only have 401k & emergency funds. what's next?

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Bones_Jones
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Joined: Thu Aug 11, 2016 2:27 pm

only have 401k & emergency funds. what's next?

Post by Bones_Jones » Fri Aug 04, 2017 8:50 pm

ok, so.... we are super noob... created a thread while back. viewtopic.php?f=1&t=197277

we learned so much since then.

ok, so here is where we at.

1. we make about 270k together. (a doctor and a freelance designer)
2. we got about 550k in student loans (10 years of deferring killed us. i know.. we are that dumb)
3. sold our expensive house. we live in apartment now. feeling free as ever.
4. about 25k in credit card debts. we spend alot of money in traveling...
5. no more car payments & furniture payments. we tried our best reducing our spending.
6. $30k in emergency funds
7. 401k balance - $50k (basically started less than a year ago with starting balance of 26k, just me)


we thought about aggressively paying off the student loan, but we decided to invest on something. we are both 37. we desperately want to grow money. we want to spend $1500 monthly to invest. we got good return on my 401k. it was fun watching money grow.

i've read things. IRAs. ETFs. peer to peer, etc, etc. but it's too much for us to process. we need some guidance. so what's next for us? what would you do with $1500 a month?

thx in advance!

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: only have 401k & emergency funds. what's next?

Post by MotoTrojan » Fri Aug 04, 2017 9:02 pm

Bones_Jones wrote:ok, so.... we are super noob... created a thread while back. viewtopic.php?f=1&t=197277

we learned so much since then.

ok, so here is where we at.

1. we make about 270k together. (a doctor and a freelance designer)
2. we got about 550k in student loans (10 years of deferring killed us. i know.. we are that dumb)
3. sold our expensive house. we live in apartment now. feeling free as ever.
4. about 25k in credit card debts. we spend alot of money in traveling...
5. no more car payments & furniture payments. we tried our best reducing our spending.
6. $30k in emergency funds
7. 401k balance - $50k (basically started less than a year ago with starting balance of 26k, just me)


we thought about aggressively paying off the student loan, but we decided to invest on something. we are both 37. we desperately want to grow money. we want to spend $1500 monthly to invest. we got good return on my 401k. it was fun watching money grow.

i've read things. IRAs. ETFs. peer to peer, etc, etc. but it's too much for us to process. we need some guidance. so what's next for us? what would you do with $1500 a month?

thx in advance!
What are you investing your 401K in? In general, it is best to think of your entire portfolio as one unit, and then you can just maintain that across all of your accounts. This also allows you to place funds in a tax-efficient manner, such as bonds in tax-advantaged (401k), and then save your taxable space for efficient equity funds.

Once you have determined your overall desired asset allocation, you should maximize your 401k, and consider a non-deductible IRA (since your income is high) or a backdoor Roth. Anything else, you would want to put into a taxable account, but keep in mind that you don't really want bonds etc... in there, as they are not tax-efficient. I would recommend you just stick with a simple 3-fund portfolio of Total US Stock Market (or S&P500), Total International, and Total Bond.

Having said all of that, you need to payoff your credit cards and loans. I know it isn't as fun as seeing your investments grow, but unless your interest rate is 1-2% (what is it?) you are making a huge mistake by investing. Just like your 401k grows, so will your interest on the loans.

Alto Astral
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Re: only have 401k & emergency funds. what's next?

Post by Alto Astral » Fri Aug 04, 2017 9:10 pm

Bones_Jones wrote: 4. about 25k in credit card debts. we spend alot of money in traveling...
what would you do with $1500 a month?
Get rid of this. Talk to you in 17 months (25k/$1500) about next steps.

sailaway
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Re: only have 401k & emergency funds. what's next?

Post by sailaway » Fri Aug 04, 2017 9:12 pm

What is your interest rate on your credit cards? What about your student loans?

Your best investment in your future is probably to get those paid off. It does depend somewhat on interest rates, but I know that personally I would feel very confident paying down debt right now, expecting the market to come down sometime soon, but knowing that even if it doesn't I did something very positive for my financial future.

Nate79
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Re: only have 401k & emergency funds. what's next?

Post by Nate79 » Fri Aug 04, 2017 9:16 pm

Good lord. How do you have so much debt with such high income? You are broke and need to clean up your debt.

bampf
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Re: only have 401k & emergency funds. what's next?

Post by bampf » Fri Aug 04, 2017 9:19 pm

Bones_Jones wrote:
4. about 25k in credit card debts. we spend alot of money in traveling...
what would you do with $1500 a month?

