What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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k1dpsu
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Joined: Tue Jul 08, 2008 10:14 pm

What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by k1dpsu » Mon Jul 30, 2012 2:33 pm

** UPDATED WITH 2018 INFORMATION ... SEE BELOW **

Hello,

I appreciate anyone that could give me some advice regarding what to do next with my money.

What should I do with my money when I already have a significant amount of money saved and my only debt has a very low interest rate? Is it a bad decision to pay off low interest debt?

I am 30 and married. My wife and I hope to start a family this year. We are both lawyers and we currently make approximately $350k a year (combined). Once we have a child (God willing), my wife will attempt to work part time and we expect our combined income to drop to approximately $250k.

We currently rent ($2200 a month) and we are looking to purchase a home in the next 18-24 months.

Assets:
* $360k sitting with in a "high yield" (*sarcasm) online savings account (not doing a whole lot). This is where we are saving money for a future house (1-2 years in the future); and
* $30k in Vanguard index funds (VTSMX, VGTSX, VASGX, VEIEX, VISVX); and
* both maxing out our 401ks

Debt:
* $422 a month car payment (2.5 years remaining);
* $100k of student loans ($65k at 2.625%[$363 minimum a month]; $35k at 1.63% [$189 minimum a month])

We are saving approximately $6k a month.

Would you continue to make minimum payments on these student loans or would you start to aggressive pay them off. What would you do with that extra money at this point -- should I start investing some of that extra money in index funds (if so, which ones would you recommend)?

I know that we have a lot of money saved up for a house. I just do not know what to do with my money when I have fully saved up to purchase a house but the time to buy one is not yet ripe. There has to be something better for me to do with this money besides putting it in a low interest online savings account.

Thanks in advance!


**********************************************************************
Update #1:

It has been 4 years since I last asked what to do with my money and I wanted to give an update regarding my situation. I am at another "What next?" situation in my life.

I am now 34, married, and I have two young girls (3 and 1). My wife and I are both lawyers and we make approximately $450K in base salary a year and we clear about $20k a month after maxing each of our 401Ks. My wife now works part-time but our combined salary has gone up from where it was 4 years ago because I am now a partner.

We have been doing yearly backdoor Roth IRAs for the past 4 years. I also opened up a 529 plan for my children.

We purchased a house in 2015 for $850K and we put 20% down. We have two mortgages on the house, 417K @ 3.75% for 30Y and 263K @ 3.99% for 15Y.

I have life insurance, disability, and umbrella insurance ($1m). I also max out my HSA (which my company started using in 2015).

Assets:
* 120K cash (emergency savings) [12 months worth of expenses]
* 160K cash (savings account)
* 155K in Vanguard index funds (VTSTM 70%, VGTSX 30%)
* 525K combined 401ks (VTSMX, VGTSX, VASGX, VEIEX, VISVX)
* 53K combined backdoor Roth IRAs (VTSMX)
* 65K 529 plan

Debts:
* 415K Mortgage #1 (3.75% interest)
* 245K Mortgage #2 (3.99% interest) **I am prepaying 4K a month**
* 35K Auto loan (0% interest, $800/month, 4 years remaining)
* 49K School Loans (<3% interest, $325/month, 20+ years remaining)

Monthly Savings/Investments/Debt Paydown (after expenses):
* $2K toward Mortgage #2 (I also take $2K out of savings to pay down this mortgage on a monthly basis)
* $1K 529 contribution
* $3.5K Savings (my wife's takehome pay)

I was able to get our monthly loan repayment for law school expenses down to $325 a month with 49K remaining. I considered this to be a manageable monthly bill.

My primary concern right now is paying off Mortgage #2. Doing so will reduce my monthly house payment by $1944 a month (from $4900 to approximately $3000). I am taking $2K of my TH pay and using another $2K from our savings account each month in order to accelerate payment on this loan. With this accelerated payment, I will have Mortgage #2 paid off in less than 5 years.

Once Mortgage #2 is paid off, I will re-evaluate priorities for money.

Anyway, that's where I am right now and that's my current plan.

Am I missing anything? Is there something that you would be doing if you were in my shoes?

Thanks in advance.


**********************************************************************

Update #2:

It has been 2 years since I last asked what to do with my money. I am at another "What next?" situation in my life. This forum has been so helpful to me over the years. I am asking for its help again as I wrestle with this question.

I am now 37, married, and I have two young girls (5 and 3). My wife and I are both still lawyers. However, I practice FT and she practices PT (3 days a week). She is considering stopping work to be there more for oru children as my oldest will start Kindergarten next year. I make approximately $450K in base salary a year and she makes around $60k (depends on her number of hours). We clear about $21k a month after maxing each of our 401Ks. If my wife stops work and I ramp down my number of hours, our salary may drop to approximately $385k (clearing about $18.6k a month after maxing out my 401k). For the foreseeable future (~5 years, our salary should clear between $19k and $21k a month).

