Budgeting 160K for newbs Forum

[XxSpyKEx]

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.

Are you serious? Just let $50,000-100,000 sit in a checking account? That's just ridiculous. I think letting anything more than $10,000 sit around in a checking account is pretty outrageous (unless you're planning on spending $20 grand a month to rent a house in the upper east side or something crazy like that)... Realize, worst case scenario, you pull money out of an investment account.

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 know you said your advice is a bit conservative, but I have to point out that 7-8% is a bit low. Historically over just about any 25 year period after the great depression era, around 10% for large cap stocks and 12% for small cap stocks has been typical.

I agree with the rest of your advice, though.

[blackhawkfan]

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.

Are you serious? Just let $50,000-100,000 sit in a checking account? That's just ridiculous. I think letting anything more than $10,000 sit around in a checking account is pretty outrageous (unless you're planning on spending $20 grand a month to rent a house in the upper east side or something crazy like that)... Realize, worst case scenario, you pull money out of an investment account.

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 know you said your advice is a bit conservative, but I have to point out that 7-8% is a bit low. Historically over just about any 25 year period after the great depression era, around 10% for large cap stocks and 12% for small cap stocks has been typical.

I agree with the rest of your advice, though.

Want to chime in and agree that keeping 50k-100k is almost assuredly on the high side. Additionally, 7-8% is probably more realistic long term prospects than 10-12% for U.S. stocks. the geometric average for the s and p 500 and its precursor indexes are a little north of 9% (this includes the great depression, but I think it's a little dodgy to start eliminating historical periods. for example, if you just eliminate the crash you get all of the post crash run up in value which will distort the returns higher. best to just not eliminate historical periods when looking at charts). Additionally, the 20th century saw the united states experience phenomenal average gdp growth per year. for example see this chart http://www.multpl.com/us-real-gdp-growth-rate. Real GDP growth has dropped off substantially since 1990, and it seems unlikely that one will see the same sort of growth going forward that was seen in the 20th century that produced such high average returns. thus, I think something a little lower than the historical average, for U.S. stocks, probably seems realistic.

[BVest]

RE: Roth IRA

If you're BigLaw (this is a budgeting [market starting salary] for newbs thread after all) then you can open the Roth if you choose to, and you can contribute the max in the year you start, assuming you start in the fall. After that you will not be able to contribute unless you're married and you spouse earns basically nothing.

Roth IRAs have an upper income limit to keep them available only to individuals with an AGI under a certain amount. For this year, that amount is $112,000 AGI for single taxpayers for a full $5500 allowed contribution, with a phase-out (i.e. lower contribution allowed) up to $127,000 AGI. For married filing jointly, it's $178,000 phasing out up to $188,000. (Of course if you're married and your spouse has no income, you can likely max out into both your Roths for a full $11,000.)

So starting in your first full year of biglaw, you likely can't contribute to the Roth until your income takes a dive. It's not the worst problem to have.

ETA: It used to be and I suspect still is that you can make your Roth contribution for the tax year up until the filing deadline. I.e. you can make your 2013 contribution up until April 15, 2014. The reason for this, I believe, is that you may not know if/how much you can contribute to your Roth until you've calculated your AGI by doing your 1040. I do not think, however, that this is extended if you extend your tax return.

[Anonymous User]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

[thesealocust]

RE: Roth IRA

If you're BigLaw (this is a budgeting [market starting salary] for newbs thread after all) then you can open the Roth if you choose to, and you can contribute the max in the year you start, assuming you start in the fall. After that you will not be able to contribute unless you're married and you spouse earns basically nothing.

Roth IRAs have an upper income limit to keep them available only to individuals with an AGI under a certain amount. For this year, that amount is $112,000 AGI for single taxpayers for a full $5500 allowed contribution, with a phase-out (i.e. lower contribution allowed) up to $127,000 AGI. For married filing jointly, it's $178,000 phasing out up to $188,000. (Of course if you're married and your spouse has no income, you can likely max out into both your Roths for a full $11,000.)

So starting in your first full year of biglaw, you likely can't contribute to the Roth until your income takes a dive. It's not the worst problem to have.

ETA: It used to be and I suspect still is that you can make your Roth contribution for the tax year up until the filing deadline. I.e. you can make your 2013 contribution up until April 15, 2014. The reason for this, I believe, is that you may not know if/how much you can contribute to your Roth until you've calculated your AGI by doing your 1040. I do not think, however, that this is extended if you extend your tax return.

You can open a traditional IRA regardless of income and immediately convert it to a Roth due to a recent change in the law. Google "backdoor Roth IRA" or some similar combination of words to learn more.

