Let’s say that you want to know how to invest your time and your money to increase your salary, allowing you to achieve financial independence faster. As we know, we can either reduce our expenses, increase our wages, or improve our investment returns to achieve financial independence sooner. In this article, I want to review the scenarios that my husband and I lived through and analyze which path would result in higher net worth earlier in your career.
My husband and I both graduated school around 2010, however my husband went to school to become a diesel mechanic, and I started a few years earlier to earn my bachelors in engineering. Both of us recognized an excellent return on investment for our degrees, and I highly recommend that you understand your expected wages after graduation for any degree you invest in. One thing to consider is that even if your job isn’t your dream job, it could allow you to build a portfolio that allows you to supplement your income long term so that you can pursue something else. Depending on the expenses you expect after achieving financial independence, this example suggests that you could potentially progress from minimum wage income to financial independence in as little as 15 years with only 3% returns.
I’ll give you a hint, it’s not the engineering degree many think they need to achieve financial independence, and this analysis shows that achieving FI is faster and easier than you think.
Scenario 1 – Invest 5 Years to Pursue an Engineering Degree
For the first scenario, we’ll look at my experience investing my time towards an engineering degree. Note that this analysis assumes the average income and investment for the respective degrees and job categories in this article. Our specific experiences varied slightly, but you’ll get the idea. For the engineering degree, let’s suggest that I invested $20,000 on average per year for 5 years from 2005-2010. During that time, we’ll assume I also missed out on an estimated $17,160 in full time minimum wages. Assuming I start working in 2011 for an estimated $60,000 per year, I have increased my wages by $44,640 per year compared to my baseline (minimum wage). Assuming I averaged an estimated 3% cost of living increase per year, I wasn’t positive net worth until 2015. In reality, I wasn’t net worth positive until 2018 because I took our student loans to cover my educational investment which isn’t factored into this analysis. That means that I had a higher interest payment due that made it challenging to pay off the principle before starting to invest my extra income. Regardless, even with student loans, I paid off my investment after about 13 years and now have the opportunity to recognize higher wages for the next 20-30 years depending on when I retire.
Scenario 2 – Invest 2 Years for Trade School – Diesel Mechanic
My husband is younger than I am, so while he started school later, we graduated about the same time. In this scenario, let’s assume he invested an estimated $15,000 over 2 years to get his associates degree as a diesel mechanic. During those 2 years, he had the opportunity to work through a few on-the-job internships, allowing him to earn an estimated $12,800 per year. Not as much as the estimated $17,160 in lost wages if he worked full time for minimum wage, however it certainly helps compared to no income. After two years, let’s say he earned an estimated $35,000 annually. His positive net worth would be recognized as early as 2012 versus my estimated 2015. Keep in mind, he started 3 years later than I did, and so if we started in the same time, he would have recognized a positive net worth as early as 2009, about 6 years earlier! While the wages are not expected to be as high, the time value of money by investing extra wages earlier is a factor to consider. The chart below shows how these scenarios compare over the years and you’ll see that it isn’t until 12 years later that the two paths cross.
Scenario 3 – Apprentice Program Following Trade School
In scenario 3 (yellow), we will look at the path my husband ended up taking after working as a Diesel Mechanic for 5 years. At that time, he was able to transition into an apprentice program as a lineman working on power lines. With the estimated average lineman salary of $70,000, he was able to significantly increase his salary with no additional investment needed. This is where things get interesting because not only was he able to pay off his associate degree much sooner than my bachelor degree, but he was still able to turn around a high paying salary in a short period of time leveraging his experience and knowledge as a mechanic to be accepted into the lineman apprentice program.
15 Year Projection Assuming 3% Interest
When I created the analysis above, I assumed a 3% annual return for the cash available for investment. This is a conservative estimate for how much you could return for your cash and also doesn’t account for taking out any loans for tuition investments. In my scenario, I took out student loans that required me to pay 7-8% in interest to the bank which ate up my initial salary when I started my career, preventing me from investing as much as I would otherwise have done. Instead of 3%, many investments have the opportunity to earn closer to 7%, or more, if you can tolerate a higher amount of risk. In reality, the value of the dollars my husband earned earlier in his career were worth more than this analysis shows based on previous market performance assuming they were invested.
In this analysis, I assume across the board that we are missing out on $17,160 in minimum wages. Now looking at the current minimum wage rate, the annual wage is closer to $19,240. If you maintained your expenses as if you continued to make minimum wage, and only made about 3% on your investments, this analysis suggests that you would have over $500,000 in 2020 after about 15 years if you followed a similar path from diesel mechanic to lineman apprentice program. Following the 25x rule I talked about in my previous article, What is Financial Independence, your income from this portfolio would result in approximately $22,180 annually ($554k x 4%). If you invest in the 4-5 year engineering program, it could take you 4+ years to reach the same portfolio value.
Now don’t get me wrong, there is still strong potential with the 4-5 year degree as opportunities present themselves and allow for higher life long earnings and provide a more rewarding career path to pursue. I personally hate the idea of working outside in awful weather conditions or getting calls at 2am for an outage. However, if you’re looking to achieve financial independence sooner, the time value of money is critical to consider if you never anticipate needing more than $20,000-$25,000 annually and would prefer the freedom to consider other alternatives earlier in life.
Unfortunately, in our scenario, we experienced lifestyle creep and did not maintain a lifestyle in line with us both earning minimum wage. Reflecting back, it’s easy to see how close we could be to achieving financial independence if we were more frugal with our income and invested earlier. I hope by sharing our example, that you can learn from us and choose to live as frugal as you are comfortable to achieve your goals.
Financial Independence in 15 years with $0 Down
Assuming this scenario is repeatable, you could invest 15 years of your life to secure a high confidence of an annual income over $22,000, even if you had nothing to start with. Maybe you’re 18 years old and getting ready to graduate high school and want to plan a quick route to financial independence. Maybe you’re 35 with no savings and wondering if going back to school could allow you to achieve financial independence by 50 years old. Maybe you invested a significant amount of money into a 4 year degree, but your annual salary is lower than expected and you’re struggling to keep up with high interest rates from your student loans. Maybe you’re wondering if a different career path could give you a quick return on your investment and allow you to get ahead and achieve financial independence sooner. This could allow you to go back to your dream job or volunteer without fear of where the next paycheck would come from while living a fulfilling and rewarding life aligned to your passions and values.
At the end of the day, it is critical to think through a few details before you invest your time and money in an education to increase your income. This perspective is especially valuable if you have a goal to achieve financial independence earlier in your career where the time value of money plays an important role:
- How much money do you need to invest in the degree or certification?
- How long will it take you to complete the degree or certification?
- Are you able to earn an income while you work on it?
- How much to you expect to make after you complete the degree?
- What are the potential career progressions and are you able to move to another job with higher income potential?
- Will future job moves or progressions require additional degrees that you need to pay for?
Nerd out on spreadsheets? Check out the excel file I used to create the chart in this article below. Don’t want to download? Shoot me a note on my contact page and I’ll send a google doc your way.
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