paying back loans

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Anonymous User
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Re: paying back loans

Postby Anonymous User » Sat Oct 22, 2011 10:35 pm

Fresh Prince wrote:
keg411 wrote:
Anonymous User wrote:Serious question:

After law school, is there someone I can hire at reasonable price to (based on education and sound principles) figure out and/or handle the best course of financial action in terms of paying off loans and building capital for the future?

I mean, people come to us with their legal problems... can't we rely on others who study these things to take all these numbers and just put forth in layman's terms the way forward?


Yeah. A lot of people have financial planners/accountants.


There actually are financial advisors that provide services tailored to the needs of students deep in student debt. They did a presentation at my law school. Most of the services they offered were free.

Question-poser here. Thanks a lot both of you; I'm only a 2L but I'll be on the lookout for this upon graduation.

-Ignores rest of thread now-.

shmoo597
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Re: paying back loans

Postby shmoo597 » Sat Oct 22, 2011 10:50 pm

ToTransferOrNot wrote:Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.


All true. Another thing being ignored is that Muni bonds are by no means risk free. Municipalities are going bankrupt left and right and have absolutey atrocious outlooks over the next few years. Anyone read Michael Lewis' most recent article? Read about Harrisburg PA? Follow Meridith Whitney?

shmoo597
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Re: paying back loans

Postby shmoo597 » Sat Oct 22, 2011 10:52 pm

So what is the consensus on 401k, roth IRA, regular IRA, and cash savings?

Assuming 200k in debt, am I wrong to think that the best course of action is to save up a rainy day fun, and then do nothing but pay down loans? Does it make sense to put any cash into a 401k or roth IRA in addition to saving a rainy day fund?

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A'nold
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Re: paying back loans

Postby A'nold » Sat Oct 22, 2011 11:59 pm

shmoo597 wrote:So what is the consensus on 401k, roth IRA, regular IRA, and cash savings?

Assuming 200k in debt, am I wrong to think that the best course of action is to save up a rainy day fun, and then do nothing but pay down loans? Does it make sense to put any cash into a 401k or roth IRA in addition to saving a rainy day fund?


At least invest up to the max allowed under your match 401k. I could see also maxing out your Roth IRA as you could begin your compound interest journey earlier and you really can't put that much in each year.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 2:31 am

ToTransferOrNot wrote:Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.


I was hinting at traditional mutual funds or ETFs. The only people who need individual bonds have a lot more than a 100-200k

ToTransferOrNot
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Re: paying back loans

Postby ToTransferOrNot » Sun Oct 23, 2011 6:17 am

quakeroats wrote:
ToTransferOrNot wrote:Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.


I was hinting at traditional mutual funds or ETFs. The only people who need individual bonds have a lot more than a 100-200k


Mutual funds and ETFs have transactional costs (on entry, exit, and while the funds are being invested) that eat further into the return, though, unless you're claiming that ther are bond funds that result in a *net* 5%, which I find difficult to believe. Even if they do exist, it's still 2.5% less which, for someone who has $200k in debt, is not an insignificant amount.

shmoo597
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Re: paying back loans

Postby shmoo597 » Sun Oct 23, 2011 9:50 am

A'nold wrote:
shmoo597 wrote:So what is the consensus on 401k, roth IRA, regular IRA, and cash savings?

Assuming 200k in debt, am I wrong to think that the best course of action is to save up a rainy day fun, and then do nothing but pay down loans? Does it make sense to put any cash into a 401k or roth IRA in addition to saving a rainy day fund?


At least invest up to the max allowed under your match 401k. I could see also maxing out your Roth IRA as you could begin your compound interest journey earlier and you really can't put that much in each year.


Given that for biglaw, neither of these are possibilities (no matching; above roth IRA limits), the best course of action is just to pay down ASAP (aside from an emergency fund?)

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Old Gregg
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Re: paying back loans

Postby Old Gregg » Sun Oct 23, 2011 10:23 am

Given that for biglaw, neither of these are possibilities (no matching; above roth IRA limits), the best course of action is just to pay down ASAP (aside from an emergency fund?)


Ignoring the circle jerk that's going here, my current strategy is a pretty even split between saving money and putting money toward my debt. I also put my entire bonus toward my debt at the end of every year, and any money from the "spending money" part of my salary every month that I don't spend goes toward my debt.

