Budgeting 160K for newbs

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Anonymous User
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Budgeting 160K for newbs

Postby Anonymous User » Wed Oct 09, 2013 10:59 pm

This is not a troll or a flame, but a serious question.

I will be starting big law next year (in a certain southern state known for low COL and longhorns). I have never had a real job that paid real money before, and I am in need of preliminary advice on how to budget, save, invest, 401(k)s etc. As an English major, I know basically zilch about personal finance. (Obviously this is a gargantuan and crucial area of life in which I am starting from scratch, so, as a preliminary matter, I was wondering if anyone could recommend any good books on budgeting, saving, and investing for young professionals?)

With that in mind, the main question is: how does a "reasonable person" spend his/her paycheck? What would a "typical" budget look like? I know everyone's habits are different, but suppose that I have no interest in luxuries (at least not right now). As someone who has been conscientious and thrifty my whole life, how should I be spending/investing my disposable income?

First, in TX, would it be correct to assume that after all taxes, social security, and other deductions I will be able to take home 110K of the 160K, right?

Second, I will have ~100K total debt, including undergrad. Let's say I pay it off in five years (I have a question about this below). Leaving 110-(100/5)=90K. I expect to spend 3K*12=36K on housing, food, and entertainment ($1500 a month can you a very nice pad here, I think). I will need to buy a car (monthly payment of $400, ~$400*12=5K). This leaves approximately 50K. Does this calculation seem reasonable?

From an investment perspective, what should I do with the 50K?

Another question is, should I try to pay off my loans as soon as possible (could be done in two years), or should I take my time (five years or more) and invest the extra cash instead?

Miscellaneous: Have a girlfriend (who works) but no kids, etc. Parents can support themselves.

rad lulz
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Re: Budgeting 160K for newbs

Postby rad lulz » Wed Oct 09, 2013 11:04 pm


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Danger Zone
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Re: Budgeting 160K for newbs

Postby Danger Zone » Wed Oct 09, 2013 11:09 pm

Come jerk it with us.

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Re: Budgeting 160K for newbs

Postby Anonymous User » Wed Oct 09, 2013 11:13 pm

Danger Zone wrote:Come jerk it with us.


OK. So I guess this isn't directly related to "legal employment" per se. So if a mod comes along s/he is welcome to move it to Off-Topic.

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Re: Budgeting 160K for newbs

Postby 2ndtime » Wed Oct 09, 2013 11:51 pm

For very basic personal finance advice: " The Wealthy Barber" by Chilton
There is also a follow-up book. This might be too basic for some, but I think I know
a lot about personal finance and I found the book worth reading. After that, I suggest
Personal Finance for Dummies by Eric Tyson.

You should start keeping track of all your finances, including all your expenditures, on Quicken.

You should have at least 6 months of expenses in a savings or checking account.
Given the insecurity inherent in a Big Law job, you should probably have at least 12 months of expenses in cash, so that's where your first $50,000 to $100,000 should go.

You should maximize your tax free contribution to your 401K plan at work. That will give you an immediate return on your investment equal to your marginal tax rate. That's 28% Federal, so as soon as you put the money in the 401K, you get a 28% return on your investment. You can't beat that. And then the money will grow, tax free. Texas doesn't have a state income tax, so there's no additional state tax benefit. I suggest that the 401K money be put in a total stock market index fund, or a target date blended fund. That topic should be covered in the Dummies book. If you're investing on your own, and not through work, use either Vanguard or Fidelity. Other's might disagree, but after extensive experience and research, I strongly recommend avoiding individual stocks and managed mutual funds, and investing only in index funds. For more information on this, read "A Random Walk Down Wall Street".

Once you have your emergency fund taken care of, and once you have made the 401K investment, you should probably pay off your loans with the excess money. A good return on investment is 7 to 8%, and bonds historically paid about 5%, so if your loans are anywhere in that range, paying them off is a great guaranteed return on your investment.

I believe that the above advice is pretty much standard and conservative. If anyone disagrees, I would look forward to discussing other recommendations.

As for your budget, I would just be careful about committing to big expenses early on. Get a nice, but not extravagent apartment. Buy a Honda, not a BMW or Mercedes, and definitely not a Ferrari. Read the above books, run through some investment scenarios, and figure out how much you need to save and invest in order to retire at a reasonable age.