We have been doing yearly backdoor Roth IRAs for the past 6 years and we have 529 plans for our children.

We purchased a house in 2015 for $850K and we put 20% down. We paid off our 15Y mortgage and we now only have one mortgage on the house, 397K @ 3.75% for 27Y. We already paid off our second mortgage (263K @ 3.99% for 15Y). Mortgage payment is $1931 a month ... taxes and insurance adds another $1138 for a total mortgage payment of $3069.

I have life insurance, disability, and umbrella insurance ($1m). I also continue to max out my HSA on a yearly basis.

Assets:
* 92K cash (emergency savings) [~12 months worth of expenses]
* 130K in Vanguard index funds (VTSTM 70%, VGTSX 30%)
* 846K combined 401ks (VTSMX, VGTSX, VASGX, VEIEX, VISVX)
* 104K combined backdoor Roth IRAs (VTSMX)
* 114K 529 plan (age of children 5 and 3 ... contributing $1k a month)

Debts:
* 397K Mortgage #1 (3.75% interest)
* 13.5K Auto loan (0% interest, $800/month, 2 years remaining)
* 43K School Loans (<3% interest, $325/month, 20+ years remaining)

Monthly Savings/Investments/Debt Paydown (after expenses):
* $1K 529 contribution
* $2K Joint Savings (vacations, backdoor 401k, funding HSA)
* $4.5k ??? (this will vary between 2.5k-4.5k per month for the next ~5 years)

My questions is regarding how to best apply my excess money per month (currently this is $4.5k per month ... over the next few years it will range between $2.5k-$4k per month). Would you pay off the mortgage or use it in index funds? I could also increase my monthly contribution to the 529 plans. With my current job, I am also available for year end bonuses that vary depending on the year. They can be anywhere from $50k up.

Option 1:
* action: put the excess monthly money toward the mortgage; put year end bonus money toward the mortgage
* result: mortgage will be paid off in Dec 2021

Option 2:
* action: little bit of both, put the excess monthly money towards the mortgage and index funds; put the year end bonus money towards the mortgage
* result: splitting the funds between both would result in the mortgage in Dec 2023

Option 3:
* action: put all excess funds in index funds

Anyway, that's where I am right now. Please let me know how you would apply the extra take home money at this point in your life (pay down mortgage or invest in index funds).

Thanks in advance.
Last edited by k1dpsu on Wed Feb 28, 2018 8:58 am, edited 5 times in total.

User avatar
Polar_Ice
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Re: What next?

Post by Polar_Ice » Mon Jul 30, 2012 2:43 pm

Do you know that the FDIC limit per account is 250K? Some people choose to spread savings between multiple banks.

k1dpsu
Posts: 24
Joined: Tue Jul 08, 2008 10:14 pm

Re: What next?

Post by k1dpsu » Mon Jul 30, 2012 2:47 pm

Thanks . I am aware of the limit. I have the funds spread out with different online banks.

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linuxuser
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Re: What next?

Post by linuxuser » Mon Jul 30, 2012 2:52 pm

If it was me, I would pay off the student loans.

How much is the $360K earning APY?

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englishgirl
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Re: What next?

Post by englishgirl » Mon Jul 30, 2012 2:54 pm

Where are your index funds? In a taxable account or in IRAs? If you don't have IRAs, you should do. Even though you make over the limit for Roth IRAs, you can open traditional non-deductible IRAs. These can then be converted to Roths if you pay the taxes.

What's the interest rate on the car loan?

If you're looking to buy a house shortly then there's not much you can do other than to keep that money in cash. For slightly longer term funds you can look into CDs, I-bonds, and short term bond funds, but not necessarily your house fund. And, as far as the house goes, why not now? Will you know when the time is right?
Sarah

NYBoglehead
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Re: What next?

Post by NYBoglehead » Mon Jul 30, 2012 2:58 pm

Keep enough in your savings to have a 20% down payment on the house and a 6 month emergency fund. After that, I'd throw more money at those student loans. I know the interest rate is low but it's higher than you are receiving for your savings. Your AGI is too high for the interest on those student loans to be deductible anyway so part of the rationale for keeping them is gone.

If you're saving 6k/mo you should be able to knock out the car loan in less than 3 months, freeing up that $422 to make accelerated payments on the student loans.

After that if you're already maxing out your 401k I'd start a Backdoor Roth IRA for both you and your wife.

Best of luck.

k1dpsu
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Joined: Tue Jul 08, 2008 10:14 pm

Re: What next?

Post by k1dpsu » Mon Jul 30, 2012 3:11 pm

My index funds are in taxable accounts.

The car loan has $8.5k remaining at 0.9% interest.

