23 Years Old - Looking for guidance and help!

[RetirementDream]

Hello everyone - I am pretty excited to become a member of this forum. I have been interested in financial independence and early retirement for the past year. However, coming from a very humble family, I have no idea where to even start. Should I focus on further education and increasing my earning potential? Should I start investing in real estate next year? I am really lost as to where to start and I am hoping that the experience of others on this forum can help me in this regard.

Some data on myself: I am 23 years old, graduated with a Bachelor of Science in Electrical Engineering, and currently earn about 75K/Year. I have about 18K in a Roth 401(k), a little over 3K in my HSA, and about 15K in the bank. I have no debt.

Based on what I have been reading and listening to, it seems that the first step towards both of my goals is to gain a greater control over expenses. This area I have only been focusing on in the last two months (which was really a wide opening experience for me). But what now? I feel like by only focusing on saving I am not going to be able to reach my goals.

Thank you everyone in advance for reading this and sharing your experience!

P.S. Ideally, I would like to be able to retire between 35-40. I don't have any intention to actually stop working, but I would like to be financially independent enough to have more freedom at that age to pursue what I love.


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[GrayHare]

Welcome aboard. To ER in 15 years at an under-40 age you need to smartly invest about 50% of your income, then be prepared to not increase spending during ER. Apparently being INTJ (Myers-Briggs) helps a bunch too.

 

[Rickt]

Welcome and Congratulations on an excellent start with a good income, decent amount saved in Roth IRA, savings and HSA. At age 23 you have time in your favor. Please ensure that you have an Emergency Fund set up for 3-6 months of your expenses before you start investing your after tax dollars. Max your IRA/Roth IRA, HSA Acct and any employer sponsored retirement plan before investing after tax dollars. I would suggest that you start with investing in Stock Index Mutual Funds (both domestic & International) with proper asset allocation that makes you feel comfortable with the volatility. At your age I wouldn't recommend any bond mutual funds but if you want to reduce volatility in your portfolio you may add 10-15% in Bond funds as well. Once you have set up these investments and also set automatic monthly investments into these funds, you can start educating yourself about investing in individual stocks. At some point in the future, when you you feel comfortable investing in individual stocks you may start investing in good quality companies which have potential to give you a slightly better return than the index funds. If your annual returns are even 1% more than that of your benchmark index, it will make a BIG difference in your portfolio over the next 15-20 years. Good Luck!

 

[Midpack]

P.S. Ideally, I would like to be able to retire between 35-40. I don't have any intention to actually stop working, but I would like to be financially independent enough to have more freedom at that age to pursue what I love.

At first I was saddened by your OP, but it appears you're goal is really FI, a goal more people should probably actively work toward.

When/if you "retire" (no work at all) is just one option once you reach FI including whatever safety factors you need to sleep at night. Aside from celebrities, athletes & rock starts, to me the ideal path is probably:

a) a first career with income a priority over job satisfaction (but not to the exclusion of),
b) saving/investing to reach FI as early as possible,
c) a second/third/etc. career with job satisfaction as the priority until
d) no longer willing or able to work any more.

You're doing all the right things to reach FI, you just need time and discipline to get there, there is no risk-less silver bullet I've ever heard of.

 

[gauss]

You're doing all the right things to reach FI, you just need time and discipline to get there, there is no risk-less silver bullet I've ever heard of.

OTOH, Keeping expenses low relative to income and saving the rest is the closest thing that you can get to a silver bullet. You get a huge boost on this by starting early (think exponential functions with kt in the exponent where k is a positive number and t is time - you have a EE degree like me!)

Time to FI is a function of the ratio of spending/income.

There is a nice chart illustrating this (with some assumptions) at The Shockingly Simple Math Behind Early Retirement

-gauss

 

[martyp]

It's good to learn and practice sensible spending and saving habits when you are young. However, don't forget to have a good life now and to find a job you love.

 

[Totoro]

Welcome aboard. To ER in 15 years at an under-40 age you need to smartly invest about 50% of your income, then be prepared to not increase spending during ER. Apparently being INTJ (Myers-Briggs) helps a bunch too.

+1. First reply already hit it right on the head.

Three things I would add:

• Look up DCA (dollar cost averaging) and start a program immediately. Invest in a low index fund (like vanguard VTSAX).
• Sounds like you don't have a significant other. Be aware that that person (when he/she arrives) will have a very large impact on your future (financial and otherwise). Children are another major factor.
• Focus on your career first, expenses second, much less on financial management of your assets. That only becomes more important as your relative savings go up

You might want to read up on this guy's blog, he has most of the essentials down, start here: How I failed my daughter and a simple path to wealth

Oh, and since you asked: be careful with real estate, start with something easier first to invest in.

