Financial Advice to a Young Software Developer

First of all, Congratulations!  Welcome to the fast-paced, engaging, and constantly shifting world of software development.  Of course, every company and position in the field varies, but the good news is that a skilled developer always has options.  Always.

If you’ve already made it through the interview process and have been given a job offer or two, then you’re well aware that this particular field can be lucrative as well.  Once again, pay will vary depending on the company, position, and geographic location, but there’s a good chance your starting salary (as one person) has already surpassed the median household income and will only grow from there.  Take a minute to fully absorb that last sentence, this is not an opportunity that everyone gets!

With this great opportunity comes great power, and a few decisions that you make in the coming years can have a drastic impact on your future.

As someone who stood in your same shoes 5 years ago and came out the other side stronger than ever, I’d like to take this opportunity to lay out the most important lessons I learned along the way.

Make a few smart decisions early on in your career and you will have the ability to choose the life of your dreams a short way down the road.

The Short Version

As I was typing this up, I realized that I underestimated how much information I wanted to share and it turned into a fairly long post.  I highly encourage you to read through it in it’s entirety, but I’ll break down the basic ideas here as a quick reference:

  1. Keep fixed expenses low by continuing to live the “college lifestyle” for a while.  Find roommates to keep housing expenses down, live as close to work as possible, and drive a basic older car.  After some time has passed, it’s okay to start upgrading these parts of your life, but avoid going crazy as soon as that first paycheck arrives.  The longer you can hold out on inflating your lifestyle, the better off you will end up in the long run.
  2. Start investing now!  Contribute at least enough to your employer’s 401k to get any matching contributions (it’s free money!), but work towards completely maxing it out ($18,500) over the next few years.  Aggressively pay down debt starting with the highest interest rate and redirect that extra cash flow into investments once the debt is paid off.  More details below on Roth vs. Traditional and what specific investments to look for.
  3. Remain flexible, both in your career and geographic location.  You may start out with the absolute perfect position at the perfect company, but things move fast and change frequently in the tech world.  Being open to switching roles and/or companies, especially in the first 3-5 years, has the potential to accelerate both your career and income growth significantly.
  4. Save raises and bonuses while investing on autopilot.  To echo #2, start investing in your company’s 401k ASAP and work towards growing your contribution % up to the max.  Any bonus or raise is a great time to bump that contribution percentage up, and don’t stop once you max it out.  Redirect additional funds into an IRA or regular brokerage account.  Automate as much of these savings as possible.
  5. Financial independence is the goal, you can figure out what you want to do with that power later.  Investing early on will open up a world of possibilities a decade or two down the road.  Whether you want to retire early, take significant time off to raise kids, backpack across Europe or Southeast Asia, become a leading donor at your favorite charity, or a little of each, it will be the investments you make in the early years of your career that will make it possible.

Don’t worry about mapping out your future too far in advance because any number of things can and will change in the coming years.  Start laying down a strong financial base by living smart, investing what you can now, and growing that savings rate as you start bringing in more money.

Pulling this off in the first 5-10 years of your career means having the ability to do just about anything you can dream of a short ways down the road.  Remember, most people don’t get this opportunity, so be sure to make the most of yours.

1. Keep Fixed Expenses Low

Whether you are a child prodigy that was programming computers before you could walk or someone that grinded out 4+ years of college to master the intricate art of writing code, you probably weren’t living a lavish lifestyle before finding that first job in the industry.  Transition out of that old lifestyle as slowly as you possibly can!

A brand new career does not have to mean a brand new life, at least not initially.

One of the biggest mistakes a young professional can make is to start spending their entire paycheck as soon as it hits their bank account.  Even worse is to start spending money that hasn’t even been made yet in the form of auto loans, credit card debt, and more!  This is the surest way to lock yourself into a lifetime of employment, and whether or not you like your job now, there may come a point down the road you will want to transition to something else.  Maxing out your paychecks early on with regular monthly payments (which are offered for EVERYTHING these days) will start you down a path that can be tough to recover from.

Let’s look at a few of the biggest fixed expenses in most people’s lives and a few smart alternatives for a young professional:

Housing

For the majority of households in America, housing is the single largest expense category by a significant margin.  By choosing to live a little differently during the first few years of your career, you can free up thousands, if not tens of thousands of dollars to direct as you please.  That extra cash can go towards paying down debt, travel, investing, entertainment, and more, but only if you can find a way to optimize your housing situation up front.

One of the most powerful ways to optimize housing (and potentially eliminate Transportation costs altogether!) is to live as close as possible to where you’ll be working.  Being able to walk to work everyday is ideal (bonus points if groceries and other errands are also walkable), being able to hop on public transit is a close second, while being forced to drive into work everyday is a distant third.

