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I am not much different than you.
I am a 24-year-old college graduate.
I have a normal W-2 job that pays me a slightly above average wage.
I have over $85,000 in student loans.
I love spending time with friends, watching sports (go Pats!), and traveling as much as I can.
In the past few years, I have traveled to over 25 countries and 20 states. I have skydived in the Swiss Alps, scuba dived in the Galapagos, and hiked Machu Picchu. My extracurricular activities over the past couple of years have not been cheap, and I have no intentions of changing them.
I have also been able to save over 40% of my monthly income and have amassed over $100,000 of assets in under two years since graduating college.
Let me start by saying this: Everyone has a unique opportunity that they can capitalize on. For some, it is obvious. For others, it is not. For everyone, it is extremely valuable to put forth the effort to discover what opportunities you have and how to capitalize on them.
Saving 40% of my monthly pretax income of ~$5,400 and $100,000 in total assets makes me nothing more than a novice in personal finance. Many of my peers, who make significantly more than me, have failed to discover their unique opportunity and find themselves saving very little, if anything at all.
In just a few words, what I have done is discover my unique opportunity, automate my saving/investing strategies, and make better lifestyle decisions. Keep reading to hear how.
How to Invest in Real Estate While Working a Full-Time Job
Many investors think that they need to quit their job to get started in real estate. Not true! Many investors successfully build large portfolios over the years while enjoying the stability of their full-time job. If that’s something you are interested in, then this investor’s story of how he built a real estate business while keeping his 9-5 might be helpful.
Saving & Investment Strategies
Assuming you receive a W2 paycheck each week, there are three times upon this money hitting your bank account where you should save and invest:
- Before it is taxed
- After it is taxed, but before any expenses
- After your expenses
Let’s dive a little deeper into each step.
Step #1: Before it is Taxed
As I am sure you have noticed, the annual salary that you signed for on the dotted line is not the amount that hits your bank account. While it differs by state, everyone’s favorite uncle takes approximately 30% of income each month for people in the 25% tax bracket (including social security, Medicaid, etc.).
One way to reduce the taxes you pay now is by setting up a 401k and investing a portion of your paycheck into it each month. You decrease your taxable income and delay any income taxes paid until after your investments have appreciated and generated a return.
“But, Craig, I can’t spend my 401k without a penalty until after I retire.”
This is true. However, there are many different ways you can leverage your 401k penalty-free. You can take a loan against it. You can self-manage it. You can even take advantage of the tax system by rolling it into a ROTH account in a year where you realized less income and are in a lower tax bracket. The opportunities are limitless, and there are strategies out there. Consult a 401k wizard for what works best for you.
Many employers offer a match up to a certain percentage. My suggestion would be to take full advantage of that. It’s free money! This was my unique opportunity and one of the main reasons I was able to amass over $100,000 in total assets. My employer matched 100% up to the maximum of $18,000 per year.
“My employer does not do a 401k match, so this is not possible for me.” *Open fridge, grabs Bud Light, and returns to World of Warcraft.*
Keep that game paused!
I did not include any returns or the 401k match my employer provided as part of my 40% monthly savings calculation. This is only the portion I invested.
Since my strategy was to take full advantage of this, I invested the maximum amount of 25% or ~$1,500 of my monthly paycheck into my 401k. Keep reading, as later I explain how I was able to afford this through lifestyle design.
After step 1 (pretax investment), $1,500/$5,400 has been saved and invested, representing 28% of my income.
Step #2: After You Are Taxed, Before Your Expenses
After investing in the 401k, Uncle Sam takes his share. Because I had the luxury of living in California (it truly is a wonderful place), I paid taxes of ~$1,100 each month. This left me with $2,800 for my monthly expenses.
As George Samuel Clason coined in The Richest Man in Babylon, “Start thy purse to fattening.” In other words, “Pay yourself first!” Before paying your landlord, the bank, the local grocer, the gym, pay the man (or woman) in the mirror!
My recommendation is to set aside at least 10% of your after-tax income and put it away in an investment account of your choice. I would advise against a simple savings account. Keeping your money in a savings account is losing you money. You are earning 0.5% interest on 2% inflation. You do the math.