Get rid of this. Talk to you in 17 months (25k/$1500) about next steps.
Yeah this exactly. And really not in 17 months at your income. Wasting money. Put another way, you are working really hard for someone else. Don't do that. I have $13K on my credit card right now. I just put it on there and I will pay it off during this billing cycle. I did it for points and for a vacation. I saved for a year for that vacation. Then I purchased it. At $270K a year and a 40% tax hit (you can't possibly have a 40% tax hit can you?) you should take home ~$14K a month. Focus on using as much as that as you can to kill the cc debt. Then pay yourself. Put some in a vacation fund. Put some in an investment. Put some towards your debt. Just my .02 cents. Interest free.

Bones_Jones
Posts: 49
Joined: Thu Aug 11, 2016 2:27 pm

Re: only have 401k & emergency funds. what's next?

Post by Bones_Jones » Fri Aug 04, 2017 9:31 pm

MotoTrojan wrote:
Bones_Jones wrote:ok, so.... we are super noob... created a thread while back. viewtopic.php?f=1&t=197277

we learned so much since then.

ok, so here is where we at.

1. we make about 270k together. (a doctor and a freelance designer)
2. we got about 550k in student loans (10 years of deferring killed us. i know.. we are that dumb)
3. sold our expensive house. we live in apartment now. feeling free as ever.
4. about 25k in credit card debts. we spend alot of money in traveling...
5. no more car payments & furniture payments. we tried our best reducing our spending.
6. $30k in emergency funds
7. 401k balance - $50k (basically started less than a year ago with starting balance of 26k, just me)


we thought about aggressively paying off the student loan, but we decided to invest on something. we are both 37. we desperately want to grow money. we want to spend $1500 monthly to invest. we got good return on my 401k. it was fun watching money grow.

i've read things. IRAs. ETFs. peer to peer, etc, etc. but it's too much for us to process. we need some guidance. so what's next for us? what would you do with $1500 a month?

thx in advance!
What are you investing your 401K in? In general, it is best to think of your entire portfolio as one unit, and then you can just maintain that across all of your accounts. This also allows you to place funds in a tax-efficient manner, such as bonds in tax-advantaged (401k), and then save your taxable space for efficient equity funds.

Once you have determined your overall desired asset allocation, you should maximize your 401k, and consider a non-deductible IRA (since your income is high) or a backdoor Roth. Anything else, you would want to put into a taxable account, but keep in mind that you don't really want bonds etc... in there, as they are not tax-efficient. I would recommend you just stick with a simple 3-fund portfolio of Total US Stock Market (or S&P500), Total International, and Total Bond.

Having said all of that, you need to payoff your credit cards and loans. I know it isn't as fun as seeing your investments grow, but unless your interest rate is 1-2% (what is it?) you are making a huge mistake by investing. Just like your 401k grows, so will your interest on the loans.

401k currently -
VANG INST INDEX PLUS (VIIIX)
FID INTL INDEX INS (FSPNX)
VANG TOT BD MK IS PL (VBMPX)


i'm thinking about getting rid of our credit card debts next year when i receive bonuses. it should remove most of them. our CC debts are mostly travel related. now that wife is pregnant for the 1st time, we are looking to chill at home. :D

Bones_Jones
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Re: only have 401k & emergency funds. what's next?

Post by Bones_Jones » Fri Aug 04, 2017 9:36 pm

bampf wrote:
Bones_Jones wrote:
4. about 25k in credit card debts. we spend alot of money in traveling...
what would you do with $1500 a month?

Get rid of this. Talk to you in 17 months (25k/$1500) about next steps.
Yeah this exactly. And really not in 17 months at your income. Wasting money. Put another way, you are working really hard for someone else. Don't do that. I have $13K on my credit card right now. I just put it on there and I will pay it off during this billing cycle. I did it for points and for a vacation. I saved for a year for that vacation. Then I purchased it. At $270K a year and a 40% tax hit (you can't possibly have a 40% tax hit can you?) you should take home ~$14K a month. Focus on using as much as that as you can to kill the cc debt. Then pay yourself. Put some in a vacation fund. Put some in an investment. Put some towards your debt. Just my .02 cents. Interest free.


i feel like i'm just way too late in the game and seeing others growing their wealth kinda pains me... i was thinking to pay off CC all at once with my bonus... fortunately most of my CC debts are low % or 0% balance transfers...

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: only have 401k & emergency funds. what's next?

