Critique my first year associate budget Forum

[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.

I agree with this poster .... even if you're not building up a huge rainy day fund, you have flexibility with such a high loan payment if you do have unexpected expenses and need to pay less one month. Lack of savings would be more of a concern if you weren't planning to pay off your loans in two years.

I'm assuming this doesn't include bonus? Just throw that bonus in your rainy day fund. Problem solved.

Buying plane tickets and a couch are expected purchases that you can adjust in advance. In other words, it ignores completely unexpected life events that might happen after you've sent in your payments.

Within the past year and a half, my GF has had to get her gallbladder removed ($6k), I had to go to the hospital for getting absolutely fucking drilled in the face in softball (playing shortstop, grounder took a bad hop and hit so hard off my face that it went into foul territory)...anyway that was $1.8k, and we had to replace our garage door ($1.1k). Other unexpected stuff can happen--car accident, fire, etc.

Shit happens. It's better to just build up that liquid cash at the outset and replenish as necessary.

I am assuming a rainy day fund and in fact said that that should be the first order of business. We are just talking about on a monthly cash flow basis whether the budget seems reasonable.

[swc65]

So could somebody summarize the basic/standard advice for someone in a similar position as OP (approx. same debt load -about $60k) but in MFH.

From the thread, it looks like it would be something like this, in order of priorities:

1. Try not to waste money on dumb shit.
2. Refinance Loans and don't worry about paying much over the minimum (assuming a favorable interest rate).
3. Create a rainy day fund that can cover you for 6 months in a savings account.
4. Max out 401k
5. Put money in an HSA (? - I am a little confused on what the priority level of this is)
6. Put extra savings in a diverse index fund

Is that just about right? I don't know much about all of this and would appreciate input.

The standard advice as far as priorities are concerned are this:

Step 1. Build emergency fund (6 months of expenses)
Step 2. Contribute to 401K up to match
Step 3. Pay off high interest loans (high interest being somewhere between 5-6% and up)
Step 4. Max IRA
Step 5. Max 401K (IRA first because of flexibility...most 401K plans have higher expenses than an IRA with Vanguard/Fidelity etc. with expense ratios around .05%)
Step 6. Pay down low interest debt
Step 7. Save for other goals

Seems like the best plan. Only thing is that I would save much more than six months of expenses, more like 9-12 months. How many lawyers have been out of work for a year or more? How many have taken jobs that pay significantly less after being fired/laid off? It doesnt take much to drain savings. If you are out of work for even a few months, it just takes one other unexpected expense to zap it.

[AVBucks4239]

OP here:

I have a question regarding rainy day and index funds:

1. Should I put my 20k cash in a regular savings or can I get away with a money market or medium-term bond?
2. Regarding indexes, is Vanguard TCR given its low fees?
3. If so, would it be imprudent of me to only invest a small portion in the Big Cap S&P in lieu of Small Caps?

1. Regular savings.

2. Yes, but others (Fidelity, Schwab) have comparable fees for their index funds. I personally use Schwab because the fees are the exact same and it's connected to my checking account, which is very convenient.

3. I wouldn't get too hot and bothered with big and small caps. Just figure out how much you want in each market sector (US, international, real estate, bonds) and buy the total market funds for all of those. I'd go over to Bogleheads and submit a forum post if you want a more detailed analysis about diversification of your index funds.

[AVBucks4239]

Seems like the best plan. Only thing is that I would save much more than six months of expenses, more like 9-12 months. How many lawyers have been out of work for a year or more? How many have taken jobs that pay significantly less after being fired/laid off? It doesnt take much to drain savings. If you are out of work for even a few months, it just takes one other unexpected expense to zap it.

If you get fired and don't have a job after a few months, you need to suck it up and start solo'ing. There's no excuse to have a license to practice law and not be generating income for more than a few months.

Also, your scenario is just another reason why absorbing a higher interest rate might be worth it to stay on your federal loans (call them, tell them you lost your job and your payments are zero).

[Tiago Splitter]

To me even six months of emergency savings as a first priority is a little over the top. Most people can adjust their expenses downward relatively easily during periods of unemployment, and as much as we hate to do it there's no law against accessing retirement funds during hard times. At the very least $5,500 of say your first $7,500 of emergency money should go into your Roth and then you can slowly start investing it when no emergencies materialize. There's no reason to miss an entire year of Roth contributions because you were waiting to have $25,000 in a savings account before doing anything else.