One of the finance books I read made the following observation: When you save and invest, the "young you" is giving money to the the "old you". When you borrow, the "young you" is taking money from the retirement account of the "old you", which will never be repaid. And, retirement age will be here sooner than you think.

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kalvano
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Re: Budgeting 160K for newbs

Postby kalvano » Thu Oct 10, 2013 12:03 am

Definitely start putting in the max contribution to 401(k) as soon as you can, especially if your firm matches it.

If you need a car, PM me if you're in Dallas or Houston. I used to be in the car business and I can steer you towards some good places that won't rip you off.

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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 12:49 am

kalvano wrote:Definitely start putting in the max contribution to 401(k) as soon as you can, especially if your firm matches it.

If you need a car, PM me if you're in Dallas or Houston. I used to be in the car business and I can steer you towards some good places that won't rip you off.


Thanks! Will keep this in mind when the time comes.

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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 12:52 am

2ndtime wrote:For very basic personal finance advice: " The Wealthy Barber" by Chilton
There is also a follow-up book. This might be too basic for some, but I think I know
a lot about personal finance and I found the book worth reading. After that, I suggest
Personal Finance for Dummies by Eric Tyson.

...



Thanks for the great write-up! A lot of words I've-heard-of-but-don't-really-understand that I'm gonna have to look up.

Since now there's two threads going on I'm hoping to get this one shut down. Anyone interested in following should check out the Jerk It thread. A lot of awesome newbie advice there.

viewtopic.php?f=10&t=208952

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redsox
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Re: Budgeting 160K for newbs

Postby redsox » Thu Oct 10, 2013 12:55 am

Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)

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kalvano
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Re: Budgeting 160K for newbs

Postby kalvano » Thu Oct 10, 2013 12:58 am

redsox wrote:Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)


Even if the firm's matching isn't vested immediately, worst case scenario you get fired and get all the money you put in back.

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Nelson
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Re: Budgeting 160K for newbs

Postby Nelson » Thu Oct 10, 2013 1:00 am

Who keeps 100k in cash while they still have student loans? That's insane.

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redsox
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Re: Budgeting 160K for newbs

Postby redsox » Thu Oct 10, 2013 1:06 am

kalvano wrote:
redsox wrote:Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)


Even if the firm's matching isn't vested immediately, worst case scenario you get fired and get all the money you put in back.


Less a 10% penalty, no?

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kalvano
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Re: Budgeting 160K for newbs

Postby kalvano » Thu Oct 10, 2013 1:16 am

redsox wrote:
kalvano wrote:
redsox wrote:Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)


Even if the firm's matching isn't vested immediately, worst case scenario you get fired and get all the money you put in back.


Less a 10% penalty, no?


Maybe. I'm not a tax expert. If that's true, then OP would have to weigh the pros and cons.

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englawyer
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Re: Budgeting 160K for newbs

Postby englawyer » Thu Oct 10, 2013 8:43 am

"
You should maximize your tax free contribution to your 401K plan at work. That will give you an immediate return on your investment equal to your marginal tax rate. That's 28% Federal, so as soon as you put the money in the 401K, you get a 28% return on your investment


That is not true. You are taxed on that money when you take it out at retirement; the benefit is that when you are old, your income tax rate will probably/hopefully be a lower rate. If you are making at least 36k per year in retirement from savings, you are looking at 25% tax based on today's rates. Thus the 401k benefit is really an extra 3%. That is significant, but it is a far cry from 28%. I would pay off student loans ahead of unmatched 401k savings as long as you student loan rate is at 7% or higher.

Now if the firm matches, that is another story. If they match, say, 50 cents on the dollar, that is a 50% return instantly and totally worth it.

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Danger Zone
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Re: Budgeting 160K for newbs

Postby Danger Zone » Thu Oct 10, 2013 8:56 am

kalvano wrote:
redsox wrote:
kalvano wrote:
redsox wrote:Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)


Even if the firm's matching isn't vested immediately, worst case scenario you get fired and get all the money you put in back.


Less a 10% penalty, no?


Maybe. I'm not a tax expert. If that's true, then OP would have to weigh the pros and cons.

I think there's a little confusion. You don't "get back" the money that you put in a 401k, even if you leave. You can either roll it over to another retirement account (IRA or a different 401k) or just leave it where it is. If you decide to withdraw it instead of doing either of the previous two options, you will suffer the 10% early withdrawal penalty and have to pay taxes in addition to that, so there's really no reason to touch that money. Also, anything that the employer invests into your account is still theirs until it vests, which is usually five years or less. If you leave before it vests, the money that the employer has contributed will disappear from your account. Some places allow you to vest over time. So if you vest fully in five years, you'd get 20% per year (i.e. at the end of year 1, 20% of the employer's contribution becomes your money, year 2 40%, and so on).

