Personal Finance 101 for Young Lawyers Forum

[dabigchina]

Would really appreciate some advice on how best to move forward, because I just don't know what order to do things in.

- HCOL area
- SA coming up @ market, but salary will probably come down to 25k after withholding. Intend to return to this firm.
- ~40k in high yield savings account
-Will have ~70k in fed loans on graduation
~No retirement (for me) or investment accounts (either of us)
~SO earns mid-100s, has 401k, and 15k in federal loans

Our primary goal is to eventually buy a house (we're in our 30s). I don't know what I should be doing, and in what order, to get us there. Should I be paying off our student debt when the 0% interest ends? Should I spend some of my SA salary on school so I graduate with 50-60k? And where should we put savings for a downpayment? (given that we're still probably 3-5 years off) Sorry for all the questions, I'm totally lost.

Pay down the fed loan with approx 20k of that cash in the savings account once the 0% interest ends. In the meantime, put excess savings into a low cost index fund (VTSAX, etc).

[iar]

Thanks!

Two quick follow on questions

Is index fund a good place for the 3-5 year downpayment horizon?

And, should I take advantage of summer 401K? (my firm has one)

[The Lsat Airbender]

Is index fund a good place for the 3-5 year downpayment horizon?

On such a short timeframe you need to hold cash or something close (short-term Treasuries or a fund thereof) unless you're okay with losing a substantial amount of principal and/or delaying your home-buying plans, perhaps by years.

And, should I take advantage of summer 401K? (my firm has one)

If you can afford to, definitely. Bear in mind that the tax benefits of pretax 401(k) contributions are smaller for a tax year where you "only" make $40-50k; personally I'd do Roth 401(k) if possible but it's close.

[Anonymous User]

I'm coming out of 2 clerkships and could use some advice on how to best use my clerkship bonus/NY biglaw salary. I have 150k in student loans (refinanced at 4% over 15 years) and will be getting a 75k clerkship bonus. I have 40k in savings, 10k of which is in the market. I plan to spend 2-3k per month on rent and at least 1k on student loan payments. I'm currently single, won't be getting married for another 3+ years, and don't plan to invest in real estate or move out of NY for 4-5 years, when I'll look to transition to the DOJ/USAO in a coastal city for 4-8 years.

These numbers are not to suggest that I have my life mapped out, but are just ballpark estimates to facilitate more tailored advice for those who are willing to provide it!

[The Lsat Airbender]

At 4% I'm tempted to just retire the loans ASAP with anything left over after (1) setting aside whatever you need to pay income taxes (would have to do the math on withholding) and (2) maxing out tax-advantaged space. A risk-free, untaxable return of 4% compares pretty favorably to the stock market over a random timeframe.

By the time you leave NYC you'll have retired your loans, have a very healthy 401(k) etc., and have saved a healthy sum on top of that—which can either buy stocks or make a downpayment on a house in [new city]. Putting off that decision (equities or a house) is a side benefit of paying debt first.

[Anonymous User]

At 4% I'm tempted to just retire the loans ASAP with anything left over after (1) setting aside whatever you need to pay income taxes (would have to do the math on withholding) and (2) maxing out tax-advantaged space. A risk-free, untaxable return of 4% compares pretty favorably to the stock market over a random timeframe.

By the time you leave NYC you'll have retired your loans, have a very healthy 401(k) etc., and have saved a healthy sum on top of that—which can either buy stocks or make a downpayment on a house in [new city]. Putting off that decision (equities or a house) is a side benefit of paying debt first.

This is extremely helpful--thanks. Would your advice change if the debt were 200k rather than 150k? I assume not.

My only hesitation is if I get and jump ship to my dream DOJ/USAO job in 2 years (rather than staying in biglaw for 4-5 years), and if I want to buy a house in [new city] at that time, I'll have fewer options with 200k less cash/liquidable assets.

Assuming I don't have any unique circumstances, how much in cash do you think I should keep?

[The Lsat Airbender]

Assuming I don't have any unique circumstances, how much in cash do you think I should keep?

3-6 months expenses plus [downpayment on house minus what you could get out of stocks via a margin loan] assuming you really do intend to buy a house soon and the bracketed amount is greater than zero. Both piles of cash take priority over loan prepayments as well as your brokerage account (you shouldn't put short-term cash needs into the stock market) so the questions aren't really related.

If you want to preserve the flexibility to simultaneously take a paycut and buy a house in ~2 years then you're going to take a bath on inflation and cost of capital. I would just make peace with the fact that bailing out to fedgov so early means delaying a home purchase (on the bright side, you start banking your pension sooner).

