the start of the phase-out period for a Traditional IRA. By contributing the max to a Traditional IRA, an engineer could further reduce their federal income tax burden to less than $5,500 for the year. If an engineer works smart and hard, they will likely get nice raises. Therefore, a Roth IRA may make more sense.
Keep living like you are in college to eliminate student debt
If an engineer can keep living like they were in college, they can start to pay down debt quickly. Living frugally is vital to a young engineer’s success to quickly pay down student loan debt. A few pointers:
Create a budget, stick to it, and check in on your budget. This is the most important piece of advice I can provide. It seems simple, but creating a budget and sticking to it requires discipline. In full disclosure, I am OVER budget this month going out to eat. But we know exactly how much we are over because we check in on our budget EACH WEEK!
Don’t try to keep up with your friends. One of my engineering buddies bought an Audi A5 right out of college. It was a super nice car and I was definitely jealous. However, I stuck with my $18,000, brand new, Hyundai Sonata – even after the same friend upgraded to an S5 a year later!!
Save, Save, Save!
Don’t get scammed as I did and buy a stupid insurance policy.
Another pointer for young engineers – keep learning. Not necessarily a financial tip, but I know many engineering managers and one thing they all say that sticks out during an interview is hearing that a potential candidate works on “engineering” things in their spare time.
Next, let’s take a look at three scenarios for a 23-year-old starting out in his or her engineering role.
Scenario #1 – An Engineer with $37K in Student Loans
You are an engineer that graduated with $37,000 in student loan debt in 2019 and are making the average starting salary for an engineer – $62,000. If you continue living like you are in college, you can knock out the debt in two years or less. Let’s examine the numbers.
If you max your 401(k), after you pay your federal income taxes you will have $37,200. To pay off your student debt in two years, you will need to pay a little over $18,000 per year to pay off your debt. That leaves you about $18,000 to live off of. Now, this doesn’t seem like much, but I doubt you were spending more than that in college. If you were, you probably have more than $37k in debt.
Now, on to the awesome part. By the time you turn 30, you will have stocked away over $170k in your 401(k) (assuming 10 percent return). From what I have seen, most employers contribute at least 3% of what you contribute. Tack on that employer match and you will have over $185k. By the time you are 40, you will have a cool $795,000.
Finally, if you really want to knock it out, after you pay off your debt start contributing to a Roth IRA. By the time you are 30, you will have $220k, and at age 40 you will darn near be a millionaire.
Scenario #2 – An Engineer who Received Scholarships
You were super smart and received scholarships to go to college for free. Now you can start maxing out your Roth IRA and 401(k) right out of the gate!
After, contributing to the Roth, with post-tax dollars, you have $31,700. If you haven’t heard of Mr. Money Mustache, I highly recommend you check out his blog. In a recent podcast interview, Mr. MM reviewed how he and his family live off of $25,000 – $27,000 per year.
If you can live like Mr. MM, you can invest at least another $5,000. If you are keeping up with the math, you will now have over $285,000 at age 30. By age 40, you will have $1.2 million!
If you have $1.2 million by 40, you could look into early retirement. If your portfolio returns between 3% and 5%, which equates to $36k-$60k, you could live off of the yearly return and never touch the principal balance!
Scenario #3 – An Engineer Requiring Five Years to Pay Off Debt
Let’s say you have more debt and need around five years to pay off your student debt. You are still in excellent shape. Assuming you contribute the minimum to receive your company match in your 401(k) while you are paying off debt, you will still have $80,000 by the time you are 30. When you turn 40, you will have over $630,000 to your name
Don’t fall victim to a lifestyle that you can’t afford. Yes, you may be able to “afford” it today.
But do you want to work until you are really old?
And that’s the ultimate question. If you save sufficiently over the years and invest wisely, it is possible to create a large amount of wealth.
Albert Einstein coined the phrase, Compound Interest is The Eight Wonder of the World for a reason. If you are able to save a large amount of your yearly salary, invest it wisely at an 8% yearly return, then it is possible to amass wealth of easily $1 million by the time you’re 35.
In this blog post, How Much Money Do You Need To Never Have To Work Again? Let’s Do The Math. I review the SWAN (sleep well at night) number that will provide you with a comfortable, never have to work again number. As a quick recap, if you take your current salary, multiply it by 36, and you can save that amount by the time you’re 40, then you should be golden.
Now granted, the dollars I speak about saving in the article might be a stretch, but the point is, that you need to do three things well. Earn as much as you can, save as much as you can, and then invest wisely. Each of these three requires discipline.
Most engineers, by nature, are detail-oriented … that’s no surprise considering the course load and complexity of many of the courses that you took in school (remember ENGR 141).
Now take some of that discipline, and some of the detail, combine the two and apply that toward your finances. Growing wealth as an engineer doesn’t just happen. It happens because you’re focused on growing your career and saving as much as you can.
If you really want to dream big, then read this article: How to Become a Decamillionaire, Grow your Net Worth to $10 Million, and Join the 1% Club
Good luck with your saving and wealth creation.
If you enjoyed this post, are you’re an engineer aspiring to reach mega-millions, then this blog post might help you get there: How Much Money Do You Need To Never Have To Work Again? Let’s Do The Math.
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Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.