Post by MotoTrojan » Fri Aug 04, 2017 9:45 pm

Bones_Jones wrote:
bampf wrote:
Bones_Jones wrote:
4. about 25k in credit card debts. we spend alot of money in traveling...
what would you do with $1500 a month?

Get rid of this. Talk to you in 17 months (25k/$1500) about next steps.
Yeah this exactly. And really not in 17 months at your income. Wasting money. Put another way, you are working really hard for someone else. Don't do that. I have $13K on my credit card right now. I just put it on there and I will pay it off during this billing cycle. I did it for points and for a vacation. I saved for a year for that vacation. Then I purchased it. At $270K a year and a 40% tax hit (you can't possibly have a 40% tax hit can you?) you should take home ~$14K a month. Focus on using as much as that as you can to kill the cc debt. Then pay yourself. Put some in a vacation fund. Put some in an investment. Put some towards your debt. Just my .02 cents. Interest free.


i feel like i'm just way too late in the game and seeing others growing their wealth kinda pains me... i was thinking to pay off CC all at once with my bonus... fortunately most of my CC debts are low % or 0% balance transfers...
Not paying of CC's or loans is shrinking your wealth. I agree with the above poster; while you shouldn't market time, I would use the fact that stocks are at high valuation currently (not meaning a crash is imminent, but that returns are expected to be low) to help you justify putting everything towards paying down the debt. Honestly with this kind of debt, depending on the interest rates, I may even consider trimming back your 401K contributions to only get you the match.

PFInterest
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Re: only have 401k & emergency funds. what's next?

Post by PFInterest » Fri Aug 04, 2017 10:01 pm

You will see your NW grow...As your debts shrink.

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whodidntante
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Re: only have 401k & emergency funds. what's next?

Post by whodidntante » Fri Aug 04, 2017 11:37 pm

You have a good income but it seems you don't earn enough to support your lifestyle while building wealth. How much do you spend in a year? I think you have plenty of income to live well and still build wealth. In your spot I would:

Reduce my expenses. Look at where the money is going and pick some things to reduce. If you aren't willing to do this, you will not make much progress.
Refinance my debt to low rates. Money is fungible, and you don't need some called a student loan or something called a credit card debt. You need liabilities at low interest rates, preferably low fixed rates on a long term.
Max my 401k each year, as well as an HSA and a backdoor Roth IRA.
Pay down debts, prioritizing the highest rate debt first.
Use the 30k in cash towards the above two points.

If you really can't manage to get the rate of the debt low, prioritize paying it down. You should contribute enough to your 401k to get the match regardless.

Bones_Jones
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Re: only have 401k & emergency funds. what's next?

Post by Bones_Jones » Sat Aug 05, 2017 12:14 am

thx for the input guys. i realize getting rid of the debt should be our priority. will talk to my other half about it. i doubt she will like it. :shock:

selters
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Re: only have 401k & emergency funds. what's next?

Post by selters » Sat Aug 05, 2017 12:43 am

Bones_Jones wrote: 401k currently -
VANG INST INDEX PLUS (VIIIX)
FID INTL INDEX INS (FSPNX)
VANG TOT BD MK IS PL (VBMPX)
Excellent! You can't do better than what you've selected.

So don't spend any mental energy by tinkering with it - at least not until you're debt free except the home, which will take a few years. And we're talking more like ten years plus if you don't reduce your retirement contributions down to just get the match.
Last edited by selters on Sat Aug 05, 2017 12:57 am, edited 1 time in total.

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badbreath
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Re: only have 401k & emergency funds. what's next?

Post by badbreath » Sat Aug 05, 2017 12:56 am

Your debt is killing you

2. we got about 550k in student loans (10 years of deferring killed us. i know.. we are that dumb)
4. about 25k in credit card debts. we spend a lot of money in traveling.

Take your $30K emergency fund and pay the credit card off then build emergency fund back up.

Take what what you were paying on credit card and put on student loans principal ( make sure it's on principle not prepay) Yes I am saying save for emergency and put extra on student loan, you can do it.

You have to get this debt down.
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

Bones_Jones
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Re: only have 401k & emergency funds. what's next?

Post by Bones_Jones » Sat Aug 05, 2017 1:12 am

we declared the war against student loans right after my residency last year, but then we got soft. bought a house we didn't like, bought bunch of goodies(cars, furniture, etc) [OT comment removed by admin LadyGeek]

i guess the war is back on. :sharebeer

selters
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Re: only have 401k & emergency funds. what's next?

Post by selters » Sat Aug 05, 2017 1:17 am

A few other random thoughts:

Pile up some cash for when the baby comes. Or just keep the emergency fund and pay off the credit cards with cash flow. Some breathing room when you have small kids is great to have.