[BrazilBandit]

didn't read entire thread, but regarding investments, read "A Random Walk Down Wall Street" and you're golden... you control risk, not returns...

[Desert Fox]

[FrancisScottKey]

Can everyone stop giving financial advice on TLS?

I think similar to the "retake" chant, TLS should start a "speak with a financial advisor or other qualified individual" chant.

[sublime]

..

[Desert Fox]

[krads153]

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?

Get on PAYE and don't pay a cent more than you have to. If you get a Non profit gig after biglaw, your loans get wiped and you'd rather have a money in the bank. Stafford loans are ~6%? You can make that much long-term in the S&P500.

You might end up using the savings to buy a house or something. IF after 3 years you really are staying in private practice, just pay the loans off with cash on hand.

Even with "only" $56k in debt?

Pretty sure his PAYE amount wouldn't differ much, if any....

I'd probably just refinance it to private loans and pay it off quickly/slowly depending on the interest rate. At 6-7%, I'd probably just pay it off quickly.

[bk1]

So could somebody summarize the basic/standard advice for someone in a similar position as OP (approx. same debt load -about $60k) but in MFH.

From the thread, it looks like it would be something like this, in order of priorities:

1. Try not to waste money on dumb shit.
2. Refinance Loans and don't worry about paying much over the minimum (assuming a favorable interest rate).
3. Create a rainy day fund that can cover you for 6 months in a savings account.
4. Max out 401k
5. Put money in an HSA (? - I am a little confused on what the priority level of this is)
6. Put extra savings in a diverse index fund

Is that just about right? I don't know much about all of this and would appreciate input.

The standard advice as far as priorities are concerned are this:

Step 1. Build emergency fund (6 months of expenses)
Step 2. Contribute to 401K up to match
Step 3. Pay off high interest loans (high interest being somewhere between 5-6% and up)
Step 4. Max IRA
Step 5. Max 401K (IRA first because of flexibility...most 401K plans have higher expenses than an IRA with Vanguard/Fidelity etc. with expense ratios around .05%)
Step 6. Pay down low interest debt
Step 7. Save for other goals

Mostly agree with this order except maybe 7 (I don't think it's unreasonable to save for other goals before maxing 401k or paying down low interest debt). Re 401k match, most firms don't match for biglaw associates. I'd also note that emergency funds can be lower (e.g., 3 months) or higher (e.g., 12 months), depending on risk tolerance.

[Desert Fox]

[swc65]

Seems like the best plan. Only thing is that I would save much more than six months of expenses, more like 9-12 months. How many lawyers have been out of work for a year or more? How many have taken jobs that pay significantly less after being fired/laid off? It doesnt take much to drain savings. If you are out of work for even a few months, it just takes one other unexpected expense to zap it.

If you get fired and don't have a job after a few months, you need to suck it up and start solo'ing. There's no excuse to have a license to practice law and not be generating income for more than a few months.

Also, your scenario is just another reason why absorbing a higher interest rate might be worth it to stay on your federal loans (call them, tell them you lost your job and your payments are zero).

Agree on the fed loans point. Probably better to wait a bit and get some experience and become more marketable before refi. though some priv. lenders have employment protection.

soloing is tough and costs money and you arent going to make six figures/anything near a replacement income. Not to mention, I personally would have no idea where/how to solo in my practice area and would dread starting over with wills and trusts

[AVBucks4239]

Seems like the best plan. Only thing is that I would save much more than six months of expenses, more like 9-12 months. How many lawyers have been out of work for a year or more? How many have taken jobs that pay significantly less after being fired/laid off? It doesnt take much to drain savings. If you are out of work for even a few months, it just takes one other unexpected expense to zap it.

If you get fired and don't have a job after a few months, you need to suck it up and start solo'ing. There's no excuse to have a license to practice law and not be generating income for more than a few months.

Also, your scenario is just another reason why absorbing a higher interest rate might be worth it to stay on your federal loans (call them, tell them you lost your job and your payments are zero).