Re the house: my wife and I only want to move once in the next 10-15 years. We do not want to purchase the expense of a 4 BR house without a family.

It is good to hear that people still think that paying down debt (even low interest debt) is not a bad idea.

k1dpsu
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Joined: Tue Jul 08, 2008 10:14 pm

Re: What next?

Post by k1dpsu » Mon Jul 30, 2012 3:12 pm

Another note, I have another 25 years to pay these loans off. That's another part of the reason why I was not in too great of a hurry to pay them off.

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runner9
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Re: What next?

Post by runner9 » Mon Jul 30, 2012 3:17 pm

I'd debt adverse, but I'd pay them off. Certainly higher interest than you're earning in any safe investment.

k1dpsu
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Re: What next?

Post by k1dpsu » Mon Jul 30, 2012 3:20 pm

I note people stating to start paying off the student loans.

I am keeping in mind that the interest rate associated with my mortgage is going to be higher than the rate attached to either of these loans. Wouldn't it be better to just save this money now and then make bigger payments on my house when I get one?

Of course, this does not solve my problem of what to do with the money right now.

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N1CKV
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Re: What next?

Post by N1CKV » Mon Jul 30, 2012 3:27 pm

k1dpsu wrote:Another note, I have another 25 years to pay these loans off. That's another part of the reason why I was not in too great of a hurry to pay them off.
My crystal ball doesn't make any promises about my employment status or salary two years from now, it's certainly foggy 20+ years from now....
I have met a lot of people that claim to love money, but they also seem to be the same people that are in the biggest hurry to get rid of it.

NYBoglehead
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Re: What next?

Post by NYBoglehead » Mon Jul 30, 2012 3:30 pm

OP,

Keep in mind that the interest on your mortgage will be tax deductible, so the true cost of borrowing for a house is less than the actual interest rate. It'll be easier to make accelerated mortgage payments once you don't have a car payment or student loan payments. You've got lot of cash right now sitting on the sidelines not earning much.

Once you've got a house it'll be easier to make accelerated payments if you don't have those other debt payments to make.

k1dpsu
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Joined: Tue Jul 08, 2008 10:14 pm

Re: What next?

Post by k1dpsu » Mon Jul 30, 2012 3:54 pm

What are the thoughts regarding taking the 30k invested in Vanguard index funds (purchased 4-5 years ago having a basis of around 30k -- so no real earnings) and using that money to pay down the student loans?

Would this be a prudent decision?

NYBoglehead
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Re: What next?

Post by NYBoglehead » Mon Jul 30, 2012 3:58 pm

This would not be a good decision IMO. You have the liquid assets to either pay off the loans in full or make accelerated payments if you'd rather keep a large cash balance. If you're saving 6k/monthly there is no need to sell your mutual funds to pay down your student loans, you've got a hugh amount of free cash monthly building up.

For your liquid savings:
-Keep a 20% down payment in savings
-Keep a 6 month Emergency fund
-If money is left, fully fund backdoor Roth IRAs, then work on knocking out that debt

There is no need to continue to put 6k/mo into savings accounts.

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Duckie
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Re: What next?

Post by Duckie » Mon Jul 30, 2012 4:31 pm

k1dpsu, you have $360K just sitting around earning next-to-nothing and owe ~$109K. Just pay off the debt, all of it. That leaves you $250K for your potential house.

As for the $6K in monthly savings, first open two traditional IRAs, make the max $5K non-deductible contribution to each, then, once you get the confirmation that they're open and funded, convert to Roth IRAs. This is the Backdoor Roth IRA method. You'll need to file two IRS Forms 8606 when you do your taxes next year.

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englishgirl
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Re: What next?

Post by englishgirl » Mon Jul 30, 2012 4:47 pm

k1dpsu, don't forget that as lawyers you earn high salaries, but you are prime candidates for malpractice lawsuits - you have deep pockets, + the potential of a simple mistake being deemed to be malpractice is high. The amount that is in an IRA that is protected against creditors varies by state, but it is better than money just sitting around in a savings account or a taxable account. Two links: http://www.nytimes.com/2009/04/02/busin ... REDIT.html http://www.latimes.com/la-ira-story3,0,6977190.story

Prudent financial decions are not just based on interest rates!
Sarah

Default User BR
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Re: What next?

Post by Default User BR » Tue Jul 31, 2012 9:41 am

Personally I would not pay off low-rate loans. Yes, reserve the cash you need for the down-payment. The rest should be invested according to your retirement plan.


Brian

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 10:10 am

Well, that brings me back to my original question.

Say, I do not pay off these low interest loans < 3%.

I will fully fund back door IRAs this year and my wife and I both max out our 401k (and the firms match 5%).

What index funds should I be looking at for this extra money? I had been doing a 65% VTSMX and 35% VGTSX split.

TSR
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Re: What next?

