In 2014, I found myself at a crossroads. I had just finished my master's degree and my career was kicking off. But the specter of debt was looming: I had to pay off $50,000 in student loans.
I've never earned six figures in a single year. I haven't struck gold on speculative investments: no Bitcoin, no lottery, no individual stock-picking. And I wouldn't recommend doing that, either. I haven't inherited any money, other than the occasional $25 in a birthday card from my grandma.
Even without making big money or big bets, in the past six years, I've paid off all of my debt, built a net worth of around $250,000, and am now on track to retire by age 45 if I so choose. And in December 2018, I started my blog The Best Interest to help pay it forward and share the advice that helped me succeed.
These are the four steps I take that help me accomplish my money goals.
In 2014, I knew a small fraction of the personal finance information that I know today. I've learned by reading articles and blogs, and asking questions on financial forums like the Bogleheads and Reddit.
Over time, I began to realize that many personal finance principles aren't as intimidating as they might seem at first. You just need to find the ones that resonate with you.
I learned a lot from reading economist Burton Malkiel and the late Vanguard founder John Bogle's insights about the wisdom of index investing, and You Need a Budget founder Jesse Mecham's writing about the mindset and behavior behind budgeting.
One of the key things I learned was the importance of compound interest — the way that investment money grows over time. Understanding compound interest will rewire your brain. You'll stop seeing items in terms of today's dollars and start seeing them in future dollars.
For example: Would you rather have a new $20,000 car today or have $200,000 in 20 years and use it to retire five years ahead of schedule? That car seems cool but not as cool as "buying" five years of time for yourself.
Retirement accounts like Roth IRAs and 401(k)s are often referred to as "tax-advantaged" accounts. With 401(k)s, you make pre-tax contributions to the account, which in turn lowers your taxable income. And with Roth IRAs, you pay tax on contributions, but the money grows tax free and there's no tax on future withdrawals.
I highly recommend investigating what types of tax-advantaged accounts you qualify for because you might be leaving free money on the table, especially when many companies will also offer an "employer match," up to a certain percentage of your salary.
That's why I maximize my 401(k), Roth IRA, and health savings account (HSA) contributions each year. In 2020, these three investment choices will save me about $6,000 on my tax bill. My employer match will give me another $7,000. That's $13,000 for free.
Video by David Fang
Investing can be intimidating if you've never done it. But one of the ways that I confidently and wisely invest is through index funds.
Rather than choosing individual stocks and relying solely on their success, an index fund contains huge swaths of entire markets. For example, my S&P 500 index fund owns a tiny fraction of every single stock in the S&P 500. Some companies will grow quickly while others will fall by the wayside. But on the whole, an index fund balances the good and bad to provide, ideally, a net increase.
Index investing is an easy choice for me because, in my opinion, it has the highest ratio of positive investment gains to investment stress. Index investing yields returns for me without having to think about it and I can attribute a considerable portion of my financial growth to the money I've socked away into index funds using my tax-advantaged accounts.
Video by David Fang
Budgeting has played a pivotal role in my past six years. It has drastically reduced my stress, since I always know if I have enough money to cover my needs. It's made spending more fun, since I get to make those occasional big purchases knowing that I've successfully saved for months. And it has allowed me to drastically increase my savings rates to enable an early retirement.
Within my budget, I use two common tactics. I "pay myself first," meaning that before I make any external payments, I always put money into my own accounts: my 401(k), my Roth IRA, my long-term savings account, and I only get to spend money after I've saved.
And then I use a digital "envelope system." At the beginning of every month, I allocate money towards many different spending categories, like groceries, fun money, my mortgage.
Up until a couple years ago, student loan debt was in this category, too. Every month, I would set aside money specifically for the cause of paying down debt. This careful budgeting even allowed me to repay my student loans seven years ahead of time, on a 10-year original schedule. By holding myself accountable by avoiding activities like dining out and internet shopping, I was able to put money into more pressing categories.
The steps I've taken — to clear my debt and build a net worth that has me on track to early retirement — don't require years of studying, a huge salary, or taking on any big risks. I don't pay any professional advisors, though I do think financial planning has tons of positive benefits. But I believe anyone can use these four pillars to help them achieve their financial goals.
Jesse Cramer is an engineer and writer hailing from Rochester, New York. When he's not working on his blog, he's probably reading a library book, reluctantly jogging, or relaxing with his girlfriend and their foster dogs.