After finding the ideal location to live, the next easiest optimization is finding a roommate or two to split expenses with.  This can come in the form of browsing ads that are looking for roommates or finding an empty place to rent and roommates to fill it at the same time (other young software developers at your company can be a good place to start).

However, if the idea of roommates is unbearable to you, then the next best option is to get a small studio apartment or similar, ideally within walking distance of your office.  In almost all cases, this will end up costing more than splitting expenses with someone else, but I am willing to admit that not everyone is cut out for the roommate lifestyle.  Either way, you’re going to come out ahead of someone that decides to live it up right out of college by renting a 2-bedroom apartment on a high floor just for themselves.

I do NOT recommend taking your offer letter to the closest bank in order to start shopping for a place to buy right away.  After a year or two of living by the above principles, I’d recommend looking into the various forms of “house hacking” to optimize further, but make sure you’ve done your research.

Transportation

Now that we’ve covered the largest expense in most people’s lives, let’s move on to number two: Transportation.

For most people, this will mean a vehicle of some kind and all of the related expenses that go along with it including insurance, gas, maintenance, parking, and more.

I said it earlier, but it bears repeating: Do NOT start out your brand new career by committing tens of thousands of dollars to a depreciating asset!  There will be plenty of time for that later if you must have that brand new car, but for now, let’s try to live a little smarter.

However you were getting around before is probably still good enough to get you around now.  If you were driving a beater, keep driving a beater.  If you were taking the bus into school every day, see if that option can still work.  Remember, we’re trying to transition into your full adult life slowly.  We’ll get there eventually, but should be able to set yourself up on an amazing financial footing during the transition.

Depending on how successful you were with optimizing your housing, you might not need to spend anything on transportation at all!  The perfect scenario for someone starting a new gig in a new city is to find a place where you can walk to work, walk to most of your errands, and split expenses with roommates.  Minimal housing costs, little to no transportation costs, and a steady paycheck to start setting up that life of your dreams.

If that’s not an option and you choose to live somewhere where driving is necessary, then pick a reasonable vehicle to do that driving in.  Something used in 5-15 years old range that costs less than ~$10k should be more than sufficient for your commuting needs.  Yes, that’s extremely broad, but I think you get the idea.

Start your life out minimally and build outwards as necessary, don’t inflate your lifestyle up front and scramble to pull back spending down the road.

Food and More

After housing and transportation, food rounds out the “Big 3” expense categories in most people’s lives.  The good news is that if you are able to optimize housing and transportation to a reasonable degree, then food (within reason) probably isn’t going to break the budget.

This is a good time to talk about why we’re looking to save money on things like housing, transportation, food, and more.

It’s not just so you can watch your savings grow while living a bare bones lifestyle.  In fact, it’s almost the exact opposite!  By saving money on these significant everyday expenses, you are able to spend freely on the things that matter most to you in life AND set your future self up at the exact same time.

Saving thousands of dollars on these fixed expenses means you can take that trip to Hawaii, you can build that awesome computer, you can try that fancy new restaurant, you can go out with your friends for drinks on a regular basis, AND you can start saving money all at the same time.

If you start out your career making the lazy choice of renting the fancy apartment, filling it with nice new furniture, and driving the fancy car, there simply isn’t enough money left to have those amazing experiences while building a solid financial base.

Getting back to food, try to cook most of your own meals and bring your own food to work if a reasonably priced option isn’t available on site.  If you do that for the majority of your meals, then you have the freedom to make the remaining meals special.  As far as food goes, that will mean something different to everyone, but going out to a fancy restaurant, grabbing food and drinks with friends, or simply ordering in are all reasonable options if you’ve optimized the bulk of your meals already.

2. Start Investing Now!

As a young professional entering the workforce, your number one advantage is the amount of time available for investments to grow and compound over time.  Even a small amount invested now will make a big difference as it grows over the coming decades.

The first place to look would be your employer’s 401k (if they offer one).  As soon as you are eligible to contribute to the plan (which may be your very first paycheck), at least contribute enough to get the entirety of any matching contributions.  These matching contributions are part of your overall compensation package and basically free money.  Don’t leave any of it on the table!

However, doing the bare minimum of just getting the match isn’t going to set you up for a financially secure future in most cases.  Beyond getting the maximum 401k match, there are a couple other options for directing additional funds towards your financial future.

The two most obvious ones are paying down debt and investing more.  Both of these help towards the overall goal of growing your net worth, but come with their own trade-offs.  Which of the two is the optimal choice is eternally debated within the personal finance world, but will heavily depend on the interest rate of any debt you currently have.