Post by TSR » Tue Jul 31, 2012 10:35 am

This isn't quite what you asked, and I have no reason to assume that you haven't thought of this, but I have to side with the people who suggest that you might not know what your employment status will be a few years from now. I had the big firm law job for a few years and I just. hit. a. wall. It was like I couldn't bill another hour to save my life. I left and was lucky enough to find a great government job and I'm happy, doing good work, and making a decent salary, but I do miss the days of the higher income. (I also believe that they probably wouldn't have kept me for more than another year if I'd stayed.) Obviously, plenty of people are losing similar jobs in non-voluntary ways these days as well.

For those reasons, I'd be real tempted to pay off those student loans in their entirety right now, keep the taxable funds (your $34K per year is going to seem mighty small for retirement purposes), then re-accumulate the house funds. You might also consider making a smaller down payment on the house and keep some of that cash in reserves or CDs for the rainy-day fund, then double your mortgage payments whenever you feel like you have plenty in reserve.

Good luck!

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 10:40 am

Some additional information.

My wife is at a smaller firm and after we start a family, she will either be working part-time or staying at home full-time (depending on how flexible the firm is with her).

I, on the other hand, really love my job. I am at a small intellectual property firm (40-50 attorneys) and I am eligible for partner in the fall of 2013. All signs currently point to me being made a partner here. This is another one of the reasons why we have put off purchasing a house. I will either make partner or go in-house.

Grt2bOutdoors
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Re: What next?

Post by Grt2bOutdoors » Tue Jul 31, 2012 10:55 am

How much is the future home purchase going to cost?
If you make partner, how much cash will you need to pony up, if any?

Take your 6K a month, save half and use the other half to start knocking off those student loans. You are in an enviable spot of being super-liquid. Your current investments are nominal. You don't say how much is invested in the 401k's. Let's just say you are about 90% liquid. If your savings are earning less after tax then the rate paid on the loans, conventional wisdom says to get rid of it. You are in a high tax bracket, therefore I would focus on reducing the student loans with the highest rate first.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Default User BR
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Re: What next?

Post by Default User BR » Tue Jul 31, 2012 11:04 am

k1dpsu wrote:What index funds should I be looking at for this extra money? I had been doing a 65% VTSMX and 35% VGTSX split.
Generally speaking, international index funds are first choice for taxable, as it helps to recover the foreign tax credit. After that, tax-efficient broad-market stock funds.


Brian

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 11:13 am

Thank you to everyone for the information. This is really helping me out.

We expect to spend around 700k-800k on our future house.

If I make partner, I will not need to buy-in or anything. Your first year share as a partner is used to buy you in.

As for the 401ks, there is 200k in mine and 45k in my wife's. We are both 30 y/o.

Taking into account everything, we are around 63% liquid.

Net worth (including 401Ks) of approximately 625k with 100k of student loans @ ~2% interest and 8k of car @ 0.9% interest.

I am liking the idea of taking 3k of the 6k a month of savings and paying down the student loans.

Default User BR
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Re: What next?

Post by Default User BR » Tue Jul 31, 2012 11:50 am

k1dpsu wrote:I am liking the idea of taking 3k of the 6k a month of savings and paying down the student loans.
If it makes you fell better, then go for it. It's not something that I would do, but each person has to follow their own path.


Brian

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linuxuser
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Re: What next?

Post by linuxuser » Tue Jul 31, 2012 12:12 pm

Default User BR wrote:
k1dpsu wrote:I am liking the idea of taking 3k of the 6k a month of savings and paying down the student loans.
If it makes you fell better, then go for it. It's not something that I would do, but each person has to follow their own path.


Brian
Some people live life assuming that what exists now will always be.

I suppose the OP is on the fast track and that the possibility of him losing his highpaying job is 0% and that the same applies to his wife.

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 12:52 pm

I understand what everyone is saying but I guess my thoughts are that staying more liquid is allowing me to better plan react to what happens in the future.

It's not as if I am going to be clearing out all of my savings when I decide to purchase a house. I will still have the money sitting there and will be able to pay off large chunks of the student loans as it makes sense. Also, even if we were both laid off tomorrow, I would still have a large amount of money in my savings account. In fact, if we did lose our jobs, I would be kicking myself for spending 100k of my savings paying off student loans @ 2% interest.

No matter what happens, I cannot imagine it being difficult to continue to make the required $550 minimum monthly payments on the student loans.

Over the next 18 months, I can pay off $3k in loans a month for a reduction in the loans of $54k. Then, I will be able to pay off the remainder by the end of 2013 using bonus & added compensation money received in 2012 and 2013.

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hand
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Re: What next?

Post by hand » Tue Jul 31, 2012 1:24 pm

You appear to have two challenges: 1) Managing your debt 2) Dealing with excess cash.