To automate “fattening thy purse,” I have set up an automatic deposit of $400 a month with Betterment (click here to learn more about Betterment), a robo-advisor that invests your money in different stocks, bonds, and mutual funds depending on your risk profile. As I write this article, my annualized Betterment returns are 9.0%—significantly better than 0.5% earned in a savings account.
Now that I have saved an additional $400 to save and invest, my total saved this month is $1,900 divided by $5,400 of monthly gross income to arrive at 35% of my monthly income saved.
Step 3: After Your Expenses
After steps 1 and 2, I now have $2,400 for my living expenses. Enter Mint.com, a website and phone application that allows you to set a budget and tracks spending in accordance with the budgets set. I set budgets to ensure I do not overspend and am self-disciplined enough to stick by them. I will spare you the granular details of my monthly spending, but here is the gist.
My three largest expenses are rent, student loans, and food and drinks. Reducing my expenses in each and confirming that I am spending wisely in these categories will allow me to save the most.
When moving to a new place, I am a Craigslist fiend. I search and search until I find a phenomenal deal. To spare my previous landlords with whom I have great relationships with, I will not share the details of how much I paid. I can tell you that I have lived in a livable environment with my own room in Boston, Palo Alto, San Jose, and San Francisco for under $1,000 a month. Here in Denver, I pay ~$600 and live in a brand new apartment complex in one of the most desirable areas.
Rent remains one of my largest expenses. To eradicate it completely, I am looking to house hack my first multifamily property in the next few months. This is an option for everyone, and I highly recommend considering it.
Student loans cost me $700 of principal and interest each month. Other than pay it down, there is nothing more I can do to reduce this monthly payment. Since my interest rate is ~6.0% and I am confident I can make more than that in Betterment, I choose to continue to pay the minimum payments until I cannot make 6.0% or greater.
Food & Drink
Personal health is one of my greatest values, and I can tell you I am not merely surviving on Ramen Noodles, Lean Cuisines, or Hot Pockets. In fact, you could not pay me to eat any of these things. Believe it or not, I cook! I purchase organic groceries at Trader Joe’s or Safeway and eat like a king! I cook my meals 3 to 4 days in advance, which ensures that I eat healthily and limit my restaurant and fast food consumption.
When an opportunity arises to go to dinner or out with friends, I rarely say no. Instead, I go and get a small appetizer or eat before and enjoy the time with my friends.
Cutting back on drinking will also save your more than just your wallet, but your body and mind as well. I encourage you to try not drinking for an entire week and see how good you feel.
However, I do realize not drinking for many people my age is out of the question. How about limiting it to one day a week? Rather than getting trashed at the bar, pregame (or pre-drink) at someone’s apartment.
At the end of the month, my food & drink expenses account for about $275, and I set aside another $175-$300 for gym membership, travel, and other miscellaneous expenses. In this example, I will use $200 as my miscellaneous expense.
Related: How I Went From $0 Net Worth to Qualifying for $1M in Real Estate Financing in 2.5 Years
After all of my expenses are accounted for, any residual income I have, I save and invest. I use an app called Digit, which tracks spending habits and automatically transfers money that you should be saving from your checking account to your “Digit” account. With this, I save an additional ~$250 per month after all of my expenses.
After putting money aside in each of the following steps, I save ~$2,200 per month on $5,400 of monthly gross income. I’ll save you the calculation. That comes out to saving 40% each month. My employer’s 401k match along with compound interest, the eight wonder of the world, has allowed me to grow my savings from $30,000 to over $100,000 in under 2 years.
I’m not an angel (sorry, Mom) nor am I a financial guru in personal finance. In fact, I have NEVER taken a personal finance class in my life. I am a young and dumb 24-year-old kid who has committed to living life to the fullest while putting myself in a financial position such that in 5-10 years, working will be an option for me, not an obligation.
The strategy and examples I outlined above work for me and my unique situation. It may not work for you. What does work for you? What is your unique situation? Think creatively. How can you save 40% or more of your W2 income? As the old adage goes, “Whether you say you can or you can’t, you’re right.”
[Editor’s Note: We are republishing this article to help out our newer readers.]
What outside-the-box strategies do you use to save a significant percentage of your monthly income?
Leave a comment and let’s chat.