$1500 a month in debt reduction and investing at your level of income will never make you even modestly wealthy with the amount of debt you have.

Be prepared to keep those cars until they're like ten years or old.

I get that in high income professions and cultural milieus there will have to be some level of keeping with the Joneses, but I with your income I think you can do both: maintain a reasonable lifestyle and pay off debt and invest at a good pace.

mega317
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Re: only have 401k & emergency funds. what's next?

Post by mega317 » Sat Aug 05, 2017 1:54 am

selters wrote:I get that in high income professions and cultural milieus there will have to be some level of keeping with the Joneses,
I agree with everything you've said in this thread except this. OP is a physician. I think, other than possibly a few very specialized fields, that this isn't true. Lots of highly paid physicians drive old Hondas and even dress poorly.
OP: what's the rate on your loans? You can knock them out! But it has to be priorities 1, 2, and 3. Consider these:
1. No expensive trips.
2. Congrats on the baby. No high-end brand crib, changing table, car seat, stroller, backup stroller, etc. After those items you can get most everything you need through the registry, and you're likely to be gifted lots of clothes of all sizes with each birthday/winter holiday/family visit plus books and toys. Then mostly all you're paying for is diapers. Cheapest child care you can possibly find. Next baby gets all hand me downs, and at that point the cost of child care might outweigh your wife's income. I think she shouldn't stop working if it won't make her happy, but it might be an expense rather than income.
3. Regular grocery stores, not Whole Foods, and cook basically every meal.
4. Every penny of bonus goes to debt. If you need to reward yourself, pay for a babysitter and go out to a nice dinner, not a week in Paris.
5. I know nothing about your apartment but consider going cheaper.
6. Moonlight. Every penny goes to debt.
7. Cut the cord. Discount cell provider.
8. Sell and donate a lot of stuff for cash/tax deductions.

You will get rich; $1500 a month isn't going to cut it.

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sunny_socal
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Re: only have 401k & emergency funds. what's next?

Post by sunny_socal » Sat Aug 05, 2017 9:41 am

I think you're looking at ~10 years of Dave Ramsey type living to dig yourself out of that hole. Learn to be happy with what you have, lock yourself into your _current_ lifestyle and don't upgrade anything (home, cars, jewelry, dining.) Eliminate wasteful items (cable, fancy phones & plans, big vacations), focus on things that are inexpensive or free (hiking, biking, gardening, hanging out with friends, spend time with your child.)

My approach:
- Yes, pay off the CC with the EF. The CC is the emergency. Then build the EF slowly but surely.
- Add enough to the 401k to gain company match.
- The rest: debt payments

Think 50k/year toward that debt, nothing less. Ten years will go by pretty fast.

"Comparison is the thief of joy." Remember, we're all very rich compared to most people in the world. Focus on all the good things you have, not what your doctor friends have :beer

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rob
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Re: only have 401k & emergency funds. what's next?

Post by rob » Sat Aug 05, 2017 10:00 am

Agree with above except I would ask why are you talking about investing.... Get spending under control, pay off credit cards now (waste of time without first step), then all money to loans. That level of income will save you after you get rid of most of that debt (and certainly all of the cc debt).
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien

Jackson12
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Re: only have 401k & emergency funds. what's next?

Post by Jackson12 » Sat Aug 05, 2017 10:23 am

A warning about when the baby comes, mainly because I made the mistakes below and regret it:

Resist the temptation to buy tons of brand new and expensive toys for your baby....and in the process, rack up credit card debt again. Most of those toys, or similar ones, can be found at stores which sell " gently used" toys and clothing. Including high end strollers, cribs, etc.

Or frequent garage sales. Or get stuff friends whose babies are older.

Avoid products marketed to parents who fall for the hype proclaiming they are " necessary to ensure your child will be smart..or a genius." And of course to "ensure" this, it is equally necessary for you to spend plenty to buy these products.

Kids are expensive enough. So is the truly necessary stuff you need for babies. Cut corners where you can.

In hindsight and Pre- Boglehead days, I wish I bought only a small fraction of the stuff I did for our babies.

JGoneRiding
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Re: only have 401k & emergency funds. what's next?