Personally, I would immediately work towards paying off any debt at an interest rate above 6% (starting with the highest rate first).  The 4-6% range is more of a grey-area, so it will most likely come down to your risk tolerance.  Historically, the stock market has returned an average of 9-10% annually, but that comes with significant ups and downs along the way.  Paying off debt is a sure thing right now while investing in the stock market has the potential to come out ahead in the long run.

At an interest rate below 4%, I would personally just continue making the minimum payments and investing excess money in the market instead of paying it down.  Keep in mind that both investing and paying down debt are extreme positives versus failing to save at all, so don’t get too caught up in the decision at this point.  Pick the one you feel more comfortable with and re-evaluate every so often.

If you either have no debt to pay down or are choosing to invest instead, it’s probably optimal to direct those investments towards tax-advantaged accounts such as the 401k.  Assuming your employer’s 401k has a reasonable low-cost stock market index fund, it would be a great place to invest additional funds.  Plus, you get the benefit of it all coming out of your paycheck automatically!

If you don’t have access to a 401k or the investment options are poor, then opening or adding money to an IRA is your next best option.  Just be sure to pay attention to the contribution limits based on your income.

Another hotly debated topic in the personal finance world is Roth versus Traditional accounts, which can be applicable to both 401k’s and IRA’s.  Standard 401k’s always offer the Traditional option and it will probably be the default, but more and more these days are also offering a Roth option that you can contribute to instead.

Roth means you will pay taxes on your contributions up front and will never be taxed on them in the future when the account grows or when you withdraw the funds.  Traditional allows you to save money on taxes in the current year and the account will grow tax-free, but any withdrawals made in the future will be taxed as regular income.

Just like with paying down debt vs. investing, both are great options versus doing nothing, so don’t get too caught up in the decision right now.  The optimal decision depends on predicting the future which simply isn’t possible, but I can provide a rough rule of thumb that I give people as advice when choosing between the two:

If your top tax bracket for the year is expected to be <25%, go with Roth and simply pay the taxes on that income now.  If your top tax bracket for the year is expected to be >25%, then go with Traditional to save money on taxes up front.  For 2018, the cutoff will be ~$150,000 for a single income earner, but you will have to adjust if you are filing jointly and/or have significant tax deductions.

For most people just starting out, this means you will want to go with Roth, but try to re-evaluate every year or so based on changes to the tax code and your plans for the future.  The earlier you plan to stop working full time, the better Traditional contributions start to look.

Beyond contributing more to a 401k, maxing out an IRA, and paying down debt, the next best option is just opening a regular brokerage account and investing additional funds there.  Vanguard, Schwab, and Fidelity each have great low-cost stock market index funds to choose from and would make a great choice.  My personal preference is Vanguard, but going with a company that you already have a relationship with can also be the logical choice.

A brokerage account has no contribution limit and you can basically treat it like a savings account that you regularly contribute additional money into.  Just make sure those funds are being added to the investment of your choice (hopefully a low-cost index fund such as VTSAX) and you’re good to go.

3. Remain Flexible In Your Career

While the first two points above are applicable to almost anyone starting a new profession at a young age, this section is more geared towards software in particular.

Tech as a whole and software development in particular is a VERY high demand field right now.  This is good news for anyone that happens to have talent in the space, but makes for some interesting dynamics regarding switching companies and pay structures.

The key point is that it’s important to remain flexible, especially early on, in order to optimize both your career and income growth.

The first reason to be flexible is that tech, especially at the big companies, moves extremely fast and projects are constantly changing.  A project and team you like today could be completely phased out and re-organized tomorrow.  The good news is that this almost never involves someone losing their job, but it will mean starting fresh on a brand new problem, possibly with a new team.

This doesn’t mean you shouldn’t dive fully into a project and give 100%, because you will get recognized for that effort even if the overall project doesn’t work out, but it does mean you shouldn’t get too emotionally invested in any given problem.

Speaking of the fluidity of projects and teams, don’t be afraid to initiate transitions yourself.  As a rule of thumb, it’s easier to grow your income in significant chunks by switching companies than it is being promoted within the same company.  I wouldn’t recommend jumping ship within the first year if you aren’t in an bad situation, but it’s almost the norm for people to switch companies around the 2 or 3 year mark.  At that point, if you aren’t making 20-50% more than your starting salary, just know that another company would probably be willing to bump you up to that level for the same level of work.