In general, most financially advantageous route would be to use excess cash to pay down debt with an eye to future cash / debt needs.
To answer your question, it is not a bad decision to pay off low interest debt. This is especially true when you are stuck with even lower interest cash!

Do note that doing anything other than paying down debt means you are increasing the risk / consequences should things not go as planned.

That being said, in your shoes I would do the following:

1) Follow advice and determine the amount of cash you need on hand to either:
a) put 20% down on your desired house + a 6 month emergency fund, or
b) put > 20% down so you only required a conforming mortgage + a 6 month emergency fund.

2) Project the amount of cash available to you in 18 months when you'd first consider buying a house if you do nothing ($360k + 18*$6k = $468k??)

3) Assuming you have excess cash above what is required for your house + emergency fund, pay off the $10k in remaining car loan. (This loan costs you money as you are borrowing at $0.9% to lend at something less)

4) Pay down / off the $65k student loan at $2.625% as likely not too much cheaper than a mortgage (crystal ball alert!) and will cost you ~$3k in interest over the next two years

5) If money was tight, I would not pay down the remaining $35k at $1.63% as likely significantly cheaper than your eventual mortgage.

letsgobobby
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Re: What next?

Post by letsgobobby » Tue Jul 31, 2012 2:43 pm

it's a little confusing because you have $300k+ in cash but it is really earmarked for a downpayment on a house.

If you were to pay off all debt you'd have $250k in cash. If you buy an $800k house and put 20% down you'll have $90k left.

At that point, your bottom line looks like this:

$250k 401k
$120k taxable (index funds and cash)
$25k Roth IRA (totally guessing here)

$640k in debt

When you put it that way, it doesn't look nearly as impressive (not a knock at all - just a different perspective). So if it were me, I wouldn't pay off any low interest debt. I would take about $50k of the cash and invest per your asset allocation in low cost index funds. I would increase my savings rate to 30% plus of gross income, because in the near future your expenses will go up (you will buy a house and have to furnish and maintain a house), your expenses will go up again (you may have a child/children), and your income will go down (your wife may work less). In other words, make hay while the sun shines. You have enough in cash for the down payment, the rest should be going toward longer term goals like retirement.

And I second the need for both excellent malpractice and personal liability insurance. Do you have an umbrella policy? Do you have life insurance policies?

k1dpsu
Posts: 24
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 2:53 pm

Thank you for the comments.

We are both covered with our law firms malpractice insurance policy. We do not have life insurance. We intend to get life insurance once we learn that we are expecting a child.

We do not have IRAs. This is something that I will look into starting.

I am saving approximately 40% ($6k) of our net income.

Grt2bOutdoors
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Re: What next?

Post by Grt2bOutdoors » Tue Jul 31, 2012 3:01 pm

Do not wait to get life insurance once you are expecting, get it before hand. Buy term, it's cheap enough at your age that it will not cost you much in dollars to get it prior to getting pregnant. If anything, it will be one less thing you have to worry about.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

letsgobobby
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Re: What next?

Post by letsgobobby » Tue Jul 31, 2012 3:47 pm

$6k per month is not 40% of $350k per year, but I may have misread your post.

You do need umbrella, and as GET2BOUTDOORS says, get the life insurance now.

Batousai
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Joined: Mon Jul 30, 2012 11:21 am

Re: What next?

Post by Batousai » Tue Jul 31, 2012 4:37 pm

If you are currently savings 6K/mo and expect your income to drop by 100K after a child, then you are going to be barely treading water after you have a child. Are you're expenses really on the order of 10-12K/month or am I missing something?

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Jul 31, 2012 4:57 pm

Our combined salary is 321k. We clear 15k a month after taxes and contributing to our 401k. 6k is 40% of 15k.

The other 30k comes in the form of OT. We clear around 55% of this OT money for $16,500 and we save all of that money. The only issue is that this money is only paid out in December.

Taking that all into account, we are saving over $7,000 a month.

letsgobobby
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Re: What next?

Post by letsgobobby » Tue Jul 31, 2012 8:07 pm

I don't want to give the impression that you aren't saving enough. Saving about $80,000 per year is very admirable and should be more than enough to meet your needs. And you are also saving $34,000 per year in 2 401ks, so that is $114,000 per year. And the 5% company match which is, what, another $15,000 per year? So let's call it $130,000 per year in savings. I think most people would define a savings rate as $130,000 / $350,000 to arrive at approximately a 35% savings rate. That is excellent.

When we had kids my wife didn't work for 3 months each time. We aren't spendthrifts and yet I can't believe how many little things we have to buy for the kids. There is definitely cash flowing out of the household that didn't 6 years ago. Classes, daycare, clothes, more food, 4 airplane tickets only during peak holiday travel times, etc. Like you we saved like dogs for a while and were able to get ahead before loosening up last year. I still plug that strategy.

