Critique my first year associate budget Forum

[TFALAWL]

Hello, I am C/O 2016, and with 3LOL have had enough time to start planning my financials. I will be working big law in SoCal making 160k. I will be 25 years old when I start.
Vision: Plan for both the best and worst case scenarios: 1. try to have enough liquidity after the two year mark, should I or firm decide big law is not for me 2. have a good start on retirement (I am a big believer in the power of compound interest i.e. 'snowball effect') 3. Be mindful with money. Mindful is different from frugal insofar that the former recognizes that I am willing to put up certain costs to improve my QOL (e.g. living close to work to not have to deal with horrible traffic).

Stats:
1. Projected Debt at first day of employment -- 56k stafford
2. No liquid assets, but I own my car.

Budget for first year:
1. Max out 401k. This will probably put my post-tax income at $7,200 a month
2. $3,500 towards loans: this is the part where I am curious as to what TLS'ers think. I could easily get away with putting only 2k a month given my low debt.
3. High deductible health insurance, with a couple grand shored up in an HSA: $250 a month
4. COL: $3,200.
5. Remaining cash --> rainy day fund. If I put $3,500 towards loans that only leaves me with $250 a month. I could overcome this by saving all the money that I would put towards loans during my second year, however, this plan does not allow for an exit at the 12 month mark.

Year two:

Mostly the same as year one, except once my loans get paid off at the 17th month I will have an extra $3,500 + salary increase.
1. Put 5k in an IRA and backdoor it to a Roth
2. Hit 10k in cash in a savings account
3. Put the rest in a medium-risk Index that can be liquified relatively easily.

Thoughts?

[ponderingmeerkat]

Overall not bad. If it were me, I'd stick with the classic advice to build a rainy day fund before anything else. So, if COL for you is $3200, 6 months of that drives you to $20K liquid in savings. After that, I'd put enough into the 401K to get a full match and dump all the rest into loans. Why? A guaranteed 6% ROI (the rate on your Stafford Loans) is better than a 50% chance of a 10% ROI (the average annual rate of return on equities).

After that loan is paid off, there will be lots of time for HSAs, back door Roths, etc.

[TFALAWL]

Overall not bad. If it were me, I'd stick with the classic advice to build a rainy day fund before anything else. So, if COL for you is $3200, 6 months of that drives you to $20K liquid in savings. After that, I'd put enough into the 401K to get a full match and dump all the rest into loans. Why? A guaranteed 6% ROI (the rate on your Stafford Loans) is better than a 50% chance of a 10% ROI (the average annual rate of return on equities).

After that loan is paid off, there will be lots of time for HSAs, back door Roths, etc.

Thanks for your critique!

Regarding the 20k rainy day fund, does the analysis shift if I tell you that my parents live in the same market as me and I could move in with them should I need to + CA unemployment is 450 a week for 6 months.

[ponderingmeerkat]

Overall not bad. If it were me, I'd stick with the classic advice to build a rainy day fund before anything else. So, if COL for you is $3200, 6 months of that drives you to $20K liquid in savings. After that, I'd put enough into the 401K to get a full match and dump all the rest into loans. Why? A guaranteed 6% ROI (the rate on your Stafford Loans) is better than a 50% chance of a 10% ROI (the average annual rate of return on equities).

After that loan is paid off, there will be lots of time for HSAs, back door Roths, etc.

Thanks for your critique!

Regarding the 20k rainy day fund, does the analysis shift if I tell you that my parents live in the same market as me and I could move in with them should I need to + CA unemployment is 450 a week for 6 months.

More of a relationship question, frankly. Me personally, I'd keep the full 6 months because it would crush my soul/pride to move back in with the parents. But, if you have that kind of relationship, then maybe. Only you can truly decide that.

As far as unemployment is concerned, treat that like insurance. It's there if you catastrophically need it but shouldn't be part of your planning process.

[jkpolk]

You may want to consider paying the minimum on loans to build credit and increase liquidity (if you consider the option value of being able to liquify your investments and/or rainy day fund in the situation where you are out of work this option is definitely better than 6% return). You also may want to consider NOT maxing your 401K for your stump year, since your taxes are lol-low anyway and the market is probably lol-bubbly (the value of maxing your 401K increases as your marginal rate increases- your marginal rate for your stump year will be low so maxing 401k isnt the free money proposition it is at higher income levels)

[BigZuck]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

[anonnymouse]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

Sounds fine to me. My monthly expenses in MFH are under $3k (not counting loan payments).

