Students graduating college in 2016 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 my fellow Electrical Engineers.

The starting salary is up quite a bit for Electrical Engineers, about $10,000, from when I graduated college (2010.)

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 $62k 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 $18k, brand new, Hyundai Sonata – even after the same friend upgraded to a S5 a year later!!
  • Save, save, save!
  • Don’t get scammed like I did and buy a stupid insurance policy. Read more here on my mistake.

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

You are an engineer that graduated with $37k in student loan debt and are making the average starting salary – $62k. 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 our 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

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 $25k – $27k 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

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?

Put your time in when you are young to enable the opportunity to venture out on your own later in life and do something you love and that you are passionate about. 

What tips would you give to a new graduate?

Any other engineering bloggers have additional comments to add?