Definitely get the umbrella and term life. Also, do you each have excellent disabilit insurance?

k1dpsu
Posts: 24
Joined: Tue Jul 08, 2008 10:14 pm

Re: What next?

Post by k1dpsu » Thu Feb 25, 2016 5:03 pm

It has been 4 years since I last asked what to do with my money and I wanted to give an update regarding my situation. I am at another "What next?" situation in my life.

I am now 34, married, and I have two young girls (3 and 1). My wife and I are both lawyers and we make approximately $450K in base salary a year and we clear about $20k a month after maxing each of our 401Ks. My wife now works part-time but our combined salary has gone up from where it was 4 years ago because I am now a partner.

We have been doing yearly backdoor Roth IRAs for the past 4 years. I also opened up a 529 plan for my children.

We purchased a house in 2015 for $850K and we put 20% down. We have two mortgages on the house, 417K @ 3.75% for 30Y and 263K @ 3.99% for 15Y.

I have life insurance, disability, and umbrella insurance ($1m). I also max out my HSA (which my company started using in 2015).

Assets:
* 120K cash (emergency savings) [12 months worth of expenses]
* 160K cash (savings account)
* 155K in Vanguard index funds (VTSTM 70%, VGTSX 30%)
* 525K combined 401ks (VTSMX, VGTSX, VASGX, VEIEX, VISVX)
* 53K combined backdoor Roth IRAs (VTSMX)
* 65K 529 plan

Debts:
* 415K Mortgage #1 (3.75% interest)
* 245K Mortgage #2 (3.99% interest) **I am prepaying 4K a month**
* 35K Auto loan (0% interest, $800/month, 4 years remaining)
* 49K School Loans (<3% interest, $325/month, 20+ years remaining)

Monthly Savings/Investments/Debt Paydown (after expenses):
* $2K toward Mortgage #2 (I also take $2K out of savings to pay down this mortgage on a monthly basis)
* $1K 529 contribution
* $3.5K Savings (my wife's takehome pay)

I was able to get our monthly loan repayment for law school expenses down to $325 a month with 49K remaining. I considered this to be a manageable monthly bill.

My primary concern right now is paying off Mortgage #2. Doing so will reduce my monthly house payment by $1944 a month (from $4900 to approximately $3000). I am taking $2K of my TH pay and using another $2K from our savings account each month in order to accelerate payment on this loan. With this accelerated payment, I will have Mortgage #2 paid off in less than 5 years.

Once Mortgage #2 is paid off, I will re-evaluate priorities for money.

Anyway, that's where I am right now and that's my current plan.

Am I missing anything? Is there something that you would be doing if you were in my shoes?

Thanks in advance.

CoAndy
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Re: What next?

Post by CoAndy » Thu Feb 25, 2016 5:21 pm

I think you are doing absolutely phenomenal. Therefore, I have nothing to add.
Cheers :sharebeer

Chadnudj
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Re: What next?

Post by Chadnudj » Thu Feb 25, 2016 5:26 pm

k1dpsu wrote: Assets:
* 120K cash (emergency savings) [12 months worth of expenses]
* 160K cash (savings account)

Debts:
* 415K Mortgage #1 (3.75% interest)
* 245K Mortgage #2 (3.99% interest) **I am prepaying 4K a month**
* 35K Auto loan (0% interest, $800/month, 4 years remaining)
* 49K School Loans (<3% interest, $325/month, 20+ years remaining)


My primary concern right now is paying off Mortgage #2. Doing so will reduce my monthly house payment by $1944 a month (from $4900 to approximately $3000). I am taking $2K of my TH pay and using another $2K from our savings account each month in order to accelerate payment on this loan. With this accelerated payment, I will have Mortgage #2 paid off in less than 5 years.
Any reason you're only taking $2k per month out of savings to pay down Mortgage #2? If you already have 12 months of expenses in a 2 earner household with relative job security for you (presumably as a partner you'd know if the firm is solid/if there's a chance they could de-equitize you) and some level of job security for your wife's part time job, that's a pretty huge emergency fund....and you are doing great on saving for retirement/kids' education, etc.

Why not take the whole $160k right now (or as much as you can comfortably sleep with at night) and immediately use it on Mortgage #2, thereby saving the 3.99% interest (or it's monthly share) it's costing you each month? Why spread that out over 80 months (which is what your $2k per month plan is doing) and costing you interest all of those 80 months? You could also ask them to recharacterize that loan after making that large payment, thereby significantly reducing the monthly minimum payment....

Otherwise, your plan seems solid. I'd just determine how much cash you really need to sleep at night in savings SEPARATE from your emergency fund, keep that, and throw every other penny immediately from your savings at your highest interest, Mortgage #2 loan.

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JDCarpenter
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Re: What next?