 

[38Chevy454]

Hi fellow engineer, you are wise to be thinking about savings now and having a goal to strive toward over the years. I think previous answers sum up pretty good, you need to maximize savings and let compounding work for you. Keeping expenses low is critical. Great that you have no debt! Keep driving your older car and avoid keeping up with your friends and their new cars, lavish living, and expensive vacation trips. You can still enjoy things, do spend some money to have fun. Just look at the cost vs savings trade-off and make good choices.

As for whether to invest in rental real estate, remember that it is like another job. If you can handle the hassles and do your own maintenance it can be good financially. Or you can get a second job and just invest all that money 100%. I would recommend the second job and invest for now, that way you can have more freedom to chase new job opportunities and moving away from the current area. By willing to move you open up a lot more opportunities.

Overall, great start having the degree and developing a life plan and goals for early retirement, which you have correctly defined as financial independence.

On the more education idea, if you can handle the time and sacrifice to get the MS or even PhD you will benefit over your career. I respect anyone that can work FT and get advanced degree at same time. It requires discipline and sacrifice.

 

[phil70]

Take it from me - 44 and finally getting on track for FI - that focusing on savings is #1. It is the easiest to control and cutting you lifestyle and consumption expectation at a young age is the equivalent of a "free" annuity that pays out for the rest of your life.

People in the FIRE or early retirement community talk about "safe withdrawal rates." (You can find a lot on this through some internet searches or searching this site.) Choosing a safe withdrawal rate is a key assumption in the mathematical formula for ER. Some say 4% is safe. Others aren't comfortable above 3% (I'm one of them, especially for a 40-50 year retirement). So, for every dollar you spend per month, you need between $300 and $400 dollars in assets to support you for the REST OF YOUR LIFE WITHOUT A JOB.

Once you get your spending to the point where you are saving more than 30% of your post-tax income you have accomplished two things (1) faster accumulation of wealth and (2) lower target nest egg needed to sustain your retirement.

Then, focus on increasing income, confident that you have the discipline to put MOST of it in the bank. Which really puts your FI plan into high gear.

Avoid the temptation to become an expert stock picker or use exotic investments to improve your return. Visit the "Boglehead" websites for the an explanation of the importance of a low-fee, high efficiency asset allocation.

It's a marathon. Be prepared to track your spending, invest your savings and ruthlessly cut waste for the next 120-150 months. (Exaggerated for the point of emphasis. You still need to enjoy your life - take vacations, dates with your spouse, fun for the kids, etc.)

 

[bad_LNIP]

I have no idea where to even start. Should I focus on further education and increasing my earning potential?

Education is important, as it can help increase your earnings potential, but most importantly, it can help you understand money, the math behind it, how it works, etc...I would suggest you take a community college corporate finance course and personal finance course ASAP. You need to understand concepts like discounted cash flows, time value of money, compound interest, etc.. if you are trying to get out of the game by 35-40.

Maybe look at an MBA if you can get it paid for by your employer.

Should I start investing in real estate next year?

Absolutely not, especially given the following sentence. You can't be lost and investing in real estate or really anything other than index funds.


I have about 18K in a Roth 401(k), a little over 3K in my HSA, and about 15K in the bank. I have no debt.

Good start. It takes money to make money.

I feel like by only focusing on saving I am not going to be able to reach my goals.

But what are your goals? How much are you shooting for and when? What interest rate do you need to achieve based on your current savings rate and funds to get there?

 

[retirementguy1]

Congrats on such a great start. I wish I was asking these questions when I was your age but my family is financially illiterate. lol. You have a great income for a 23 year old so I wouldn't worry about further education unless it's something you really want to do.

The best thing you can do is avoid lifestyle creep. It's when you get a raise and your spending goes up accordingly. Stay away from new cars especially. If you live close to how you did in college then you should be able to walk away from paid employment by 35, 40 if you buy toys along the way.

Hope to see you active in the forum.

 

[Closet_Gamer]

Congrats on a great start. At your age and with your strong start (education, income, etc.) I would suggest you work on a good offense and a good defense at the same time.

Offense: Take career risks, get more education…do what's necessary to crank your income. You've got time so even if you stub your toe, you can get back up and take another risk.

Defense: As your income grows LBYM more and more each year.

You're going to crush it.

 

[Walt34]

Pretty impressive for a 23 year old to even be thinking about retirement. You are already ahead of the curve and will do well.

This post by me includes a letter that I wrote to a 24-year-old friend who we think of as a niece. It will also give you some things to think about.