As with everything else, this will vary heavily by company and region, plus your own knowledge, skill, and specialty (if any), so treat this all as a rough rule of thumb.  Just don’t be afraid to keep these options in the back of your mind if you want to mix things up and possibly get a significant raise at the same time.

Depending on the company, it may also be possible to initiate switching teams within the same company.  This has the benefit of starting fresh on a new problem with new people and gaining new experience, but will probably not come with a pay bump if it’s a lateral move.  A lateral move between companies can.

Expanding on flexibility, be open to moving to a new location for work.  As a young developer that hasn’t laid too deep of roots yet, this is the best time of your life to try out a major lifestyle change, possibly across the country.  Most of the biggest (and highest paying) opportunities will be on the west coast (mostly Seattle and the Bay Area), but Denver, Austin, Chicago, and several other cities have their own growing tech markets as well.  If you end up not liking it, then there will still be jobs available in your current location if you want to transition back.

If you are serious about saving a high percentage of your income and reaching financial independence at an early age, moving for a significant bump in pay could greatly reduce your timeline.  Despite the cost of living being higher in most of these locations, it’s still possible to live smart and your savings as a raw dollar amount will end up significantly higher.

If you find the perfect role with great compensation and an awesome work-life balance, then by all means stay in the same place!  I’m not saying that you have to move around to be successful, just know that being open to a transition can often provide more opportunities.  At some point in the future, your current situation may change outside of your control, so don’t forget that you have options if that day comes.

If you haven’t found that perfect role yet, then look at the many other options that are available to you.  These can be different roles in the same company, switching to a different company, or even a totally different position across the country.

Overall, remain flexible as you grow as a software developer and check around every year or two to make sure you’re being paid what you’re worth.

4. Save Raises and Bonuses, Invest on Autopilot

Regardless of how much you are able to save when you first start out, the advantage of time is on your side.

Once you are consciously paying attention to your spending and living below your means, raises and bonuses shouldn’t have a drastic impact on your lifestyle.  Ideally, every raise or bonus should result in the equivalent amount of money being put towards growing your net worth.

If that sounds extreme or you feel like your current spending level is preventing you from living the life you want, then you may feel more comfortable with doing a 50/50 split or similar for every raise or bonus.  That means directing half of the new money coming in towards paying down debt or investing while spending the other half in some way that improves your quality of life.

50/50 is just an example, but you can adjust the ratio as you see fit.  Just keep in mind that every time you increase how much your everyday life costs, the further you move away from financial independence.

The easiest way to make sure you aren’t inflating your lifestyle by accident is to automate your savings up front, allowing yourself to spend the remainder.  Doing the opposite (spending first and saving second) will almost always result in sub-optimal spending habits.  Try to save as much as you feel comfortable doing up front, before it has a chance to sit idly, waiting to be spent.

Automating your saving habits can help with this enormously.  The simplest way to automatically put a part of your paycheck towards investments is going to be your 401k contribution.  Whenever you get a raise, bonus, or find yourself with extra money leftover each paycheck, bump your contribution up a few percentage points.

If you are working on paying down debt or investing outside of the 401k, then see if you can automatically direct deposit a portion of your paycheck into that respective account.  Many banks and investment firms can provide the correct routing and account numbers to make it seamless on your HR’s end.  This has the ability to reduce any downtime between getting paid and getting that money to the right place which can save interest or let that money start growing a little bit faster.

If direct deposit isn’t an option for your preferred method of saving, then see if you can set up an automatic withdrawal that occurs a day or two after your paycheck reaches your checking account.

If you are able to set up a system to automatically invest your paycheck as it comes in, then you will rarely even have to think about your money as is continues to grow in the background of your life.

Reduce as much friction as possible between earning and investing money, remembering to tweak that system every time your income grows.

5. Financial Independence is the Goal

The primary goal of everything above is to lay a foundation that helps to achieve financial independence at a young age.

Financial independence (or FI) is the ability to live entirely off of your existing investments, which means you no longer need a steady income to support your lifestyle.  Note that it doesn’t make any statement about what that lifestyle can look like.

Financial independence can be achieved whether you want to spend $40k per year or $300k per year, but obviously a lower level of spending will get you there faster.  A rough rule of thumb is that you need to have 25 times your desired level of spending invested in the market in order to live off of the dividends and growth.

This means a lifestyle that costs $40,000 per year will require $1,000,000 invested to support (25 x $40k).  Likewise, a lifestyle that costs $100,000 per year will require 2.5 million dollars to support.  For every $1 your lifestyle requires, you will need $25 invested to achieve FI.

The 25x guideline (or “4% rule”) comes with a lot of caveats, but is a great first number to shoot for when getting started.  Once you start to approach that target several years down the road, you can start diving into the gritty details about whether or not the rule of thumb will work for you.  For now, just start saving and investing and let time and compound interest do its thing.