2ndtime
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Re: Budgeting 160K for newbs

Postby 2ndtime » Thu Oct 10, 2013 9:28 am

Maxing out the matched portion of the 401k should come BEFORE your "in case I lose my job" savings (as long as matches are immediately vested...)


I agree, first the 401k, if it's matched, but he still needs some money in the bank

That is not true. You are taxed on that money when you take it out at retirement; the benefit is that when you are old, your income tax rate will probably/hopefully be a lower rate. If you are making at least 36k per year in retirement from savings, you are looking at 25% tax based on today's rates. Thus the 401k benefit is really an extra 3%. That is significant, but it is a far cry from 28%.


I disagree. Yes, you are taxed on the money when you withdraw it, and if you have enough money saved, you will be taxed at the same rate when you withdraw it. HOWEVER, the money grows tax-free, and at the usual estimate of 7% earned per year, your money is expected to double every 10 years. So, $1000 he puts in now, at say, age 30, will be worth 8 times as much at age 60, or $8000. If he invested it outside of a 401k, he would start with $720, and thus would end up with $5760. Of course, he would be taxed on his earning every year, so in fact, he would likely earn about 5%, so his money would take about 14 years to double, earning him about $2,880 by age 60. This is only 36% of what he would have had.
So yes, he will be taxed on his withdrawals, but maybe at a lower rate depending on how much he takes out. But even if you take 28% off the $8000, he will still have $5760, vs $2880. Plus, it's a form of forced savings. I haven't taken possible matching into account.
There are a lot of assumptions here, and rough calculations, ( I welcome corrections ) but the above is approximately correct. OP, just read the books I recommended and it will be explained in more detail.

Of course, I didn't take into account the interest rate on his loans. If they are high enough, then paying them off might be worthwhile before investing in a non-matched 401k, but probably the 401k should be done anyway. OP should be able to do both, and if it's a toss up, he could do half and half.


Who keeps 100k in cash while they still have student loans? That's insane.


Well, we can disagree about whether he should have 50k or 100k in cash, but I think it's irresponsible to have less than 6 months of expense money saved up when you have a job with absolutely no security, when you expect that only a small percentage of your contemporaries will still be there in 7 years, and where you expect yearly attrition.
Almost all advisors and books recommend starting with an emergency fund.

Some more basic advice: When you are ready to have kids, get a term life insurance policy. Never buy a whole life policy. Do some reading to see why.
Also, get a long term disability policy. If work has a policy, it's usually only a one year policy. You want a policy that will pay you until you're 65, and preferably, with an automatic inflation increase. Long term care policies ( nursing home insurance ) are very iffy. I would skip that now, especially at your age with no assets ( medicaire would kick in ). I have seen many young people disabled: bicycle accidents, cars, motorcycles, and some friends with neurological illnesses: ALS, MS, etc.

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Re: Budgeting 160K for newbs

Postby anonymous2012 » Thu Oct 10, 2013 9:32 am

englawyer wrote:"
You should maximize your tax free contribution to your 401K plan at work. That will give you an immediate return on your investment equal to your marginal tax rate. That's 28% Federal, so as soon as you put the money in the 401K, you get a 28% return on your investment


That is not true. You are taxed on that money when you take it out at retirement; the benefit is that when you are old, your income tax rate will probably/hopefully be a lower rate. If you are making at least 36k per year in retirement from savings, you are looking at 25% tax based on today's rates. Thus the 401k benefit is really an extra 3%. That is significant, but it is a far cry from 28%. I would pay off student loans ahead of unmatched 401k savings as long as you student loan rate is at 7% or higher.

Now if the firm matches, that is another story. If they match, say, 50 cents on the dollar, that is a 50% return instantly and totally worth it.


I agree here but I think it's prudent to point out that you can actually save more via a Roth since the contribution limits are the same. 18k roth'ed is more than 18K in a traditional 401k. If you only contribute up to the match amount, then the Roth under compensates you since 5% contributed to a Roth is more than 5% contributed to a traditional 401k. But my strong recommendation would be to contribute the full limit in a Roth 401k and invest in a super high volatility index fund with very low fees like a non-US small cap growth fund.

