Junior Associates- How are you budgeting? Forum

[Fireworks2016]

Market and salary: Non-NYC, 215k, Stub
Rent: 3k
401(k) Contribution: 6%
Health Spending: How do people figure this out? I know my plan has $250 deductible, but not sure how to figure out monthly spending on health
Transportation: None
Student Loan Payments: 2k per month, on average, but sometimes more; trying to be aggressive about this
Savings: 5k (did not work before law school, and I put whatever savings I had toward paying down loans)

Would appreciate any feedback on how to better take advantage of income!

Max your 401(k) and HSA. Use your HSA as an extension of your 401(k) and not to actually pay medical expenses. If you invest $26,350/yr. (the combined 2023 401(k)+HSA max) for 40yrs into your 401(k)+HSA and make an 8% average market return (average market return for the last 50yrs has been 10-11%) and did NOTHING else, you'd have $6.8 million to withdraw from at that point.

Also build your emergency fund to be 4-6 months of liquid reserves that are not subject to the whims of the market (i.e., cash or bonds). I keep about 2 months in cash and 4 months in I Bonds. I Bonds can't be cashed before a year, so they are not a good idea to go all in on right away. You can ease into them over time. They're pegged to inflation, so they won't devalue like your cash and turning them into $$$ takes 24-48 hours at most (quick enough where you can just float something on a credit card for a day or two if needed).

Pay off your credit card in full every month.

For 401(k) and general market investing, just buy an index fund that tracks the S&P 500 and has a low expense ratio (e.g., VOO). You don't need to be fancy. You don't need to "diversify" (VOO is already 500 different companies that have domestic and international presences and a wide variety of products in a wide variety of industries). Then, stack stack stack. Never panic sell. Always hold. It'll bounce back, even if it's down 30%.

The build will be slow, but it is the tried and true way to becoming financially secure

Awesome advice, thank you. Regarding 401(k) and HSA max: how do I factor student loan payments into this? I've been told that I should hold off on everything else until the loans are paid.

OP non-NYC stub - thanks for advice. I have option to put money into 401(k) pre-tax deferral, and then Roth 401(k) distribution. I know my firm also does mega back door Roth, but I have no idea what that is and how it works. Should I be making contributions to Roth 401(k)? And yes I am as clueless about money as it seems.

If you have the ability to put more than 20k a year into retirement then the mega back door Roth is an unbelievable tool. It allows you to allocate another 35-40k as post-tax contributions, and immediately roll them into a Roth 401k so it grows tax free forever. It is the single best vehicle for retirement savings and it is somehow still misunderstood and under-utilized by high earners.

I contribute a full 20k as a normal 401k for the tax benefits now, and then an additional 30k as post tax contributions that get immediately rolled into an in-plan conversion to a Roth 401k. It is amazing.

To clear up your question, you should NOT be contributing to a Roth 401k, at least on the front end. A MBDR instead would be contributing to a post-tax option, that then gets over. It serves largely the same purpose, but you have to jump through the hoops in the correct order to properly take advantage.

[Anonymous User]

What if you want a decent PPO insurance plan rather than a high deductible plan? That has always been the reason ignored HSA since the plans I want are not eligible.

[Sackboy]

What if you want a decent PPO insurance plan rather than a high deductible plan? That has always been the reason ignored HSA since the plans I want are not eligible.

That's fine if you or your family's medical needs dictate that being the best option for you. I'd just make sure that you're maxing your 401(k) (or getting as close as you comfortably can). There isn't much magic in becoming wealthy over a long period of time. Once you're out of 401(k) and HSA land, you just need to start buying VOO (or any other low expense ratio S&P 500 index).

You can of course always try real estate, which I think the math will show you is almost always a terrible investment (especially with the current interest rates). Real estate as an investment generally only makes sense if you're willing to (1) highly leverage yourself or (2) put in significant work on a property outside of work. You could also open up a franchise or small business. A franchise will be easier to pull off but a successful small business has a way better potential ROI. Both are a lot of work.

Avoid fancy cars, watches, and other highly-priced luxuries. You probably don't need a $60k car when a $30k one will do just fine. Save those decisions for later in life (50+) when each $1 you spend has a lower future value (due to less time to compound in investments).

Avoid buying a home if you aren't planning on being somewhere for 5+ years. If you buy a $500,000 home today, you're going to need to sell it for $532,000 tomorrow to break even after just a 6% commission. If you include your buy-side expenses and other miscellaneous costs, you might need to sell that home for $550,000 to break even. Over a course of 5+ years, you're more likely to get gradual appreciation and your money back out of your home. That all being said, I do subscribe to the idea that your home should be more of a lifestyle choice than an investment. So, if the numbers are "good enough" when you run your projections with expected appreciation, moving timeline, etc., then I think that's fine too.