[pancakes3]

I just thought it's funny that you phrased it as you "believe" in compound interest like it's Tinkerbell

[DportIA]

Great topic.

One suggestion for still investing in your 401K in a bubble market is to set your "investment elections" so that some of your contribution goes into a money market fund. That way, you can still max out your 401K while allowing some cash to stockpile in the 401k that you can later use to snap up mutual funds after a decline. I know not all employers offer a money market in their 401K buffet, but it is definitely worth looking into.

For example, I tend to agree the equities markets are a bit overheated right now, so I am carrying about 20% of my 401K in a money market that I plan on using to buy mutual fund shares in the next big decline.

[ponderingmeerkat]

I'm already seeing several people advocating for "market timing" strategies in here. Let me be the guy to beat this drum: "It's about time in the market not timing the market". Basics people...seriously do your self a favor and set your portfolio allocations based on your risk tolerance...nothing more. Not how "frothy" you think Dec 2015 is (you have a 40 year investment horizon). I promise you that you are incapable of adjudicating market fundamentals better than the 1000's of quants and market makers on the street.

If anyone reading this thread is "holding off" on their portfolio allocations because they have a hot-tip from Uncle Vinny that the market is "frothy", slap yourself for being stupid, and stick to the plan.

That is all...

[jkpolk]

I'm already seeing several people advocating for "market timing" strategies in here. Let me be the guy to beat this drum: "It's about time in the market not timing the market". Basics people...seriously do your self a favor and set your portfolio allocations based on your risk tolerance...nothing more. Not how "frothy" you think Dec 2015 is (you have a 40 year investment horizon). I promise you that you are incapable of adjudicating market fundamentals better than the 1000's of quants and market makers on the street.

If anyone reading this thread is "holding off" on their portfolio allocations because they have a hot-tip from Uncle Vinny that the market is "frothy", slap yourself for being stupid, and stick to the plan.

That is all...

you're missing the point

[Anonymous User]

In no way is 56k a crushing debt load even if you leave biglaw after a short period. You should refinance your loans ASAP and pay on a 5-10 year repayment plan. Stash away whatever extra you have after living life in safe but not ultra conservative investments.

[ponderingmeerkat]

I'm already seeing several people advocating for "market timing" strategies in here. Let me be the guy to beat this drum: "It's about time in the market not timing the market". Basics people...seriously do your self a favor and set your portfolio allocations based on your risk tolerance...nothing more. Not how "frothy" you think Dec 2015 is (you have a 40 year investment horizon). I promise you that you are incapable of adjudicating market fundamentals better than the 1000's of quants and market makers on the street.

If anyone reading this thread is "holding off" on their portfolio allocations because they have a hot-tip from Uncle Vinny that the market is "frothy", slap yourself for being stupid, and stick to the plan.

That is all...

you're missing the point

Go on...

[pancakes3]

Actually, upon reflection, budgeting 3.2k CoL for SoCal seems unduly restrictive when the benefit is paying off the loan within 2 years instead of 5. Not familiar with the rental market but I'm guessing it's at least 1.6k-2k for just a decent studio. With coffee, utilities, food, non-edible groceries you'll basically have no discretionary income whatsoever.

Also you have to at least have SOME initial up front overhead in establishing yourself like furniture, wardrobe, getting dishes, new TV, etc.

[dixiecupdrinking]

Actually, upon reflection, budgeting 3.2k CoL for SoCal seems unduly restrictive when the benefit is paying off the loan within 2 years instead of 5. Not familiar with the rental market but I'm guessing it's at least 1.6k-2k for just a decent studio. With coffee, utilities, food, non-edible groceries you'll basically have no discretionary income whatsoever.

Also you have to at least have SOME initial up front overhead in establishing yourself like furniture, wardrobe, getting dishes, new TV, etc.

The thing about this though is that presumably the extra loan payments can be adjusted downward in any particular month. If you had to buy plane tickets or a couch or whatever, then just pay the minimum that month.

I think it looks like a pretty legit budget. Would agree not to worry about 401k until January though, assuming you have a stub year. Use the first few checks to build up the rainy day fund.

[BigZuck]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

Sounds fine to me. My monthly expenses in MFH are under $3k (not counting loan payments).