I would like to stay at my firm long term. My desire to get rid of debt as quickly as possible is to start accumulating more savings as much as possible so I can start owning my own place as soon as possible.

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wiseowl
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Re: paying back loans

Postby wiseowl » Sun Oct 23, 2011 11:19 am

You should still be able to max out your Roth during stub year.

I'd also be surprised if the income limits aren't raised on those pretty soon.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 11:23 am

ToTransferOrNot wrote:
quakeroats wrote:
ToTransferOrNot wrote:Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.


I was hinting at traditional mutual funds or ETFs. The only people who need individual bonds have a lot more than a 100-200k


Mutual funds and ETFs have transactional costs (on entry, exit, and while the funds are being invested) that eat further into the return, though, unless you're claiming that ther are bond funds that result in a *net* 5%, which I find difficult to believe. Even if they do exist, it's still 2.5% less which, for someone who has $200k in debt, is not an insignificant amount.


You shouldn't buy loaded funds unless the load is waived or it's a CDSC and you plan on staying long term. ETF trades are either cheap ($8) or free through certain brokers. The other costs are negligible because they're small and then split between everyone in the fund. You're talking about minor or non-existent costs as if they were much bigger.

http://finance.yahoo.com/q/pm?s=SXFIX+Performance
http://finance.yahoo.com/q/pm?s=NYFDX+Performance

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Old Gregg
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Re: paying back loans

Postby Old Gregg » Sun Oct 23, 2011 11:24 am

quakeroats wrote:
ToTransferOrNot wrote:
quakeroats wrote:
ToTransferOrNot wrote:Assuming no transaction costs on the muni bonds (terrible assumption, by the way, especially since you would be buying small amounts at any given time), I guess you could say that you have a 2.5% "loan" by purchasing muni bonds instead of paying off your loans. But what are you getting for that 2.5%? Liquidity I suppose, but liquidity to what end? You wouldn't want your emergency funds tied up in bonds, so you're talking funds beyond your "crap I need cash immediately" needs. I suppose you could flip it into a house downpayment if the need arose, but due to the incrimental nature with which you'd have to buy the bonds, that doesn't make sense either.


I was hinting at traditional mutual funds or ETFs. The only people who need individual bonds have a lot more than a 100-200k


Mutual funds and ETFs have transactional costs (on entry, exit, and while the funds are being invested) that eat further into the return, though, unless you're claiming that ther are bond funds that result in a *net* 5%, which I find difficult to believe. Even if they do exist, it's still 2.5% less which, for someone who has $200k in debt, is not an insignificant amount.


You shouldn't buy loaded funds unless the load is waived or it's a CDSC and you plan on staying long term. ETF trades are either cheap ($8) or free through certain brokers. The other costs are negligible because they're small and then split between everyone in the fund. You're talking about minor or non-existent costs as if they were much bigger.

http://finance.yahoo.com/q/pm?s=SXFIX+Performance
http://finance.yahoo.com/q/pm?s=NYFDX+Performance


^^^^ The circlejerk continues ^^^^

c3pO4
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Re: paying back loans

Postby c3pO4 » Sun Oct 23, 2011 11:27 am

Isn't there some finance forum you guys can run off to?

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 11:29 am

wiseowl wrote:You should still be able to max out your Roth during stub year.

I'd also be surprised if the income limits aren't raised on those pretty soon.


What are you going to do with 5k in a Roth in perpetuity? I suppose you could do a FoF and leave it, but unless your income drops substantially you'll never contribute again. If you're planing to retire, a Roth usually isn't the best idea.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 11:32 am

c3pO4 wrote:Isn't there some finance forum you guys can run off to?


This isn't finance. It's personal finance. You'll need to know this sooner or later.

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IrwinM.Fletcher
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Re: paying back loans

Postby IrwinM.Fletcher » Sun Oct 23, 2011 11:58 am

quakeroats wrote:
What are you going to do with 5k in a Roth in perpetuity? I suppose you could do a FoF and leave it, but unless your income drops substantially you'll never contribute again. If you're planing to retire, a Roth usually isn't the best idea.