While many people in today’s world struggle to retire comfortably in their 60’s, starting early and continuing to grow your savings over time can enable a comfortable level of FI decades earlier.  Your own timeline will depend primarily on your savings rate as a percentage of income.

Starting from a net worth of $0 and saving 25% of your income means you can reach FI in just over 30 years.  Saving 45% can get you there in less than 20, while saving 65% can get you there in less than a decade!  This assumes a static income, which is highly inaccurate for someone just starting out in software development, so the timelines get even smaller if you can grow your income without inflating your lifestyle at the same time.

I don’t expect most people just starting out to be saving 50% of their income or more, but it’s not impossible, especially if you were lucky enough to land that 6-figure position right out of college.  Regardless, the key is to start saving what you can now, finding the balance between spending and saving as you slowly grow your lifestyle into the one of your dreams.

Once you’ve found that ideal balance between living life now and saving for your future, FI becomes inevitable over the coming decades.

After achieving FI, any number of different options are on the table.  You can choose to stay home while raising kids, you can choose to start that company you always dreamed of with almost zero financial risk, or you can choose to backpack around the world for months or even years at a time.  The options are almost limitless once you’ve set up a strong financial footing to work off of.

Even before reaching FI, having several years worth of savings accumulated gives you an insane amount of power when choosing what your work looks like.  Extended sabbaticals, lower stress positions, and even forming a part-time lifestyle business are all possible as you watch your investments continue to grow.

Summing It All Up

The goal all along has been options.  Options that allow you to choose where to live, what you spend money on, how often you work, and most importantly, how you spend your time.

Being able to build and live that perfect life means having a level of financial autonomy that simply isn’t possible when you are relying on full time work to fund your lifestyle.

Working backwards, the way to get that financial autonomy is by achieving Financial Independence, ideally at a younger age rather than an older one.  Accomplish that by starting to invest money now, leveraging the power of time and compound interest.

The easiest way to start investing is contributing to your employer’s 401k, which often comes with additional matching funds to accelerate your savings.  Beyond getting the full match, work towards contributing even more money to the 401k, paying down debt, and investing additional money in IRAs and brokerage accounts as your savings rate continues to grow.

Force yourself to make saving a regular habit by automating as much as possible away from your paycheck and into growing your net worth.  Continue growing your savings rate over time by increasing your automated contributions in step with any raises or bonuses.

Remain flexible in your career to accelerate income growth, including being open to moving between companies and even across the country for more opportunities.  At the same time, income should not be your only focus when switching roles, also pay close attention to work/life balance.

At the beginning of your career, start out with a simple lifestyle to free up funds for amazing experiences and saving.  Don’t take your new paycheck as an opportunity to start upgrading every facet of your lifestyle (cars, apartments, furniture, technology, and more).  Start out simple, just like you were living before starting this career, and slowly build out your lifestyle over years (not months) as you continue to save money away.

Make a few smart decisions early on in your career and you will have the ability to choose the life of your dreams a short way down the road.


6 thoughts on “Financial Advice to a Young Software Developer

  1. Great article! What are your thoughts about changing job when your 401K vesting period isn’t over or if you have stock options that are waiting to mature?

    1. Great question! I think the most important thing to keep in mind is that those incentives are there for a reason, often to keep you at the same place longer than might otherwise make sense.

      In my own situation, there was ALWAYS another round of stock vesting every 6 months. This meant is was very easy to say: “Oh, well I can always make it another 6 months”. Regardless of when I left, I would always be forfeiting something.

      If your main motivation for switching jobs is income, then it should be easy to weigh what you’re giving up by leaving versus what the new job offers. If you’re transitioning for other reasons like work/life balance, team culture, or moving to a more interesting problem, then losing some potential income could be worth it. Enjoying your work should take priority over maximizing income, but you have to find the right balance in that trade-off.

      In summary, don’t let vesting periods and future compensation deter you from seeking other opportunities. It’s entirely possible the new position has a signing bonus equal to anything you might be giving up, plus job offers are pretty much always negotiable. Being able to say “I would be giving up X and Y by leaving my current position” can be a powerful tool during that negotiation. And don’t forget, you can always say no to a new offer!

  2. Great advice, thank you Noah. I have a great work/life balance, so I am very happy where I am now. I like your advice about using stock options / vesting as a negotiating tool for new positions. Keep up the great work!

  3. Just read the first part but hopefully I’ll have more time later on to read the remainder. This is great advice for anyone starting in on a new career!

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