I know I sure believe it

[BizBro]

I'm already seeing several people advocating for "market timing" strategies in here. Let me be the guy to beat this drum: "It's about time in the market not timing the market". Basics people...seriously do your self a favor and set your portfolio allocations based on your risk tolerance...nothing more. Not how "frothy" you think Dec 2015 is (you have a 40 year investment horizon). I promise you that you are incapable of adjudicating market fundamentals better than the 1000's of quants and market makers on the street.

If anyone reading this thread is "holding off" on their portfolio allocations because they have a hot-tip from Uncle Vinny that the market is "frothy", slap yourself for being stupid, and stick to the plan.

That is all...

you're missing the point

Go on...

Waiting for an answer still....

[anonnymouse]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

Sounds fine to me. My monthly expenses in MFH are under $3k (not counting loan payments).

I know I sure believe it

Not flame, duder. But I split my expenses with my wife and we live in a fairly dumpy apartment (no doorman, about 500 sq ft, near NYCHA housing) in upper MFH. My half of rent is just over $1k.

[BigZuck]

500 sq ft

I mean if you want to do this to yourself I guess

But life is too short IMO

[Johann]

assumes you have a job second year.

[anonnymouse]

500 sq ft

I mean if you want to do this to yourself I guess

But life is too short IMO

That's the beauty of hedonic adaptation, broski.

[Danger Zone]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

Sounds fine to me. My monthly expenses in MFH are under $3k (not counting loan payments).

I know I sure believe it

Not flame, duder. But I split my expenses with my wife and we live in a fairly dumpy apartment (no doorman, about 500 sq ft, near NYCHA housing) in upper MFH. My half of rent is just over $1k.

You live like this on a big law salary? Why

[pancakes3]

Bro. How? Why?

[anonnymouse]

You're working big law in CA and your cost of living will only be $3200 a month?

That's flame right?

Sounds fine to me. My monthly expenses in MFH are under $3k (not counting loan payments).

I know I sure believe it

Not flame, duder. But I split my expenses with my wife and we live in a fairly dumpy apartment (no doorman, about 500 sq ft, near NYCHA housing) in upper MFH. My half of rent is just over $1k.

You live like this on a big law salary? Why

Pretty easy. To be clear, my half of the monthly expenses are under $3k. Why? Prefer the extra $25k/yr in our pockets and the character of our apt to the luxury building experience. Not really into hyperconsumption.

[hous]

Hello, I am C/O 2016, and with 3LOL have had enough time to start planning my financials. I will be working big law in SoCal making 160k. I will be 25 years old when I start.
Vision: Plan for both the best and worst case scenarios: 1. try to have enough liquidity after the two year mark, should I or firm decide big law is not for me 2. have a good start on retirement (I am a big believer in the power of compound interest i.e. 'snowball effect') 3. Be mindful with money. Mindful is different from frugal insofar that the former recognizes that I am willing to put up certain costs to improve my QOL (e.g. living close to work to not have to deal with horrible traffic).

Stats:
1. Projected Debt at first day of employment -- 56k stafford
2. No liquid assets, but I own my car.

Budget for first year:
1. Max out 401k. This will probably put my post-tax income at $7,200 a month
2. $3,500 towards loans: this is the part where I am curious as to what TLS'ers think. I could easily get away with putting only 2k a month given my low debt.
3. High deductible health insurance, with a couple grand shored up in an HSA: $250 a month
4. COL: $3,200.
5. Remaining cash --> rainy day fund. If I put $3,500 towards loans that only leaves me with $250 a month. I could overcome this by saving all the money that I would put towards loans during my second year, however, this plan does not allow for an exit at the 12 month mark.

Year two:

Mostly the same as year one, except once my loans get paid off at the 17th month I will have an extra $3,500 + salary increase.
1. Put 5k in an IRA and backdoor it to a Roth
2. Hit 10k in cash in a savings account
3. Put the rest in a medium-risk Index that can be liquified relatively easily.

Thoughts?

You gave yourself too much wiggle room imo, unless you spend ALOT. I'm a 2014 grad that made 70k and had 47k (originally 50k but it was down to 47k when I started working) in student loans. I put 18k into my 401k, 11k into IRAs (2014 and 2015), 3.25k in HSA, 1k in taxable account, and an additional 3k in student loans in my first year. I may be more frugal than most here but I think with a 160k salary you can increase your networth by 75k a year. A large chunck will go to taxes and housing since you live in CA but even after taxes and housing you have atleast 80k left right? I live in a state that has less taxes and is lower COL so I may be completely off.