Post by JDCarpenter » Thu Feb 25, 2016 5:29 pm

If it were me and I were wanting to pay down the second mortgage quickly, I'd take the 160,000 out of the savings account (which is in addition to your 12 month emergency fund).

But, you are more conservative in that regard than we were at your age. Given the overall picture (which is excellent), going on the path you describe is going to end up with a good result and let you sleep at night.

I see Chadnudj beat me to this!
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hand
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Re: What next?

Post by hand » Thu Feb 25, 2016 8:47 pm

I too question why you'd sit on $160k cash in addition to your emergency fund while having outstanding debts.

As an alternate to partially paying down the equity loan, have you considered fully paying off the $84k of Auto and School loans?
This is essentially the high class version of Dave Ramsey's snowball approach, but would have the benefit of 1) simplifying your financial life, 2) increasing monthly cash surplus by $1k, 3) eliminating student loans which are likely toxic (non-dischargeable) should some sort of financial catastrophe befall you.

While this isn't obviously the absolutely lowest cost approach to your debt, in your situation, I would value the simplicity and there is always a benefit to reducing cash flow.

Also, you might consider looking at a Jumbo loan to consolidate your primary loan and a portion of the Equity loan - it is possible that <3.75% is currently available which would be an improvement on both mortgages.

k1dpsu
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Re: What next?

Post by k1dpsu » Fri Feb 26, 2016 10:21 am

Thank you all very much for the comments. The reason why I am sitting on such a large amount of cash in addition to my emergency fund is mostly because I have had this money sitting around for a number of years. We are using some of the money to furnish the house but we have modest tastes and we have been slowly acquiring additional stuff.

However, based on the remarks, I think that I am going to re-target my date for paying off the second mortgage. Also, the reason why I am not consolidating these mortgages is because I want to pay the second one off to lower my minimum monthly payment on the house. This is not possible if the loans are consolidated.

So, I am going to increase my $2K withdraw from the savings account per month to $7K a month. My monthly prepayment on the second mortgage will now by $9K (in addition to the $2K required to be paid on the second mortgage). This will result in $11K per month being put toward the mortgage and it will be paid off in December 2017. My savings account will dip down to approximately $30K with these withdraws and other expected spending.

I will then have a $3K minimum monthly mortgage and free up $4K in net income per month ($2K in mortgage, $2K in prepayment) to use for other purposes.

Chadnudj
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Re: What next?

Post by Chadnudj » Fri Feb 26, 2016 10:45 am

k1dpsu wrote:Thank you all very much for the comments. The reason why I am sitting on such a large amount of cash in addition to my emergency fund is mostly because I have had this money sitting around for a number of years. We are using some of the money to furnish the house but we have modest tastes and we have been slowly acquiring additional stuff.

However, based on the remarks, I think that I am going to re-target my date for paying off the second mortgage. Also, the reason why I am not consolidating these mortgages is because I want to pay the second one off to lower my minimum monthly payment on the house. This is not possible if the loans are consolidated.

So, I am going to increase my $2K withdraw from the savings account per month to $7K a month. My monthly prepayment on the second mortgage will now by $9K (in addition to the $2K required to be paid on the second mortgage). This will result in $11K per month being put toward the mortgage and it will be paid off in December 2017. My savings account will dip down to approximately $30K with these withdraws and other expected spending.

I will then have a $3K minimum monthly mortgage and free up $4K in net income per month ($2K in mortgage, $2K in prepayment) to use for other purposes.
Not a bad plan, but if you're comfortable going down to $30k in the savings account, why not just pull out $130k right now and throw it at Mortgage #2? That will save you some significant amount of interest (not sure exactly how to do the math, but $130k at 3.99% interest is $5187 a year, so figure that with it taking nearly 2 years to pay that $130k with your $7k a month plan you're paying an additional $5k-$10k in interest) rather than stretching things out. Then, more of your $2k each month in take-home pay is going to pay down principal. You could also request/see if the bank would recharacterize the loan after you made the large payment, reducing the monthly minimum and again letting more of your $2k per month go towards principal.

I mean, your plan is fine and if your'e comfortable with it/it helps you sleep at night, that's the most important thing. But in terms of optimizing results/paying less in interest, throwing $130k lump sum now (rather than $7k per month) would be better.

k1dpsu
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Re: What next?

Post by k1dpsu » Tue Feb 27, 2018 8:56 pm

**bump**

Added another update for 2018

k1dpsu
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Re: What next?

Post by k1dpsu » Wed Feb 28, 2018 8:50 am

Another factor that I am weighing with this decision is that I also have a 900k portfolio invested in equities. This is money that I do not want to touch for at least the next 2 years.