Agree on the fed loans point. Probably better to wait a bit and get some experience and become more marketable before refi. though some priv. lenders have employment protection.

soloing is tough and costs money and you arent going to make six figures/anything near a replacement income. Not to mention, I personally would have no idea where/how to solo in my practice area and would dread starting over with wills and trusts

You could probably start soloing with about $1k (make sure you front load your CLEs so you don't have to pay for dues/CLEs if you get canned). And if you're running out of money, figuring out how to do wills/trusts and signing up on the appointment list is a hell of a lot better than the alternative.

[ponderingmeerkat]

So could somebody summarize the basic/standard advice for someone in a similar position as OP (approx. same debt load -about $60k) but in MFH.

From the thread, it looks like it would be something like this, in order of priorities:

1. Try not to waste money on dumb shit.
2. Refinance Loans and don't worry about paying much over the minimum (assuming a favorable interest rate).
3. Create a rainy day fund that can cover you for 6 months in a savings account.
4. Max out 401k
5. Put money in an HSA (? - I am a little confused on what the priority level of this is)
6. Put extra savings in a diverse index fund

Is that just about right? I don't know much about all of this and would appreciate input.

The standard advice as far as priorities are concerned are this:

Step 1. Build emergency fund (6 months of expenses)
Step 2. Contribute to 401K up to match
Step 3. Pay off high interest loans (high interest being somewhere between 5-6% and up)
Step 4. Max IRA
Step 5. Max 401K (IRA first because of flexibility...most 401K plans have higher expenses than an IRA with Vanguard/Fidelity etc. with expense ratios around .05%)
Step 6. Pay down low interest debt
Step 7. Save for other goals

Mostly agree with this order except maybe 7 (I don't think it's unreasonable to save for other goals before maxing 401k or paying down low interest debt). Re 401k match, most firms don't match for biglaw associates. I'd also note that emergency funds can be lower (e.g., 3 months) or higher (e.g., 12 months), depending on risk tolerance.

Agree...it's not unreasonable. But, different people want different things. It sounds to me like OP might want different things than you. The 7-step process above is the quickest way to saving "fuck you money". If "fuck you money" isn't a priority for you and the newest E-class is, then yea, you'll probably put step 7 at step 4. NBD...just different approaches to life.

FWIW, this video sums up my priorities: Fuck you money

[bk1]

Agree...it's not unreasonable. But, different people want different things. It sounds to me like OP might want different things than you. The 7-step process above is the quickest way to saving "fuck you money". If "fuck you money" isn't a priority for you and the newest E-class is, then yea, you'll probably put step 7 at step 4. NBD...just different approaches to life.

FWIW, this video sums up my priorities: Fuck you money

Fair, though I was thinking more along the lines of saving for a house down payment as opposed to a fancy car. Depending on where you live and your life plan, it may not be irresponsible to save for a house and contribute less to retirement.

[bk1]

Private refi doesn't really save much money compared to Staffard loans. You save maybe 1 percent.

I mean, I'm all for PAYE/IBER/etc as being far safer, but 1 percent? My weighted average was 6.84%. You can refi 2-3% lower than that pretty easy, potentially 4%+ lower. Compounding interest also will favor refinancing.

[Tiago Splitter]

Private refi doesn't really save much money compared to Staffard loans. You save maybe 1 percent.

I mean, I'm all for PAYE/IBER/etc as being far safer, but 1 percent? My weighted average was 6.84%. You can refi 2-3% lower than that pretty easy, potentially 4%+ lower. Compounding interest also will favor refinancing.

I thought fed loan interest doesn't compound.

[Desert Fox]

[ponderingmeerkat]

Agree...it's not unreasonable. But, different people want different things. It sounds to me like OP might want different things than you. The 7-step process above is the quickest way to saving "fuck you money". If "fuck you money" isn't a priority for you and the newest E-class is, then yea, you'll probably put step 7 at step 4. NBD...just different approaches to life.

FWIW, this video sums up my priorities: Fuck you money

Fair, though I was thinking more along the lines of saving for a house down payment as opposed to a fancy car. Depending on where you live and your life plan, it may not be irresponsible to save for a house and contribute less to retirement.

Gotcha...slight misunderstanding. For me, I see mortgage debt as falling into step 6 (pay down low-interest debt). So, for me personally, I wouldn't assume a mortgage payment unless Steps 1-5 were taken care of. Why? Well, I'm a huge fan of diversification and buying a home automatically makes you overweight real-estate on a hyper-local basis. Additionally, historical average real estate returns are more volatile and lower than a broadly diversified portfolio of equities and bonds.