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

I'm down almost $130k, which is like 85% of what I invested this year and more than half my gross salary. It is what it is, just hope the year ends better. Was planning on leaving my job which is doubly hard in this environment as I want to maximize income to keep plowing into markets until they recover.

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

I'm down almost $130k, which is like 85% of what I invested this year and more than half my gross salary. It is what it is, just hope the year ends better. Was planning on leaving my job which is doubly hard in this environment as I want to maximize income to keep plowing into markets until they recover.

Same, I was planning to leave Big Law within 1-2 years max. This makes it a bit harder as I didn't invest at the right time when the market was moving up, invested a lot a few months ago when I got my bonus, and the market proceeded to dive literally a week after I entered.

But, I was warned something like this could occur, so I guess it's not a shocker. But yes, psychologically tough to bear. Only solace I have is, it's not like there was some other attractive alternative I could have plowed that money into at the time.

[nealric]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Yeah, that makes sense in my head, but it's helpful/comforting to see someone else say it too

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

[Wanderingdrock]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

I mean... yes and no? I'm one of those folks with a number, and also a big proponent of the "set it and forget it" approach. Whether you're pursuing FIRE or not, you're looking at a 40-year horizon for having investments. Your number should therefore take into account the likelihood of going through plenty of downs like this one, and you should have non-equity, relatively liquid assets (cash, bonds, etc.) or income sources sufficient to survive such a downturn without having to sell ETFs. If a downturn now changes your retirement calendar, you miscalculated, unless you are literally delaying just to be able to dump more money into the market while it's down (as at least one person above me suggested they were doing).

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

I think the point is that if you are dumping money into EFTs, you have to look at them in the long term. If you have a very specific amount and date in the relatively near future by which you want that amount, either you need to take into account downturns (bc they’re inevitable and the value of this kind of investment is in its performance over time) or develop different investment strategies. Obsessing over day to day downturns doesn’t get you anywhere.

[nealric]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

Unless you plan on kicking the bucket early too, your investment time horizon is still decades.

Downturns like this don’t necessarily add time to your FIRE goal. We saw a similarly sharp downturn in 2020 and most investors have actually seen healthy returns since (even taking into account the recent drawdown). A bigger problem for a FIRE goal would be extended low returns/stagnation. 10 years of 2% returns is worse than a 20% bear year followed by 9 years of 10% returns.

[champ33]

The above is also assuming there is a better way for the average person to invest. Yes, a downturn delays your goal dollar figure when you are mostly invested in Vanguard ETFs, but the consequences of thinking you can time the market to sell before a downturn and buy before the next upswing will delay that goal number a lot more when you are inevitably wrong.

[Joachim2017]

Downturns like this don’t necessarily add time to your FIRE goal. We saw a similarly sharp downturn in 2020 and most investors have actually seen healthy returns since (even taking into account the recent drawdown). A bigger problem for a FIRE goal would be extended low returns/stagnation. 10 years of 2% returns is worse than a 20% bear year followed by 9 years of 10% returns.

Well, the period after the sharp downturn in 2020 was also historically very unusual. In general, the market over the last decade or so (until just now) has been unusually good for the type of vanilla ETF "set and forget" you get from Vanguard or Fidelity. It looks like that period of growth is over. Recovering from the downward swing will likely be a much, much slower process than it was after the previous few downturns.

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

I mean... yes and no? I'm one of those folks with a number, and also a big proponent of the "set it and forget it" approach. Whether you're pursuing FIRE or not, you're looking at a 40-year horizon for having investments. Your number should therefore take into account the likelihood of going through plenty of downs like this one, and you should have non-equity, relatively liquid assets (cash, bonds, etc.) or income sources sufficient to survive such a downturn without having to sell ETFs. If a downturn now changes your retirement calendar, you miscalculated, unless you are literally delaying just to be able to dump more money into the market while it's down (as at least one person above me suggested they were doing).

Again, if your goal is to retire when you are in your 60s and/or won't be withdrawing from your investments till then, then yeah just invest and forget. Agree with that.

But if your plan was to start on FIRE (and withdraw from your investments) and/or leave biglaw after achieving $1.5M dollar in investments in 3 years when you are a 6th year, which you calculated after taking into the average stock return/withdraw rate etc. as an example, I don't understand what it means to "take into account downtowns" or what the "miscalculations" are or how to "develop different investing strategies". Should've actually used 4% as average return instead of 7%/8% that is quoted as historical average and waited till you had $2M instead of $1.5M? Should've considered making the push to make partner instead of leaving biglaw early? Should've never quit that side hustle or job that got me at least some income? Should not expect to withdraw until that "40 year" is over in the first place? So basically should've put your head down and worked longer? Thought we were talking about FIRE?

