Building Wealth from Zero Part 1: Student Loans and Average Status

Wealth Building Jul 23, 2020

Everyone deserves a chance at amassing wealth and getting their financial lives together. Unfortunately most of the knowledge is gated and only taught to the wealthy. One of the reasons that the rich keep getting richer is they know how to talk about money and create more wealth from existing wealth.

In this series, we will talk about money and how an average college graduate can build wealth and attain financial success. The first step is to define a college graduate with average stats.

It is not uncommon to build wealth from zero in America and in many cases less than zero. Look no further than the Millennial and Zoomer generations who are graduating with an unprecedented level of college debt.

If you are debt free, this section is still very important. We all eventually carry some form of debt throughout life (car loans, mortgages, business loans, etc).

Student Loans

Don't have student loans yet or need a refresher on them? Check out this comprehensive Student Loans Guide from LendEDU.

According a 2020 Federal Reserve report, "Fifty-five percent of people under age 30 who went to college took on some debt".

For those of you in the negative wealth territory, don't worry about it. You will be fine. You just have to make the right moves as early as possible. If you come from an immigrant background, then your parents may have taught you that debt is evil and should be paid off as quickly as possible.

Part of me agrees with that statement, but it is not always true. We need to examine the trade offs of paying off debt early. Most debt will have an interest rate tied to it. Interest is money you have to pay on top of the money you borrowed to the lenders.

Depending on who you ask and the type of loan, on average students loan interest rates can range between 4.00% to 7.00%. (Here are the three sources that I referenced: Crediful, The Balance, Bankrate). The higher the interest rate, the more money you have to pay back.

If your interest rate is higher than 6.00% then I strongly suggest you pay back your student loans as quickly as possible because the stock market on average gains 7.00% each year. In simple terms, if you decide to build your wealth with the stock market then each year you make 7% and lose 6%, which leaves you with 1% gain.

Average Return - Interest Rate of Debts = Total Return

For the sake of argument, let's say the interest rate on our student loan is 5.00% and we borrowed $30,000 (actual average number is $28,565 per a voluntary research by lendedu) on a 10 year loan term.

FREE Student Loan Payment Calculator Provided by Student Loan Hero

Per the calculator above, we would pay $318.00/month over 10 years and $8,184 is interest alone. The interest is 27.28% of our original loan; that is a lot of money! If we decide to pay it off earlier, then we will pay less interest. Either approach is fine for wealth building. We will stick to the 10 years for the ease of calculation.

Now that we have figured out how deep in the hole we are in debt, we should talk about how much money we are making.

First Job Right Out of College

This one is a little tough because salary has wide ranges based on location and profession. It would be unreasonable to use a recent graduate in computer science in California making over $150,000/year. We will focus on reasonable numbers by striking a good middle ground with the average.

According to the 2019 NACE Salary Survey, the average starting salary for the the Class of 2018 is $50,944/year. For our purposes, let's be conservative and round down to $50,000/year. I encourage you to read the survey as it does break down averages by majors (spoiler: STEM makes money and liberal arts have it tough).

The Average Starting Point

Age: 25
Starting Salary: $50,000
Assets: $0
Student Debt: $30,000 with 5% fixed interest rate over 10 year period
Net Worth: -$30,000

In Part 2, we can start talking about paying off debt and investing your money in the U.S. stock market. We will set the stage for your success and make the right moves.

Cover Image Credit: Christine Roy

DISCLAIMER: This blog references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. This blog makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis. Please do your own comprehensive research before investing in anything.


Alan Chen

Hi! One day, I will build a technology company that will change the world. Right now my focus is teaching personal finance. Now that you know a little about me, feel free to reach out and chat!

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