Save in a fund or not take out loans? Forum

[tortsandtiaras]

I originally wanted to post this anonymously, but I don't think this thread allows me to do that...

I have been working for a little less than a year now, and I was able to save $10k. I was wondering whether I should put that money into a fund (pardon my naivety about finances) and take out loans for that amount if needed, or should I use that money during law school and not take out any loans?

I plan to see a financial advisor, but thought I would ask TLS in advance for any advise. If anyone has any suggestions on funds or accounts I should be using, PLEASE advise! I'm thinking there has to be some sort of break-even point where waiting for the return on this 10k makes more sense than not taking out loans and accumulating interest.

Thank you!!!

[storpappa]

Financial planning isn't just about having a loan or having no debt, it is about planning for events both expected and unexpected. If that $10k is the only cash you have, take out the loans and use those to pay for your education. Far too many people are unprepared for short term or immediate cash needs. Or worse, their emergency plan is a high interest rate credit card sitting with a $0 balance, but when needed, that surprise trip to a dying relative, medical emergency, broken major appliances or major car repair have to be saved for after the fact by paying off the high rate card.

Just as more people have too much life insurance, too many people have too little or no disability insurance. You need a plan that is a complete picture of life events, and a plan that includes reviews not only on changes, but on your progress to keep you on track.

Better to have $10k in the bank, earning you some interest, and have that financial comfort. It will encourage you to add to your savings. Then when that emergency occurs you are able to make better decisions. Besides, it is harder to spend savings because you know how much work you had to put into earning it.

My $0.02.

[Johann]

10,000 is a good amount to keep as an emergency fund. If you want to put in funds, just put it in SPY and never think about it. It's already a diversified portfolio by itself. The reason I would take out the loans is because $10,000 in loan money is peanuts - your fees and interest on it over 3 years might be like $2,500. That's one week of biglaw pay/stub bonus etc. The only reason $2,500 is important to you is if you don't make that much money and at that point, you can use PAYE to basically not pay more than 10% of your above poverty threshold pay. You also may go into a career with loan forgiveness. I think roughly 25-30% of my graduating class is in loan forgiveness jobs. In that case, why pay money you might not have to?

[tortsandtiaras]

10,000 is a good amount to keep as an emergency fund. If you want to put in funds, just put it in SPY and never think about it. It's already a diversified portfolio by itself. The reason I would take out the loans is because $10,000 in loan money is peanuts - your fees and interest on it over 3 years might be like $2,500. That's one week of biglaw pay/stub bonus etc. The only reason $2,500 is important to you is if you don't make that much money and at that point, you can use PAYE to basically not pay more than 10% of your above poverty threshold pay. You also may go into a career with loan forgiveness. I think roughly 25-30% of my graduating class is in loan forgiveness jobs. In that case, why pay money you might not have to?

Hmm, I am very interested by this. Everyone around me (family and friends) have told me something similar. I am pretty dead set now on just taking out those $10k in loans. I was just going to use it to finance my first year COL (I am going to a school in a very low COL).

What is this SPY? And what kind of interest/return would I get back in say 5/10/25 years?

[tortsandtiaras]

Financial planning isn't just about having a loan or having no debt, it is about planning for events both expected and unexpected. If that $10k is the only cash you have, take out the loans and use those to pay for your education. Far too many people are unprepared for short term or immediate cash needs. Or worse, their emergency plan is a high interest rate credit card sitting with a $0 balance, but when needed, that surprise trip to a dying relative, medical emergency, broken major appliances or major car repair have to be saved for after the fact by paying off the high rate card.

Just as more people have too much life insurance, too many people have too little or no disability insurance. You need a plan that is a complete picture of life events, and a plan that includes reviews not only on changes, but on your progress to keep you on track.

Better to have $10k in the bank, earning you some interest, and have that financial comfort. It will encourage you to add to your savings. Then when that emergency occurs you are able to make better decisions. Besides, it is harder to spend savings because you know how much work you had to put into earning it.

My $0.02.

Thanks so much for your input - you are completely right. I slaved over saving that money. I'm only 22 and to my embarrassment, do have my parents to fall back on if am emergency were to occur. Nevertheless, I live on my own right now and pay all my bills myself.

If I were to take out some loans, say those loans aren't enough in an academic year, can I take out more (up to the budget of course)?

[Johann]

SPY is the stock ticker of a fund of the S&P500. The S&P500 is like 500 of the biggest American companies. So essentially you are buying a diversified portfolio of 500 major American companies. It's stock, so there is no guaranteed return, but over a 25 year period it would probably return something like 8%/year if historical performance (50 years+) is an indicator of the future. Warren Buffet has basically endorsed this method for novice investors. I don't know shit about investing or have the time to follow a lot of companies and do my own research, so I've been dumping money in it every paycheck basically for the last 8 months. My average return (including things put in 2 months ago) is like 5% in the last 8 months right now.