I mean, this is just 100% wrong. Pick whatever fund family you're going to use (i.e. Blackrock, Ivy, whatever), set up the account directly with them to avoid an erosive maintenance fee, and manage it like you would any other investment. The benefits of a stub year/SA year roth contribution vs. a deductible IRA are not even close for a biglaw employee under 40ish years old, regardless of the contribution amount.

I would also like to see this magical muni-fund that has an average maturity (see: bond duration is different from maturity) of <10 years with a yield of 5%. If it exists, the average credit quality will be maaaaaaybe BBB/A- at best. Hardly risk free. In fact, that's barely investment grade. Quality muni bonds have NEVER yielded 250% of the equivalent treasury RoR and never will (historical average fluctuates b/t a 20-50% premium). The point is moot of course b/c you inverted the taxable RoR of repaying SL interest.

You give good advice on these boards on some topics, but investments is not one of them.

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Old Gregg
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Re: paying back loans

Postby Old Gregg » Sun Oct 23, 2011 12:01 pm

You give good advice on these boards on some topics, but investments is not one of them.


I think he's just trying to show off that he has knowledge about these things.

I can do it too:

The credit default swaps give investment banks high exposure to various risks because of the ETF comparisons run by brokers both in the front and back offices.

I have no idea what I just said. But man that looks really brilliant to the layman.

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quakeroats
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Re: paying back loans

Postby quakeroats » Sun Oct 23, 2011 12:20 pm

IrwinM.Fletcher wrote:
quakeroats wrote:
What are you going to do with 5k in a Roth in perpetuity? I suppose you could do a FoF and leave it, but unless your income drops substantially you'll never contribute again. If you're planing to retire, a Roth usually isn't the best idea.


I mean, this is just 100% wrong. Pick whatever fund family you're going to use (i.e. Blackrock, Ivy, whatever), set up the account directly with them to avoid an erosive maintenance fee, and manage it like you would any other investment. The benefits of a stub year/SA year roth contribution vs. a deductible IRA are not even close for a biglaw employee under 40ish years old, regardless of the contribution amount.

I would also like to see this magical muni-fund that has an average maturity (see: bond duration is different from maturity) of <10 years with a yield of 5%. If it exists, the average credit quality will be maaaaaaybe BBB/A- at best. Hardly risk free. In fact, that's barely investment grade. Quality muni bonds have NEVER yielded 250% of the equivalent treasury RoR and never will (historical average fluctuates b/t a 20-50% premium). The point is moot of course b/c you inverted the taxable RoR of repaying SL interest.

You give good advice on these boards on some topics, but investments is not one of them.


Pick Schwab, Vanguard, or Fidelity (or all three). None of them have maintenance fees and all have a wide selection. If you put money in a Roth, you're paying taxes now instead of later. That's only a good idea if your tax bracket later in life is going to be lower than it is when you contribute (or if you have specialized investment/tax concerns which I'll skip because it's uncommon). If you plan on retiring, your income is going to drop substantially, and you can take out the money you've put in a Traditional IRA at whatever your marginal rate is. Your retirement marginal rate is likely to be substantially lower than your working marginal rate. That's usually going to beat what you could do with a Roth. Plus, the money is likely to be orphaned in a Roth. Average salaries 15 years out of a top school are around 200k, which is well above the threshold to contribute to a Roth (it's above the phase out for deducting Traditional contributions too, but most 401k money eventually can roll into a Traditional IRA). You could always back the principle out, but then you're left with whatever gains you've accumulated. With FoF options, this isn't the allocation hassle it used to be, but why make extra work for yourself?

Also, the second fund I cited is 40% AA and 20% A. Ratings are for suckers anyway.

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IrwinM.Fletcher
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Re: paying back loans

Postby IrwinM.Fletcher » Sun Oct 23, 2011 12:31 pm

Wrong. Just so much wrong, it abounds. Everywhere.

Edited- this pissing contest will just continue to derail. But seriously, so much wrong.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 12:41 pm

quakeroats wrote:
wiseowl wrote:You should still be able to max out your Roth during stub year.

I'd also be surprised if the income limits aren't raised on those pretty soon.


What are you going to do with 5k in a Roth in perpetuity? I suppose you could do a FoF and leave it, but unless your income drops substantially you'll never contribute again. If you're planing to retire, a Roth usually isn't the best idea.

Ummm.... what?