That's just me. I think real estate's role in a financial plan can certainly be tailored to each individual/location/set of circumstances. An E-class, on the other hand, cannot.

[swc65]

Seems like the best plan. Only thing is that I would save much more than six months of expenses, more like 9-12 months. How many lawyers have been out of work for a year or more? How many have taken jobs that pay significantly less after being fired/laid off? It doesnt take much to drain savings. If you are out of work for even a few months, it just takes one other unexpected expense to zap it.

If you get fired and don't have a job after a few months, you need to suck it up and start solo'ing. There's no excuse to have a license to practice law and not be generating income for more than a few months.

Also, your scenario is just another reason why absorbing a higher interest rate might be worth it to stay on your federal loans (call them, tell them you lost your job and your payments are zero).

Agree on the fed loans point. Probably better to wait a bit and get some experience and become more marketable before refi. though some priv. lenders have employment protection.

soloing is tough and costs money and you arent going to make six figures/anything near a replacement income. Not to mention, I personally would have no idea where/how to solo in my practice area and would dread starting over with wills and trusts

You could probably start soloing with about $1k (make sure you front load your CLEs so you don't have to pay for dues/CLEs if you get canned). And if you're running out of money, figuring out how to do wills/trusts and signing up on the appointment list is a hell of a lot better than the alternative.

I get what you're saying. I would imagine soloing is harder than just coming up with 1K though. honestly, though I would just hide out in school collecting degrees and living off that unlimited fed loan teet before hanging a shingle.

[shifty_eyed]

So if your employer doesn't match 401k, the common wisdom is to not contribute until after you pay off high interest loans?

That seems wrong to me, but I'm also financially illiterate.

[bk1]

Private refi doesn't really save much money compared to Staffard loans. You save maybe 1 percent.

I mean, I'm all for PAYE/IBER/etc as being far safer, but 1 percent? My weighted average was 6.84%. You can refi 2-3% lower than that pretty easy, potentially 4%+ lower. Compounding interest also will favor refinancing.

I thought fed loan interest doesn't compound.

I didn't word that properly. I meant that because you accrue less in interest, you are making higher principal payments, thus accruing less interest.

If you are paying your fed loans normally, interest doesn't compound because you are paying off all the interest that has accrued and thus there is no interest on that amount as its been fully paid off before it can capitalize. If you are paying your loans via PAYE/IBR/etc, the unpaid interest will capitalize upon certain events (e.g., no longer under a "partial financial hardship") though PAYE limits this amount to 10% of the original principal (not sure about IBR/ICR/REPAYE/etc).

[bk1]

So if your employer doesn't match 401k, the common wisdom is to not contribute until after you pay off high interest loans?

That seems wrong to me, but I'm also financially illiterate.

The reason match is ahead of paying off high interest loans is because you are getting a guaranteed extremely high return (often 100%, but usually at least 20% depending on how the match is structured). Thus a match handily beats paying off almost any loan rate you could theoretically have (except potentially things like payday loans, high APR credit cards, predatory car loans, etc).

After the match (or ignoring it if you don't have one), the question is where are you going to get the best kind of return. While you can get good returns in a 401k (and your tax-advantaged space is disappearing every year), returns in your 401k are not guaranteed. On the other hand, paying off high interest loans is a guaranteed return of whatever your interest rate is. Because the return is guaranteed and the rate is high, that usually means it makes more sense than a 401k (i.e., the risk adjusted return for paying off high interest loans > risk adjusted return for contributing to tax-advantaged retirement accounts). The real question is what should be considered a high interest loan. That is where your risk tolerance factors in. Easily I think most people are going to say above 7-8% is high interest because it's unlikely that the market will beat that rate. Personally, I think ~5% and higher should be paid off before 401k because of the guaranteed return; ~3-5% I think is a close call; under ~3% I would definitely do retirement first.

One thing to add though, I would always contribute to an IRA prior to a non-matching 401k. This is because you have much greater control over an IRA and generally will have access a greater variety of low cost index funds. Once you've maxed out your IRA, only then would I consider contributing to a non-matching 401k.