This is all to say short term fluctuations can matter for those who do plan to withdraw from their investments early (because reaching that X dollar amount in the short term IS impacted by short term fluctuations) and maybe this all shows the inherent risk involved with calculating that number and the year to actually retire, and using the historical average return to get to that number. But maybe as someone mentioned we will experience another quick rebound. Who knows.

[Anonymous User]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

I mean... yes and no? I'm one of those folks with a number, and also a big proponent of the "set it and forget it" approach. Whether you're pursuing FIRE or not, you're looking at a 40-year horizon for having investments. Your number should therefore take into account the likelihood of going through plenty of downs like this one, and you should have non-equity, relatively liquid assets (cash, bonds, etc.) or income sources sufficient to survive such a downturn without having to sell ETFs. If a downturn now changes your retirement calendar, you miscalculated, unless you are literally delaying just to be able to dump more money into the market while it's down (as at least one person above me suggested they were doing).

Again, if your goal is to retire when you are in your 60s and/or won't be withdrawing from your investments till then, then yeah just invest and forget. Agree with that.

But if your plan was to start on FIRE (and withdraw from your investments) and/or leave biglaw after achieving $1.5M dollar in investments in 3 years when you are a 6th year, which you calculated after taking into the average stock return/withdraw rate etc. as an example, I don't understand what it means to "take into account downtowns" or what the "miscalculations" are or how to "develop different investing strategies". Should've actually used 4% as average return instead of 7%/8% that is quoted as historical average and waited till you had $2M instead of $1.5M? Should've considered making the push to make partner instead of leaving biglaw early? Should've never quit that side hustle or job that got me at least some income? Should not expect to withdraw until that "40 year" is over in the first place? So basically should've put your head down and worked longer? Thought we were talking about FIRE?

This is all to say short term fluctuations can matter for those who do plan to withdraw from their investments early (because reaching that X dollar amount in the short term IS impacted by short term fluctuations) and maybe this all shows the inherent risk involved with calculating that number and the year to actually retire, and using the historical average return to get to that number. But maybe as someone mentioned we will experience another quick rebound. Who knows.

I don't think anyone suggested that "set it and forget it" is really the right advice for someone who wants to be able to start drawing on their cash in 3 years. If your approach actually is "set it and forget it," then yes, you need to "forget it" in the sense that looking at your investments every day will drive you crazy. If your approach is "I want this money in 3 years" you're already not on board with the basic premise, which is fine (though yeah, I'd say if you're operating on such a short timeline you can't assume you'll necessarily get the historical average return. That's not to say you need to work till you're 60 after all, but yeah, you may need to work a little longer depending on what the market does. But you're still just not in the "set it and forget it" universe.)

[Wanderingdrock]

As someone who recently dumped a whole lot of bonus/savings $$ into a Vanguard ETF, let me tell ya, the "forget it" part of "set it and forget it" investing is NOT as easy as it sounds....

You are correct. It isn't easy. But don't forget anything that happens in the course of a single year is just noise. What matters is how your investments perform over decades. Over a 40 year career, the impact of having put a big slug in right before a downturn is actually going to be pretty negligible relative to your portfolio.

Not saying what you are saying is wrong but for folks who are on this board who have a number they want to save up before leaving biglaw and/or pursuing FIRE, "dump your money and forget it for 40 years" type of advice don't make a lot of sense. A downturn like what we are seeing now (if protracted) will add months if not years to their goal.

I mean... yes and no? I'm one of those folks with a number, and also a big proponent of the "set it and forget it" approach. Whether you're pursuing FIRE or not, you're looking at a 40-year horizon for having investments. Your number should therefore take into account the likelihood of going through plenty of downs like this one, and you should have non-equity, relatively liquid assets (cash, bonds, etc.) or income sources sufficient to survive such a downturn without having to sell ETFs. If a downturn now changes your retirement calendar, you miscalculated, unless you are literally delaying just to be able to dump more money into the market while it's down (as at least one person above me suggested they were doing).

Again, if your goal is to retire when you are in your 60s and/or won't be withdrawing from your investments till then, then yeah just invest and forget. Agree with that.