A retirement account that has tax-free earnings is a bad idea if you want to retire? You really don't know what you're talking about do you?


Addressing the real issue:

Make sure you have enough liquidity to be able to pay bills/expenses for 3 months. Pay into your 401k etc., especially if your firm matches. Then pay down your loans as fast as you can.

If I'm fortunate enough to land a firm job I will probably be saving money for a year or so in order to put a down payment on a house (unless I'm in NYC), so that complicates the issue a little more. This whole idea of asking people on TLS for this advice rather than asking what other associates or partners do/did at your firm is ridiculous though. It's not like you're the only one at your firm that took out loans to go to law school.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 12:42 pm

quakeroats wrote:
c3pO4 wrote:Isn't there some finance forum you guys can run off to?


This isn't finance. It's personal finance. You'll need to know this sooner or later.

You should probably try to learn it sooner rather than later, because you don't have a clue what you're saying.

c3pO4
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Re: paying back loans

Postby c3pO4 » Sun Oct 23, 2011 12:59 pm

ITT dude tries to impress law posters with finance knowledge because got laughed out of finance forums?

Brassica7
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Re: paying back loans

Postby Brassica7 » Sun Oct 23, 2011 1:05 pm

Even if you can get 5% on a muni bond with limited risk (meaning a decent rating), why would you prefer that over a guaranteed 7.9% return by paying off the Gradplus loans early? 5% return and some risk is not as good as 7.9% return and no risk (or if there is some risk it would only be in paying off your loans before the OWS people get debt amnesty for everyone--but this will not happen). The same goes for Stafford loans, although the difference is lower at 6.8% interest.

A Roth IRA is probably the best investment vehicle possible for someone early in his/her career because all of the gain on the investment will be tax free. If you are investing for 40 years before you retire, this can be a huge amount of untaxed gain. Unless your employer has matching 401k contributions, a Roth IRA is better by far than a 401k and traditional IRA (where earnings are untaxed going in but all investment profits are taxed when you cash them out in retirement). If you are close the retirement, then a 401k may be better.

The money need not be isolated, as some have suggested. Plow 5k into the Roth in the stub year, then invest in a traditional IRA/401k and quickly convert it into a Roth. This allows you to get around the income limits. http://retireplan.about.com/od/iras/a/convert.htm.

I believe it is a good idea to pay off the student loans as fast as possible while still saving for an emergency fund (6-9 months' expenses), maxing the Roth IRA (only 5k/year) and possibly maxing out 401k contributions (I think that is around 15.5k/year). If you do not make these contributions to retirement accounts each year, you lose the opportunity. If you have the chance to pick up a cheap house somewhere, this may be a really good deal that you should go for, but I do not know enough about real estate to feel comfortable commenting on it.

Brassica7
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Re: paying back loans

Postby Brassica7 » Sun Oct 23, 2011 1:13 pm

Brassica7 wrote:Even if you can get 5% on a muni bond with limited risk (meaning a decent rating), why would you prefer that over a guaranteed 7.9% return by paying off the Gradplus loans early? 5% return and some risk is not as good as 7.9% return and no risk (or if there is some risk it would only be in paying off your loans before the OWS people get debt amnesty for everyone--but this will not happen). The same goes for Stafford loans, although the difference is lower at 6.8% interest.

A Roth IRA is probably the best investment vehicle possible for someone early in his/her career because all of the gain on the investment will be tax free. If you are investing for 40 years before you retire, this can be a huge amount of untaxed gain. Unless your employer has matching 401k contributions, a Roth IRA is better by far than a 401k and traditional IRA (where earnings are untaxed going in but all investment profits are taxed when you cash them out in retirement). If you are close the retirement, then a 401k may be better.

The money need not be isolated, as some have suggested. Plow 5k into the Roth in the stub year, then invest in a traditional IRA/401k and quickly convert it into a Roth. This allows you to get around the income limits. http://retireplan.about.com/od/iras/a/convert.htm.

I believe it is a good idea to pay off the student loans as fast as possible while still saving for an emergency fund (6-9 months' expenses), maxing the Roth IRA (only 5k/year) and possibly maxing out 401k contributions (I think that is around 15.5k/year). If you do not make these contributions to retirement accounts each year, you lose the opportunity. If you have the chance to pick up a cheap house somewhere, this may be a really good deal that you should go for, but I do not know enough about real estate to feel comfortable commenting on it.