[kalvano]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

I did an FHA loan and only put down 3%. I like having cash in the bank, not tied up in something.

[Anonymous User]

1. Build a 6-month emergency fund (to be finished by the end of your first year of work). This is the absolute minimum amount you'll need to live suitably for six months if you lose your job. Keep this in an account that's easy to access. Maybe that's a retirement account, but I think it's a better idea to keep this in a savings account -- if you're new to finance, the last thing you want to do is to have to worry about how to pull money out of a retirement account if something bad happens. If you are single and have no obligations other than your debt, this should be somewhere in the area of (1) six month's minimum debt payments + (2) around $10,000 (your cost of living for that period). That way, if you lose your job, you can look for a new job without necessarily being on unemployment or needing loan forbearance for nearly half a year (although if you're on a four- or five-year debt repayment plan hopefully you'll be far enough ahead on your payments that you can treat the money you've saved to make minimum debt payments as extra cushion). If there's more than $20,000 or so in this account, it's worth spending some time to find a savings account that has a not totally horrible interest rate.

2. Max out your 401k and Roth IRA (if you can -- see other posts above). Preference your traditional IRA if you think you'll make more money now than in retirement. Otherwise preference your Roth IRA. Chances are you won't be making a full biglaw salary in retirement, so I'd max out your trad IRA first and always (and worry less about your Roth, which you may not be eligible for).

3. Aim to pay off your student loans in less than five years. The average biglaw associate leaves BEFORE five years are over, and you want to be in a position where if you want to leave, you'll be able to make that decision without debt hanging over your head. Maybe you want to hang your shingle. Maybe your dream job turns out being a law professor. Set yourself up so that you can pursue even super poorly paying jobs post-biglaw if that's what you end up wanting. I'd aim to pay your off in four years, and would even consider a three-year repayment plan. People on this thread will argue forever about how good of an "investment" paying off your student loans early is, but I think everyone would agree that--at the very east--it's *similarly* as good as what you'd find elsewhere. In my opinion, the value of being able to make long-term career decisions in 3-4 years without debt being a major factor outweigh whatever small advantages come from investing your money differently (and there's a strong argument to be made that you'll be BETTER off financially maximizing your loan payments -- personally, I'm far less optimistic than others on this thread and think you absolutely should not count on getting a 7% rate of return on your private investments).

Don't pay off your loans evenly -- pay the minimum payments on your lowest-interest loans until you fully pay off your highest-interest loans. E.g., if you have a minimum Perkins payment of $300/m, a minimum Stafford payment of $300/m, and a minimum Grad-Plus payment of $300/m, pay only $300/m to your Perkins and Stafford loans while paying $1500/m (or whatever you can afford/have budgeted) towards your Grad-Plus loans until they're paid off. Then shift to paying $300/m to your Perkins loans while paying $1500/m or whatever to your Stafford loans until they're all paid off. Etc.

4. Save for a house down-payment. You may think you're far away from wanting to buy a house now, but in three years you likely will not be, and you'll be glad you have this money saved up. Buying a house is a pretty great investment (as compared with renting), but you'll need to have a non-negligible amount saved before you can buy. Typically, 10% of the house value is the minimum you'll need to qualify for a decent mortgage and 20% is the minimum you'll need to get a good mortgage (b/c at that point you don't have to pay mortgage insurance anymore). You obviously have no idea how nice of a house you'll want now, and there's no reason to stress about it for the moment being, but I'd aim to have a minimum of $30,000 saved towards this over the next 4 years. If you find yourself with $10,000 left over at the end of each year, this is where I'd put it. I'd find some conservative way to invest this money -- e.g., don't have $30,000 or $50,000 or whatever sitting in a savings account. Vanguard has some pretty good low-yield funds (STAR is solid). You're not going to get rich like this, but if you can get ~3-5% annual return for this money without much risk, and can pull it out of the account at a month or two's notice, that's great.

----------------

If you follow this advice, by the end of four years (three if you're really aggressive) you should have a (1) six-month emergency fund, (2) a great start to your retirement fund, (3) no debt, and (4) >$30,000 saved towards a home. If you are still at the firm, I would then continue to budget as if you were paying loans for one more year, but put that ~$30,000 into your home down-payment account. If you choose to leave the firm at around that point you'll be able to go become a public defender or follow some other non-lucrative career path and still buy a pretty solid home. If you stay at the firm for even one more year, you'll have somewhere in the area of $60,000 to put towards a home -- even if you leave at the end of that year.