Post by JGoneRiding » Sat Aug 05, 2017 11:05 am

I am going to be slightly contrary here. I agree with the basics above, EXCEPT I think op should max the 401k AND max a backdoor Roth for the wife. For 2 reasons, 1) it locks money up and i think that is probably good for them both 2) and this is the more importante!! Op is 37 and WAY WAY behind. If he wants to retire he needs to start savings now!!!! And on top of that money in the 401k is a 40% Savings!!! I don't care what his SL rate is it can't be more than 6.8%

So steps I would suggest:
max the 4501k like tomorrow if you aren't already
keep the emergency fund but consider only dire need
attack the cc debt with extreme attention--it should be gone when you get that bonus seriously make that your goal
make a GOOD budget that takes everything into acct, I just had my first child I get it, I have a cashflow sheet for the next 8 mos
Then make a long term 10 yr plan that gets rid of the debt and allows your investments to grow, you can do both together.
be boring nothing exotic as far as investing, docs are considered easy targets and get sent lots of get rich quick ideas

oh and become an avid white coat investor follower!

TravelforFun
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Re: only have 401k & emergency funds. what's next?

Post by TravelforFun » Sat Aug 05, 2017 11:34 am

OP, what's your annual expense now that you're in an apartment? $270k income should yield $180k take home and if you could get by with $80k per year, you should be able to throw $100k at your your debts.

I would invest just enough to get the 401k match and throw everything at your debts. You could be debt-free 5 years from now and start building wealth then. Remember, your net worth increases by the same amount of debt you get rid of. Net worth is what counts.

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Dendritic Tree
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Re: only have 401k & emergency funds. what's next?

Post by Dendritic Tree » Sat Aug 05, 2017 3:32 pm

I'm in a similar situation - mid-30s, about 600k of medical school debt, not much retirement savings yet. I totally understand the feeling of wanting to build wealth. I think you have to look at paying off debt as building wealth; you'll have to eventually directly subtract that debt from your wealth anyway. Another way to look at it is getting a guaranteed return of (whatever your average student loan interest rate is), which is likely these days to outpace any returns you would get from investment (unless you just have a crazy low student loan rate - I bet your credit card interest isn't crazy low though!)

My advice is to look at the credit card debt as a flaming nuclear explosion fire, and the med school debt as a smoldering dumpster fire. Okay - how about an analogy that is more up your alley: the credit card debt is a STEMI, the med school debt is hepatitis C. Both are potentially fatal but treatable, but every second until treatment matters in a STEMI and you can take your time and be deliberate about HCV treatment.

My recommendation is to sacrifice (temporarily) the emergency fund to pay off the credit card debt immediately, and maximize your payments towards the student loans by any means necessary.

We had to take a hard look at our finances and were able to find multiple areas related to lifestyle where costs could be easily cut, to free up extra money to pay towards student loans. We have prioritized paying down our loans at all costs. Every little bit of extra money goes towards our loans. If we get a rebate check for $34.17, you'd better believe an extra loan payment of $34.17 will go through the next day. We still enjoy a comfortable lifestyle, without too much extravagance. Unfortunately, we also love travel and we simply have to defer that for now. We also aren't able to afford to save up a down payment for a new car or house, which is fine for now because we have reliable cars and a great rental home. We're planning a big European trip as a reward after we pay off our loans.

We do both still max out our 403(b)s because I agree that retirement savings need SOME momentum, plus you HAVE to at least grab the match. Once our loans are paid off, we plan on not expanding our lifestyle too much and plowing the many thousands per month we currently put towards loans into investments/savings to start catching up.

To answer your original question, ONCE YOUR DEBT IS PAID OFF, I'd just keep investing the extra money in a three-fund portfolio, spread (tax-efficiently) across your 401(k), backdoor Roths, and a taxable investment account.

delamer
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Re: only have 401k & emergency funds. what's next?

Post by delamer » Sat Aug 05, 2017 4:02 pm

Suggest you check out this website, which is run by a frequent contributor to this forum:

https://www.whitecoatinvestor.com

There's a lot of good information about paying down debt, investing, and other finance issues for people in your position.

But the basic decision is going to be how much you are wiiling to give up now to ensure a good financial future. All the advice in the world isn't going to help if you can't control your spending and get your debt paid down.

Bones_Jones
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Re: only have 401k & emergency funds. what's next?

Post by Bones_Jones » Sun Aug 06, 2017 4:45 am

thx all for the input.

i like the idea of maxing out 401k and roth and do a 10 year battle with student loans.

anyway my apartment rent is $1850. not cheap. only 820sq ft. too. :shock:

for student loan % - most of our % are very low 3-4%. but there is 1 private loan with 9%. only borrowed 40k but ballooned to 100k for deferring mindlessly over the years. just very stupid thing to do.

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