There is also a time value of money argument here. If you can take out loans of $10k and not have to start making payments on it until 3.5 years down the road (6 months forbearance) and then start paying like $200 a month (I'm in biglaw making $0 monthly PAYE payments right now because of my last year's tax return; will be making $500 payments next year) you are getting some insane time value money burn (this is just an after the fact cherry on top when considering the loan repayment programs like PAYE and PSLF).

Other soft facotrs that make me like the decision even more - cities are raising minimum wages to $15 for everyone (LA just passed it; Seattle passed it months ago) and there is serious pressure to raise minimum wage across the board. That's going to cause inflation. By the time you pay down this 10k you borrowed, you might literally be paying 10k off in monopoly money (inflated money).

[storpappa]

And that just complicates the entire picture when you consider inflation, interest, earnings potential.

All of that starts after you have some savings, for emergencies. Then you start saving for investments and retirements. Don't borrow more then you need, even if the school lets you borrow more due to your situation vs the COA.

Good luck. There is plenty of time between now and classes starting to check out plenty of free resources on financial planning and savings. Don't pay anyone for financial advice at this stage, it's not worth it, and with so much available for free, you can educate yourself, not only on investing and planning, but on spotting the scams

[starry eyed]

SPY is the stock ticker of a fund of the S&P500. The S&P500 is like 500 of the biggest American companies. So essentially you are buying a diversified portfolio of 500 major American companies. It's stock, so there is no guaranteed return, but over a 25 year period it would probably return something like 8%/year if historical performance (50 years+) is an indicator of the future. Warren Buffet has basically endorsed this method for novice investors. I don't know shit about investing or have the time to follow a lot of companies and do my own research, so I've been dumping money in it every paycheck basically for the last 8 months. My average return (including things put in 2 months ago) is like 5% in the last 8 months right now.

There is also a time value of money argument here. If you can take out loans of $10k and not have to start making payments on it until 3.5 years down the road (6 months forbearance) and then start paying like $200 a month (I'm in biglaw making $0 monthly PAYE payments right now because of my last year's tax return; will be making $500 payments next year) you are getting some insane time value money burn (this is just an after the fact cherry on top when considering the loan repayment programs like PAYE and PSLF).

Other soft facotrs that make me like the decision even more - cities are raising minimum wages to $15 for everyone (LA just passed it; Seattle passed it months ago) and there is serious pressure to raise minimum wage across the board. That's going to cause inflation. By the time you pay down this 10k you borrowed, you might literally be paying 10k off in monopoly money (inflated money).

Infllation is a good thing for equities? correct? i know when the fed did three rounds of quantitative easing (printing more money), the market reacted entheusiastically.

But i'm assuming a minimum wage hike would first hurt companies' profits (stocks as well), but i can see how more money in the economy could help make up for it in the long run.

[Big Dog]

$10k is chump change and not worth investing, IMO. The market may go down just when you need the money.

You will need a 1st and last month's rent when you move. You will need cash to travel to visit law schools. You will need cash to go home and visit the 'rents over the holidays.

Debt is bad, unless you are 10000% sure that you are PI-bound and/or will gun for the academia lottery. If the latter, borrow as much as you can and let the feds pay it off.

[starry eyed]

$10k is chump change and not worth investing, IMO. The market may go down just when you need the money.

You will need a 1st and last month's rent when you move. You will need cash to travel to visit law schools. You will need cash to go home and visit the 'rents over the holidays.

Debt is bad, unless you are 10000% sure that you are PI-bound and/or will gun for the academia lottery. If the latter, borrow as much as you can and let the feds pay it off.

but you can have both (cash in hand and investments). OP would essentially be replacing her cash now with debt, so he/she will still have cashflow, but her investment is separate. And short term it (SPY fund) could be volatile, but it's rational to assume that long term that 8% figure is correct.

And interest paid on debt is less than 8%

[Big Dog]

still a bad deal.

GradPlus is what, 6.8% plus a 4% origination fee for loans taken next year. (Too lazy to figure out the total rate after the origination fee.) The pennies that may be earned at your assumed (generous) 8% is just not worth the investment risk for most people, particularly when the OP will need cash to set up shop in LS before the loans are available.

[Big Dog]

just bcos I have no life, I had time to run the math:

$10,000 @ 8% = $12,597.12 in three years. From that the OP would have to pay capital gains on the earnings. But no need to run that math since the loan balance will easily exceed that amount.

Borrowing $10,425 (4.25% origination fee) to get the same amount of cash in pocket = $10,000.

At 6.84%, that total after three years is $12,713.87. Thus the OP would be worse off by $100 bucks after three years and that is before paying the capital gains on the earnings.

Debt is bad.

[Johann]

just bcos I have no life, I had time to run the math:

$10,000 @ 8% = $12,597.12 in three years. From that the OP would have to pay capital gains on the earnings. But no need to run that math since the loan balance will easily exceed that amount.

Borrowing $10,425 (4.25% origination fee) to get the same amount of cash in pocket = $10,000.

At 6.84%, that total after three years is $12,713.87. Thus the OP would be worse off by $100 bucks after three years and that is before paying the capital gains on the earnings.