It's going to be tempting while you're at the firm to live life a bit larger -- go for the $2200 apartment (even though the $1500 place is more than nice enough in your area), get a $35,000 car (even though the $20,000 was making you super happy before), eat $20 lunches out four days a week instead of packing some days and grabbing $10 lunches the remaining days, etc. Resist this temptation as much as possible. See if you can live happily on a reasonably frugal budget, and put as much of your money into savings as possible. If, after five years you decide you love the firm life (and, just as importantly, the firm loves you), you can ratchet up your spending significantly. But you're not saving and budgeting now on the assumption that you'll make partner -- you're saving on the assumption that you WON'T (the statistically-wise choice). I think you'll find that if you live a comfortable but reasonable middle class life for the next five years, you'll be much better off if (and likely when) it comes time for you to move from the firm.

[Tiago Splitter]

(and worry less about your Roth, which you may not be eligible for)

As has been described multiple times in this thread, the Roth eligibility requirements are a flame for someone with no existing pre-tax retirement savings.

The rest of your post is meaningless for anyone with real debt. Telling someone to pay off their debt in less than five years, max out their 401k and IRA, build up a substantial emergency fund in a taxable account, and then save at least 30k for a down payment on a house isn't advice at all. People aren't gettting 300k salaries out of law school.

[Danger Zone]

Wall o text

Good advice for millionaires and those who are comfortable living extremely frugally, but generally unrealistic to hit all four of those points on a big law salary.

[Anonymous User]

(and worry less about your Roth, which you may not be eligible for)

As has been described multiple times in this thread, the Roth eligibility requirements are a flame for someone with no existing pre-tax retirement savings.

The rest of your post is meaningless for anyone with real debt. Telling someone to pay off their debt in less than five years, max out their 401k and IRA, build up a substantial emergency fund in a taxable account, and then save at least 30k for a down payment on a house isn't advice at all. People aren't gettting 300k salaries out of law school.

Huh? OP was in Texas and had ~100k debt. thats ~120k post-tax. 18k to retirement, 18k (or less) to rent, 25k to loans, build up 25k to emergency fund and then 7.5k/yr (over 4 years) for a down payment. This is completely doable.

[Danger Zone]

(and worry less about your Roth, which you may not be eligible for)

As has been described multiple times in this thread, the Roth eligibility requirements are a flame for someone with no existing pre-tax retirement savings.

The rest of your post is meaningless for anyone with real debt. Telling someone to pay off their debt in less than five years, max out their 401k and IRA, build up a substantial emergency fund in a taxable account, and then save at least 30k for a down payment on a house isn't advice at all. People aren't gettting 300k salaries out of law school.

Huh? OP was in Texas and had ~100k debt. thats ~120k post-tax. 18k to retirement, 18k (or less) to rent, 25k to loans, build up 25k to emergency fund and then 7.5k/yr (over 4 years) for a down payment. This is completely doable.

That's already up to 94k /yr in expenses, and I believe the income is closer to 105k post tax. Either way, living on 10-20k a year is kind of ridiculous.

[guano]

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.

I used to pay full price for healthcare. Ok coverage was about $700 a month for an individual, $1600 for a family. Cadillac plan cost about 1.5 times as much. My understanding is that Prices have gone up about 20-30% since then

[guano]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

I did an FHA loan and only put down 3%. I like having cash in the bank, not tied up in something.

How bad is your MIP?

[Anonymous User]

As has been described multiple times in this thread, the Roth eligibility requirements are a flame for someone with no existing pre-tax retirement savings.

The rest of your post is meaningless for anyone with real debt. Telling someone to pay off their debt in less than five years, max out their 401k and IRA, build up a substantial emergency fund in a taxable account, and then save at least 30k for a down payment on a house isn't advice at all. People aren't gettting 300k salaries out of law school.

I'm the anon poster that you're replying to. And I disagree. Although, you're correct, that how feasible my recommendations are depends on how significant the OP's debt is. If the OP has the average debt of a private law school grad (approximately $125,000), this is pretty feasible. If the OP has $210,000 in debt, it may not be.

Assuming $125,000 debt:

The OP should be making about $6,500/month after taxes, health care, and maxed-out IRA contributions. The OP estimates spending $1,500/month on housing. That leaves $5,000/month. Assuming the OP has $125,000 in debt at an average 7% rate of interest, a four year repayment schedule requires about $3,000 in payments. Add in $500/month for car loan payments. That leaves the OP with $1500 for savings + food/fun. Creating a $20,000 emergency fund and $30,000 in a home downpayment fund require saving $50,000 on top of everything else over four years. That breaks down to about $1100/month. That leaves the OP with $400/month for food/fun. To put this in context, the average single male aged 19-50 on a liberal food plan (e.g., the highest-spending demographic group in the US) spends $435/month. And you better bet the average male in that group is (1) eating out a fair bit, and (2) drinking a fair bit. That calculation is, of course, assuming the OP is getting no raises over the course of the four years that the OP works at the firm. Most likely, the OP averages close to $190,000 over the four years counting raises and bonuses (and not $160,000 flat as I've assumed).