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Tiago Splitter
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Re: Budgeting 160K for newbs

Postby Tiago Splitter » Thu Oct 10, 2013 1:03 pm

Danger Zone wrote:I think there's a little confusion. You don't "get back" the money that you put in a 401k, even if you leave.

I think the point is that the only "emergency" necessitating 12 months of expenses is unemployment, which happens to be a triggering event allowing a person to access 401k funds. Yeah you'll have to pay taxes and a 10% penalty if you were deferring pre-tax but at least there will be money to put food on the table.

Because of the above, I find it laughable that someone with no major obligations needs 50-100k in a zero or nearly-zero interest savings account before putting money elsewhere. Anyone who loses a job can rearrange their lifestyle to bring expenses down in a relatively short period of time. 20k is more than enough for a single guy in Texas to get by for a while in the event of unemployment, and as I said if you lose a job you can access your qualified retirement money as well.

Along those lines, get $5500 into a Roth IRA each year before you start saving in a taxable account. You don't have to invest the money, but since you can withdraw Roth IRA contributions penalty free it acts as a savings account, and so long as no emergencies come up after a few years you'll have a nice Roth balance to start investing for tax free distributions as retirement. With your income you'll need to first put it into a traditional IRA and then convert, but this isn't difficult.

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redsox
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Re: Budgeting 160K for newbs

Postby redsox » Thu Oct 10, 2013 1:21 pm

Tiago Splitter wrote:Along those lines, get $5500 into a Roth IRA each year before you start saving in a taxable account. You don't have to invest the money, but since you can withdraw Roth IRA contributions penalty free it acts as a savings account, and so long as no emergencies come up after a few years you'll have a nice Roth balance to start investing for tax free distributions as retirement. With your income you'll need to first put it into a traditional IRA and then convert, but this isn't difficult.


This.

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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 1:35 pm

Here is one example budget (switch investments for debts if your situation so requires / allows)

Pre-tax paycheck: $13,333 / month
401(k) contribution: $1,400 / month
Paycheck after taxes, health care, and benefits: $6,700 / month
Housing: $1,800 / month
Food + predictable necessities (utilities, etc.): $1,000 / month
Leftover: $3,900 / month for paying down debt, investments, vacations, moving expenses, models, bottles, lifestyle inflation, etc.

Many pay more for housing / food in major cities, plenty pay even less. Car/transportation/health care costs can be very situational.

Anonymous User
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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 2:53 pm

Quick question for you guys who have more recent experience with this. How much are you paying for healthcare (and how many people do you have covered) and what percentage is your firm subsidizing?

I am in the position of having an offer on the table that provides 100% payment of unbelievably good health/dental/life insurance and I am having difficulty valuing that benefit.

Anonymous User
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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 5:13 pm

Starting as a first year associate in NY. Am I crazy for thinking about a $2,400 (not including utilities) apartment by myself? (no debt)

redsox550
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Re: Budgeting 160K for newbs

Postby redsox550 » Thu Oct 10, 2013 5:37 pm

Anonymous User wrote:Starting as a first year associate in NY. Am I crazy for thinking about a $2,400 (not including utilities) apartment by myself? (no debt)


I think thats ok because you awesomely have no debt. I personally would try and find something a tad cheaper because I would want to to wait a year and try out Biglaw, see how shitty it is, see if you think you can last, and after a year of that, you might decide you hate it and want to bounce, which is when thta extra $$ you have would come in super handy

Anonymous User
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Re: Budgeting 160K for newbs

Postby Anonymous User » Thu Oct 10, 2013 6:03 pm

Anonymous User wrote:Starting as a first year associate in NY. Am I crazy for thinking about a $2,400 (not including utilities) apartment by myself? (no debt)


That's exactly what I paid for my first year, place in a great location but otherwise small. I was constantly surprised to find I was paying less than a lot of other 1st years, to be honest.

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kalvano
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Re: Budgeting 160K for newbs

Postby kalvano » Thu Oct 10, 2013 6:57 pm

Anonymous User wrote:Quick question for you guys who have more recent experience with this. How much are you paying for healthcare (and how many people do you have covered) and what percentage is your firm subsidizing?

I am in the position of having an offer on the table that provides 100% payment of unbelievably good health/dental/life insurance and I am having difficulty valuing that benefit.


I get fully subsidized average health insurance, and can kick in about $300 a month for really good insurance.




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