My bad about what I said above about converting into a Roth IRA--there is a 100k income limit on that. Still, even if the money you invest during your stub year is isolated, just stick it in a mutual fund (Vanguard, Fidelity or some managed fund) and let is grow. Every 2-3 years you can spend 15 minutes to re-balance. For example, if you invest 5k in the stub year in one Vanguard fund, you can let is grow to over 6k, then split half of it into another fund. If someone is earning under 100k, I still suggest maxing Roth IRA and then targeting student loans. If someone earns over 100k, focus on 401k/traditional IRA and then student loans.

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birdlaw117
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Re: paying back loans

Postby birdlaw117 » Sun Oct 23, 2011 1:20 pm

Brassica7 wrote:
Brassica7 wrote:Even if you can get 5% on a muni bond with limited risk (meaning a decent rating), why would you prefer that over a guaranteed 7.9% return by paying off the Gradplus loans early? 5% return and some risk is not as good as 7.9% return and no risk (or if there is some risk it would only be in paying off your loans before the OWS people get debt amnesty for everyone--but this will not happen). The same goes for Stafford loans, although the difference is lower at 6.8% interest.

A Roth IRA is probably the best investment vehicle possible for someone early in his/her career because all of the gain on the investment will be tax free. If you are investing for 40 years before you retire, this can be a huge amount of untaxed gain. Unless your employer has matching 401k contributions, a Roth IRA is better by far than a 401k and traditional IRA (where earnings are untaxed going in but all investment profits are taxed when you cash them out in retirement). If you are close the retirement, then a 401k may be better.

The money need not be isolated, as some have suggested. Plow 5k into the Roth in the stub year, then invest in a traditional IRA/401k and quickly convert it into a Roth. This allows you to get around the income limits. http://retireplan.about.com/od/iras/a/convert.htm.

I believe it is a good idea to pay off the student loans as fast as possible while still saving for an emergency fund (6-9 months' expenses), maxing the Roth IRA (only 5k/year) and possibly maxing out 401k contributions (I think that is around 15.5k/year). If you do not make these contributions to retirement accounts each year, you lose the opportunity. If you have the chance to pick up a cheap house somewhere, this may be a really good deal that you should go for, but I do not know enough about real estate to feel comfortable commenting on it.


My bad about what I said above about converting into a Roth IRA--there is a 100k income limit on that. Still, even if the money you invest during your stub year is isolated, just stick it in a mutual fund (Vanguard, Fidelity or some managed fund) and let is grow. Every 2-3 years you can spend 15 minutes to re-balance. For example, if you invest 5k in the stub year in one Vanguard fund, you can let is grow to over 6k, then split half of it into another fund. If someone is earning under 100k, I still suggest maxing Roth IRA and then targeting student loans. If someone earns over 100k, focus on 401k/traditional IRA and then student loans.

I didn't read your post, but the income limit went away in 2010. Pretty sure that's what you're talking about.

Also, addressing the first sentence of your first post (because that's all I got through), one reason you would prefer that is because then you would have the cash. So, liquidity would be the reason. You may be "making more" by paying off the loan (though I'm not convinced of this because the interest on the other investments can be compounded for a longer time period), but you sacrifice liquidity. Obviously liquidity is worth something, it's just how many %s that's the issue.

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Tiago Splitter
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Re: paying back loans

Postby Tiago Splitter » Sun Oct 23, 2011 1:23 pm

Brassica7 wrote:
My bad about what I said above about converting into a Roth IRA--there is a 100k income limit on that. Still, even if the money you invest during your stub year is isolated, just stick it in a mutual fund (Vanguard, Fidelity or some managed fund) and let is grow. Every 2-3 years you can spend 15 minutes to re-balance. For example, if you invest 5k in the stub year in one Vanguard fund, you can let is grow to over 6k, then split half of it into another fund. If someone is earning under 100k, I still suggest maxing Roth IRA and then targeting student loans. If someone earns over 100k, focus on 401k/traditional IRA and then student loans.


No you were right the first time. Put 5K into your traditional IRA and then immediately convert it. The 100K limitation went away in 2010.




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