So, yea, I think that the OP can achieve all of these goals (even with significant debt) while living a pretty comfortable middle class life.

[Anonymous User]

Original OP here.

Thanks for all the great advice coming along. It's also great to see differing points of view -- all good stuff to consider.

There are two additional related facts which may affect the equation. First, my 100K "loans" (for law school and undergrad COL expenses, excluding undergrad tuition) are really informal, interest-free loans from my parents which I may pay off at my leisure. This is something I should've said up front, but this really makes my question about how quickly to pay off my loans moot -- or rather, the pressure to pay them off quickly comes not from the accrual of interest but something more like filial goodwill to my parents who have sacrificed a lot for me. On top of this, they actually also paid at least another 100K for my undergrad tuition, but we agreed that I wouldn't need to pay this back unless I make partner or something.

Second, while I definitely would still want to build that six-month nest egg, my parents and sibling live in the same city. We are all on very close terms and I expect to come home nearly every weekend, if not some weeknights too. If I lose my job, I would definitely move in with them (no shame).

Given these two facts, I'm guessing I should be more aggressive at tacking retirement, investing, and saving for that house down-payment.

[guano]

$400/month for food is not feasible

[Danger Zone]

Given these two facts, I'm guessing I should be far more aggressive at tacking retirement, investing, and saving for that house down-payment.

Absolutely. With the additional info about your student loans, I actually think you should have no problem hitting the goals that were laid out in the wall o text above.

[Anonymous User]

re: $400/m for food -- I agree, but the OP isn't in NY/SF/Boston. The OP's in a low-COL city. In any event, the OP's situation does change the calculus a bit.

OP,

I would still go for a 6-month emergency fund. Maybe just keep this to COL, though -- $10,000 or $15,000. This will ensure that if something happens to your family, you'll be on solid footing.

Re paying off your loans, I'd maybe aim for a 10-year repayment schedule *if* you think your family would be understanding if you moved to a low-paying career and switched to a 30-year repayment schedule. If not, or if you think this would cause tension, I would still strongly consider trying to pay these off in a shorter period of time. Maybe not the 4 years that I had originally recommended, but aiming for 5-7 years would probably be a good thing for your relationship with your family especially in the event you decide Biglaw is not for you. It sounds like your parents want you to pay off your loans eventually, and so the pressure of paying them off is likely to weigh on your longer-term career choices still (and therefore the value of having little deb, or being debt-free, at the point that you'll potentially be thinking about a career shift is significant).

Re what to do with the rest of your money: I would still recommend living as frugally as you are comfortable living and saving up. After maxing out your tax-advantaged retirement accounts, I really would probably put the rest to buying a house in the next couple of years. That $1500/month you spend renting an apartment is completely money down the drain. Forget the appreciation of a house and the various tax advantages -- even if you buy a house with mortgage/assessements/tax payments/maintenance totaling $1,500/month (in many markets you can buy a comparable house for the same monthly amount as you can rent) that you sell in 10 years and break even on it, you will have gotten ENORMOUS value from that house -- instead of paying $180,000 towards rent ($1,500/m over 10 years), you'll have built something like $100,000 in equity in the house (not including your downpayment). In other words, you will have turned your $30,000 downpayment on the house into approximately $130,000 in value over 10 years EVEN if the house sells for exactly the price you bought it for.* Not a terrible rate of return...and that doesn't even account for the tax benefits.

*with closing costs and whatnot, this total obviously comes down a bit. But you'll still be getting a great rate of return on your investment.

[Anonymous User]

OP here.

This discussion is making me realize, for the first time, how tough the average person has it who makes way less than even half of 160K. I realize that 160K starting out is still a long ways from extravagance, but I am very grateful for the position I am in to get such a good start.

Also, $400 for food is not gonna be enough for me. Right now as a student I'm spending at least twice that on food and entertainment. I'm not interested in nice cars, mind you, but I don't think I could do away with dining out. I'm guessing getting a slightly less fancy place ($1500 may be a little over-the-top) and a regular 20K car would let me splurge a bit on food.