Debt is bad.

OP gets job in public service and doesn't have to repay the debt. $10,000 free dollars. Paying a $100 option for that chance is easily worth it.

[starry eyed]

just bcos I have no life, I had time to run the math:

$10,000 @ 8% = $12,597.12 in three years. From that the OP would have to pay capital gains on the earnings. But no need to run that math since the loan balance will easily exceed that amount.

Borrowing $10,425 (4.25% origination fee) to get the same amount of cash in pocket = $10,000.

At 6.84%, that total after three years is $12,713.87. Thus the OP would be worse off by $100 bucks after three years and that is before paying the capital gains on the earnings.

Debt is bad.

once you add in capital gains tax, it becomes to be a quite noticeable difference (extra $390)

OP you will pay almost 500 dollar more by borrowing

And more than likely the market is headed for a 10 % correction (currently at an all time high), it would be pretty stupid to invest in it now.
you could be looking at capital losses right at the time you may need to access that money the most (right after graduation)

i usually agree with johan but he's flat out wrong here; where you are at currently at in your life means you will need to quick access to cash, and the short term market fluctuations make it pretty wrong to assume your money will grow at 8% in 2016, another 8% in 2017, etc.

so in 2019 the market could decline by 10% from where it is today (the market has done well in the past few years, but look at historical chart to get a better pic of what normal is) and you would be FORCED to sell at a loss (or borrow more lol). The only way it makes sense if you know for a fact you won't be needing that money in the next 5 years (ideally longer than that)

Johann is talking about building empires before you have laid the foundation OP

[tortsandtiaras]

Hmm so you are saying it would be worth it to just keep the $10k as liquid cash during my 1st year instead of taking out loans in that amount?

[Big Dog]

OP gets job in public service and doesn't have to repay the debt. $10,000 free dollars.

Yup, I mentioned that upthread. If the OP is 1000% sure of PI, then borrow every dime possible, and let Uncle Sugar write off your balance due (and stick it to your classmates who are working Big Law to pay their taxes).

[nachosrgood]

OP gets job in public service and doesn't have to repay the debt. $10,000 free dollars.

Yup, I mentioned that upthread. If the OP is 1000% sure of PI, then borrow every dime possible, and let Uncle Sugar write off your balance due (and stick it to your classmates who are working Big Law to pay their taxes).

FYI: Many schools with reduce the amount of the minimum based payment they will pay of the LRAP program if you have savings, equity, etc. For example at Wash U, if you have 90k in savings and 100k in loan and do the LRAP, the school only pays 10% of of your minimum loan payments for the 10 years. If you had 30k in savings, they would pay 70% of the min loan payments.

Read the fine print of each LRAP program and ask the financial services, all are different

[tortsandtiaras]

OP gets job in public service and doesn't have to repay the debt. $10,000 free dollars.

Yup, I mentioned that upthread. If the OP is 1000% sure of PI, then borrow every dime possible, and let Uncle Sugar write off your balance due (and stick it to your classmates who are working Big Law to pay their taxes).

FYI: Many schools with reduce the amount of the minimum based payment they will pay of the LRAP program if you have savings, equity, etc. For example at Wash U, if you have 90k in savings and 100k in loan and do the LRAP, the school only pays 10% of of your minimum loan payments for the 10 years. If you had 30k in savings, they would pay 70% of the min loan payments.

Read the fine print of each LRAP program and ask the financial services, all are different

So basically don't have a savings fund? haha that's just depressing in today's world

I'm not 100% sure of PI btw... I'd like to keep my options open.

[ChemEng1642]

I would keep at least 5K as emergency money because you never know what can happen. The other 5K is up to you. I personally would keep all 10K and just take out loans but that's me.

[arose928]

I had a similar situation and talked to my parents for advice. They also said other people on here have said - it's not a great idea to invest your entire emergency fund in stocks. You shouldn't be investing anything that you will need to access in the short-term, as the market could go down right as you need your money. You should only invest money you don't need to touch for 10+ years and that can ride out temporary downturns. Right now it would seem that $10k is better used for you as liquid cash/emergency reserves. You can draw down on it to float you if your loans run short one year, for start-up moving costs after school, etc. If you end up not touching it during law school, you can always use it to throw a $10k chunk at your loans right off the bat.

[tortsandtiaras]

I had a similar situation and talked to my parents for advice. They also said other people on here have said - it's not a great idea to invest your entire emergency fund in stocks. You shouldn't be investing anything that you will need to access in the short-term, as the market could go down right as you need your money. You should only invest money you don't need to touch for 10+ years and that can ride out temporary downturns. Right now it would seem that $10k is better used for you as liquid cash/emergency reserves. You can draw down on it to float you if your loans run short one year, for start-up moving costs after school, etc. If you end up not touching it during law school, you can always use it to throw a $10k chunk at your loans right off the bat.

Thanks for your advice I actually took the 10k in loans and am keeping the now 12k as emergency funds (yes 2k thanks to tax refunds lol yay!)