According to this article from Student Loan Hero, “Americans owe over $1.48 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. “
The average loan amount for a student graduating from college in 2018 is $39,400. On the higher end, a medical school graduate could have as much as $161,000 in student loans. Given the enormity of student loan crisis in the US, many students graduating from college think these student loans are here to stay with them forever. Some even resort to staying in debt for over 10 years with the hope that they will become eligible for federal student loan forgiveness program. I highly recommend you not take that route.
You don’t have to lose hope. Student loans don’t have to determine whether or not you can build wealth. Contrary to the popular belief, the math behind becoming a millionaire is shockingly simple.
Becoming Debt Free In 2 Years After Graduation
According to this article from the Ladders, average starting salary of graduates in 2018 of $50,000. Assuming you are single and filing you tax returns for 2018, you would fall into the 22% tax bracket. Assume for our calculations that there is no state tax.
Income = $50,000
Federal Tax ~= $6,900
Take Home Pay ~= 43,000/year or $3580/month
Let’s take a hypothetical example of how a 23 year old student with $40,000 in student loans borrowed at 6% interest and $50,000 annual salary.
I ran some numbers on this student loan pay off calculator at Student Loan Hero and it appears that in about 2 years you can pay off all your debt if you made a monthly payment of $1750.
You can become debt free in 2 years if you can live on 50% of your take-home pay and use the remaining amount to pay off student loans. This is totally doable folks! You can become debt free by 25 if you lean on your student loans really hard. If you lean harder, you can even avoid paying that additional $2,758 in interest towards your student loans.
Note: You can adjust the numbers to suit your specific situation if you happen to have higher starting salary or have borrowed a higher loan amount. Use the calculator shared in the link above to get your exact monthly pay off amount.
Leveraging Time And Compound Interest To B
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it. – Albert Einstein
There has never been a better time in the history than now, to become a millionaire, in the United States. Any goal might seem hard to achieve, in the beginning. Let’s break down this seemingly mammoth task to see how we can leverage time and compound interest to do the trick. I will demonstrate below a very simple process which you can adopt to crack the millionaire code.
If you started investing in a simple Roth IRA and invested $200 per month in a simple S&P 500 Index Fund and did no other investments, you could accumulate $1,006,083.23 by age 65. My calculation is based on a 9.8% (not inflation adjusted) annualized rate of return from S&P 500 index for the past 90 years.
Try playing with different numbers using this calculator to know how soon you can reach this number or your dream number.
You can already see how powerful compounding is. Your actual contribution out of $1,006,083.23 is a mere $96,000. The remaining $910083.23 is purely from compounding.
Just to put things into perspective. If you started investing the same amount at age 30, you will only accumulate – $621,264.15. Those 5 years just costed you $384,819.08.
If you are young, time is on your side. Make the most out of it. Start investing early and your older self will thank your younger self. Those army of dollar bills will do all the heavy lifting for you.
A detailed table providing return on your investment for 40 years at 9.8% interest compounded annually.
|Years||Future Value (9.80%)||Total Contributions|
- Annualized rate of return of 9.8% when invested in an S&P 500 Index fund. You can adjust this number to be more conservative and see how much more you need to save per month.
- You land a job which pays you the average salary listed in the example.
- Your loan amount is proportional to the amount listed above when you extrapolate the data to your specific situation.
- A million dollars in 65 years from now doesn’t have the same purchasing power as it has today. The article tries to demonstrate the simple math behind the process of becoming a millionaire. So you need to adjust your numbers to suit your goals.
I am aware that an average investor will do more than just stick with a $200 invest per month and possibly have more going in towards their future savings. So this article focuses on doing the bare minimum.
If you are a student who has graduated recently or someone who has already gradated from college with student loans, share your thoughts. I would love to hear back from you.