[Anonymous User]

After maxing out your tax-advantaged retirement accounts, I really would probably put the rest to buying a house in the next couple of years. That $1500/month you spend renting an apartment is completely money down the drain. Forget the appreciation of a house and the various tax advantages -- even if you buy a house with mortgage/assessements/tax payments/maintenance totaling $1,500/month (in many markets you can buy a comparable house for the same monthly amount as you can rent) that you sell in 10 years and break even on it, you will have gotten ENORMOUS value from that house -- instead of paying $180,000 towards rent ($1,500/m over 10 years), you'll have built something like $100,000 in equity in the house (not including your downpayment). In other words, you will have turned your $30,000 downpayment on the house into approximately $130,000 in value over 10 years EVEN if the house sells for exactly the price you bought it for.* Not a terrible rate of return...and that doesn't even account for the tax benefits.

*with closing costs and whatnot, this total obviously comes down a bit. But you'll still be getting a great rate of return on your investment.

OP again.

Exactly. Buying a house or condo is something I am looking to do, if not from the very beginning, then very soon thereafter. There is a huge housing boom in this city right now. And my parents have been talking about getting in on the speculation, even apart from my work. Maybe getting their help with the down payment on a condo as a family investment seems like a good idea.

[kalvano]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

I did an FHA loan and only put down 3%. I like having cash in the bank, not tied up in something.

How bad is your MIP?

Not bad at all. Significantly less than the extra cash would have been, and the house is now just about at a value where I can get rid of it.

[BVest]

You can open a traditional IRA regardless of income and immediately convert it to a Roth due to a recent change in the law. Google "backdoor Roth IRA" or some similar combination of words to learn more.

All well and good until the IRS goes after this activity which is simply a multi-step approach to make what is substantively contribution to a Roth in violation of clearly established and still effective income limits. At which point you have post tax income money possibly still inaccessible in a retirement account earning further taxable gains, defeating all of your purposes in favoring a retirement account over a run of the mill investment account. Google "Step Transaction Doctrine" to learn more.

[thesealocust]

You can open a traditional IRA regardless of income and immediately convert it to a Roth due to a recent change in the law. Google "backdoor Roth IRA" or some similar combination of words to learn more.

All well and good until the IRS goes after this activity which is simply a multi-step approach to make what is substantively contribution to a Roth in violation of clearly established and still effective income limits. At which point you have post tax income money possibly still inaccessible in a retirement account earning further taxable gains, defeating all of your purposes in favoring a retirement account over a run of the mill investment account. Google "Step Transaction Doctrine" to learn more.

It's more complicated than that - Congressional action explicitly removed the income limits for converting a traditional IRA to a roth IRA. If it's a loophole, it's one that Congress intended.

Even if the IRS came after the practice, the only open question is how long a traditional IRA would have to be held to avoid the step transaction doctrine.

This is a very widely discussed and acknowledged tactic, and everyone can make their own judgement about the potential for the "loophole" to be addressed in the future, but it's not at all a simple application of the step transaction doctrine. By all means, google around, you will find a lot of information about exactly that topic applied to exactly these facts.

Here's a great quote from a Forbes author, but there is plenty more out there (emphasis added)

I checked in with several IRA experts who all dismissed the possibility that the IRS would apply the step transaction doctrine (used to disallow corporate tax shelters) in the context of the backdoor Roth, as unlikely. Then I checked back in with Robert Keebler in Green Bay, Wisc., who suggests a 6-month waiting period between the time you contribute to a nondeductible IRA and convert to a Roth. But even he says: “I don’t see the IRS chasing this. The law allows you to do it.” The worst thing that could happen is that the IRS would say that the money has to go back into a nondeductible IRA, Keebler says, noting that if you’re doing this as a serial maneuver, you’ve run the 3-year statute of limitations on most transfers.

Another good article: http://www.financial-planning.com/blogs ... 863-1.html

[guano]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

I just realized thus wasn't addressed properly.

The above is a freaking retarded boomerism.
Renting is cheaper than buying and traditionally home appreciation tracks inflation. Doesn't mean buying is always wrong (homeowner here). But the above is a bad reason. Don't even think about buying unless you're committee to spending at a minimum the next 5 years there - 10+ would be better

[Anonymous User]

Where does saving for a down payment on a house fit into this? Paying rent continuously is not a good idea, as you growing NO equity!

I just realized thus wasn't addressed properly.

The above is a freaking retarded boomerism.
Renting is cheaper than buying and traditionally home appreciation tracks inflation. Doesn't mean buying is always wrong (homeowner here). But the above is a bad reason. Don't even think about buying unless you're committee to spending at a minimum the next 5 years there - 10+ would be better

Look at the Texas housing market before you jump to such illogical conclusions!