But if your plan was to start on FIRE (and withdraw from your investments) and/or leave biglaw after achieving $1.5M dollar in investments in 3 years when you are a 6th year, which you calculated after taking into the average stock return/withdraw rate etc. as an example, I don't understand what it means to "take into account downtowns" or what the "miscalculations" are or how to "develop different investing strategies". Should've actually used 4% as average return instead of 7%/8% that is quoted as historical average and waited till you had $2M instead of $1.5M? Should've considered making the push to make partner instead of leaving biglaw early? Should've never quit that side hustle or job that got me at least some income? Should not expect to withdraw until that "40 year" is over in the first place? So basically should've put your head down and worked longer? Thought we were talking about FIRE?

This is all to say short term fluctuations can matter for those who do plan to withdraw from their investments early (because reaching that X dollar amount in the short term IS impacted by short term fluctuations) and maybe this all shows the inherent risk involved with calculating that number and the year to actually retire, and using the historical average return to get to that number. But maybe as someone mentioned we will experience another quick rebound. Who knows.

I don't think anyone suggested that "set it and forget it" is really the right advice for someone who wants to be able to start drawing on their cash in 3 years. If your approach actually is "set it and forget it," then yes, you need to "forget it" in the sense that looking at your investments every day will drive you crazy. If your approach is "I want this money in 3 years" you're already not on board with the basic premise, which is fine (though yeah, I'd say if you're operating on such a short timeline you can't assume you'll necessarily get the historical average return. That's not to say you need to work till you're 60 after all, but yeah, you may need to work a little longer depending on what the market does. But you're still just not in the "set it and forget it" universe.)

That is actually what I was saying. If you just have a number to hit and that's it, you'll retire, then you've oversimplified your FIRE plan. There are other considerations including what remaining income streams you'll have and what your asset allocation is. It's a useful thought experiment to consider what would happen if you hit your number today, retired tomorrow, and saw a 30% drop in the market the next day. You're ready for that or you're not, but if you're not, then you miscalculated your number - or, to be more exact, your number was based on incorrect assumptions or the wrong asset allocation.

If you are retiring in the next few years (or tomorrow) you may have less of your net worth tied up in equities and more in cash/bonds/other assets, but you're still going to have a significant equity allocation and you shouldn't be planning to sell any significant portion of that tomorrow - and certainly not if there's a downturn - because you're still looking at a 40-year horizon during which you'll want to have equities growing in your portfolio, in addition to contingencies for downturns.

[nealric]

Downturns like this don’t necessarily add time to your FIRE goal. We saw a similarly sharp downturn in 2020 and most investors have actually seen healthy returns since (even taking into account the recent drawdown). A bigger problem for a FIRE goal would be extended low returns/stagnation. 10 years of 2% returns is worse than a 20% bear year followed by 9 years of 10% returns.

Well, the period after the sharp downturn in 2020 was also historically very unusual. In general, the market over the last decade or so (until just now) has been unusually good for the type of vanilla ETF "set and forget" you get from Vanguard or Fidelity. It looks like that period of growth is over. Recovering from the downward swing will likely be a much, much slower process than it was after the previous few downturns.

Nobody knows nothin. We have no idea how long it may or may not take to recover from the current downturn.

[Anonymous User]

I have $50,000 that I can put into my mutual fund or pay off part of mortgage (2.9% interest) or fully pay off my car (3.5% interest). Before the last month or two I would have obviously said mutual fund, but I have lost 25% in it the past couple months. Do I still put that money into the fund, especially if I am not planning on using it for at least 15 years?

[The Lsat Airbender]

I have $50,000 that I can put into my mutual fund or pay off part of mortgage (2.9% interest) or fully pay off my car (3.5% interest). Before the last month or two I would have obviously said mutual fund, but I have lost 25% in it the past couple months. Do I still put that money into the fund, especially if I am not planning on using it for at least 15 years?

Recent, short-term performance of the fund is irrelevant (although being down >20% implies that you're not in a total stock-market index, which I wouldn't recommend; the S&P 500 is only down abut 13% YTD). At those interest rates I would prioritize the stock market but paying off the car is a perfectly defensible choice if you want to simplify your life a bit.

[nealric]

I have $50,000 that I can put into my mutual fund or pay off part of mortgage (2.9% interest) or fully pay off my car (3.5% interest). Before the last month or two I would have obviously said mutual fund, but I have lost 25% in it the past couple months. Do I still put that money into the fund, especially if I am not planning on using it for at least 15 years?

If anything, the recent poor performance of the market is a reason to put more money in, as you are getting in cheaper than when you were buying at all time highs.