Biglaw Investor
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by Biglaw Investor » Wed Feb 28, 2018 11:36 am

k1dpsu wrote:
Mon Jul 30, 2012 2:33 pm
I am now 37, married, and I have two young girls (5 and 3). My wife and I are both still lawyers. However, I practice FT and she practices PT (3 days a week). She is considering stopping work to be there more for oru children as my oldest will start Kindergarten next year. I make approximately $450K in base salary a year and she makes around $60k (depends on her number of hours). We clear about $21k a month after maxing each of our 401Ks. If my wife stops work and I ramp down my number of hours, our salary may drop to approximately $385k (clearing about $18.6k a month after maxing out my 401k). For the foreseeable future (~5 years, our salary should clear between $19k and $21k a month).

Debts:
* 397K Mortgage #1 (3.75% interest)
* 13.5K Auto loan (0% interest, $800/month, 2 years remaining)
* 43K School Loans (<3% interest, $325/month, 20+ years remaining)

Option 1:
* action: put the excess monthly money toward the mortgage; put year end bonus money toward the mortgage
* result: mortgage will be paid off in Dec 2021

Option 2:
* action: little bit of both, put the excess monthly money towards the mortgage and index funds; put the year end bonus money towards the mortgage
* result: splitting the funds between both would result in the mortgage in Dec 2023

Option 3:
* action: put all excess funds in index funds
Sounds like you're still doing great! I noticed in the bold text below that you mentioned wanting to ramp down your hours. Are you considering moving to part-time work in the future or perhaps an in-house role in exchange for less income but more free time?

I'm not nearly as comfortable with low-interest debt as you are (no judgment, as you're probably making the right mathematical decision) so I'd take Option 1, pay off your mortgage, school loans and auto loan (in that order). This would give me flexibility going forward to take any job without having to worry about monthly payments (or needing to move to a new house).

k1dpsu
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by k1dpsu » Wed Feb 28, 2018 1:21 pm

Thanks for the response! I am very happy with my firm and I am eligible for year end profits now. So, I do not want to leave anytime in the near future unless something changes. I would just like to bill a couple hundred less hours a year (which I am currently able to do but don't because it would decrease my salary).

As for the loans, the car loan is at 0%. That is free money. The student loans only equate to a $325 bill per month. I am fine keeping both of those around. It is just the mortgage that kinda bothers me.

I am leaning towards approach #2 because that'd be kind of the best of both situations.

Mr.BB
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by Mr.BB » Wed Feb 28, 2018 1:29 pm

As a side thought, make sure you are up to date on all your legal paperwork (kind of ironic telling that to a lawyer ).
Make sure your will, living will, medical power of attorney is all updated; especially if it has been a few years since you have done it.
"We are what we repeatedly do. Excellence, then, is not an act, but a habit."

rayson
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by rayson » Wed Feb 28, 2018 1:42 pm

Congratulations, you're doing very well on your plans.

If you are not planning on retiring in the next 5-10 years, you can't go wrong with option 2 or 3.

cantos
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by cantos » Thu Mar 01, 2018 5:09 pm

Very similar trajectory here, a little older. We decided around where you are at now to aggressively pay down the loan. Loved making that decision. Its amazing to get income and do whatever the hell u want w it, and have no debt to chain you down. So I'd go for option 1 or 2.

Also - just 1 mil in life and disability and umbrella insurance? I'd recommend 2-3 million life ins until youngest kid is 18 (15 yr policy?), disability ramped up, and umbrella at 5 mil.

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randomizer
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by randomizer » Thu Mar 01, 2018 5:23 pm

If in doubt, split the difference.

Will interest rates keep going up? If they do, holding the mortgage becomes more attractive. Will they go down? Is the psychological weight of carrying debt bearing down on you too much? Lots of questions, no sure answers.

Have you done the math on treating your mortgage as a negative bond? When you look at it in that light it can make you realize that your equity allocation is heavier than you may think. You may or may not be ok with that.
75:25 AA / Expected retirement: 2097

random_walker_77
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Re: What next? A personal finance story starting in 2012, updated in 2016, and again in 2018

Post by random_walker_77 » Thu Mar 01, 2018 10:41 pm

If you've still got any of those student loans at 1.63%, keep them. Given that inflation is targeted at 2%, that's like free money.

Is the mortgage costing you less than 3.75% due to a tax deduction? If so, how much less? (i.e. if you itemize -- to what extent do your deductions exceed the standard deduction? And at your income level, you probably lost some of it to the pease limitations on deductions, though that is gone for 2018, and the standard deduction is larger)

The mortgage is a guaranteed 3.75% return. Equities might return more, but... this bull market is the 2nd longest on record, so there's that.

Personally, I found it really satisfying to have my house paid off -- it is a release of worry, and then if things were to go wrong w/ my income, my cash flow requirements are now much lower.

I don't think you can go too wrong here. Heck, split the difference and put half into the mortgage and half into index funds.

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