Author Topic: $250,000 Income, $52,000 Expenses, and $274,000 in Debts  (Read 2196 times)

ReadySetMillionaire

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$250,000 Income, $52,000 Expenses, and $274,000 in Debts
« on: November 08, 2018, 12:41:11 PM »
Clickbait headline of the month.  Sorry, but I'm wasting way too much time trying to figure this out on my own and would love the help of this forum.

Basic Situation

-Wife and I are 31
-Kiddo on the way (March 2019)
-Wife will make about $45,000 next year (1/4 year off for taking care of kiddo)
-I just started my own law practice, and it is taking off beyond my wildest expectations.  I have a steady $90-100k in hourly billing income, and then funds from settlements, which I basically treat as bonuses.  Here's the thing -- I already have settlement checks rolling in for $42,000, $7,700, and another case (unless the case goes to hell) is going to be $30,000 minimum.  I also just got referred two other employment matters as well.

-So, total income for next year will be about $250,000.

*Note: Prior to going out on my own, we've been making about $100,000 per year, saving about 30-35% per year.

Expenses

-Regular household expenses (year) = $42,000
-Business expenses (year) = $10,000
-Paid off my wife's car this year
-Paid off my car this year
-Paid off my wife's student loans this year

Assets

-House = $140,000
-HSA = $10,000
-Checking/Saving = $15,000
-401(k)s (combined) = $98,000
-Traditional IRA = $2,000
-Roth IRA = $23,000
-Cars = $20,000

Liabilities

-Mortgage = $114,000 (4.5% interest)
-My Student Loans = $159,000 (6.49% interest)

Net Worth

-$34,000


Options Moving Forward?

At this point, I feel like I'm in the great debate of whether to laser in and focus on a single goal (pay off the student loans), or be efficient, maximize tax advantaged space, and then pay off the loans.

Option A: I've been using REPAYE (student loan repayment) as a hedge to allow my life to progress to the point that I could make a high income and then kill these loans.  (Google "Gaming REPAYE" to find my thread on this, can't link it here). That time is here much sooner than I thought thanks to my practice taking off.

I would love, love, love, to pull the trigger on these loans and kill them off in basically 14 months.  That would require no retirement savings, which means higher taxes, but then also means just getting rid of these student loans.

And once I did that, I could turn around and crush the mortgage in ten months, meaning I would pay off $273,000 in debt in just two years. 

Problem is that I absolutely suck at guesstimating income taxes given that I'm self employed, so I can't really get the math on how much the interest savings would compare to the tax savings, combined with investment returns on those tax-advantaged investments, etc.

Option B: The more efficient option, I believe, is to maximize all tax-advantaged space, and then dump the rest into student loans.  This means maximizing my 401k ($53,000), wife's 401k ($18,500), and HSA ($6,900) before doing anything.  But doing this means that it will take about 3-4 years to pay off the loans rather than a 14 month sprint.

Personal/Emotional Thought

My thinking in leaning toward Option A is strike while the iron is hot.  As I said earlier, my wife and I are expecting here in March.  I'm crazy, crazy, crazy excited about it, but I also know that I'd rather be pouring in the hours now rather than when he's playing sports and in school and all that.

Maybe I'm dumb and naive, but I'd rather work my ass off in my early 30s so I can coach sports and do all that fun stuff when my kids will really remember things.

Thoughts?

So what says the MMM forum? My heart says pay off the loans in a sprint.  My head says maximize tax-advantaged space.  I can't quite figure out the math, so I can easily be convinced here.  Thanks for reading this far.  Cheers.
« Last Edit: November 08, 2018, 12:50:28 PM by ReadySetMillionaire »

RWD

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #1 on: November 08, 2018, 12:56:38 PM »
So what says the MMM forum? My heart says pay off the loans in a sprint.  My head says maximize tax-advantaged space.  I can't quite figure out the math, so I can easily be convinced here.  Thanks for reading this far.  Cheers.

Investment order recommends maxing tax advantaged space before paying down debt below 8.23% (based on current 10-year Treasury note yield). With your income even after maxing that space you'll still have leftover to throw at the student loans. So I'll vote for option B.

GettingClose

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #2 on: November 08, 2018, 01:00:57 PM »
From a broad perspective:

1) Actively plan to slow way down for the first 6 weeks after the baby is born, unless you can bring in a night nurse or some other significant support.  Until you've lived through it you can't understand the impact of a newborn, and there's no do-over.  Your wife will need you in ways that can't be outsourced.  An eight-hour day is reasonable, but not 12 or 14.

2) Along the lines of no do-overs: Would suggest maxing out all tax-advantaged accounts along with your sprint (which is psychologically very appealing to me, too!)  You can't go back and protect this year's $52k (or whatever it works out to be) from taxes by any actions in 2019.

Good luck!

MrThatsDifferent

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #3 on: November 08, 2018, 01:17:51 PM »
My grain of salt thoughts: slow the fuck down! Youíre not in a rush, relax. Youíve started a new business, and youíve got a kid on the way. Focus on that. Maximize your retirement accounts, pay of the student loans as quickly, but reasonably as possible and pay the minimum on the mortgage for the billion reasons others have suggested. They donít have to be crushed in 2 years just so you can tell everyone youíre crushing it. Build your business and give your family your everything.

nereo

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #4 on: November 08, 2018, 01:40:51 PM »
As a new father of an extremely fussy 10 week old newborn, I'll echo other posters that this will raise challenges in both you and your wife's life that you can't fully appreciate or anticipate.  Hopefully you'll have an easy baby, but don't count on it.  Once the baby is born don't try to make other major life-changing strategies for at least a few months.

Good news is that you have 4(ish) months before the baby is due, so you can put into motion a few things before that happens. 

FWIW I'd favor option B, but there are further optimization stpes you can take.  For one, look into SoFi or other vendors to see if you could knock the rate of those SL's down.  Also, if your SL's are in multiple loans (e.g. wife and I had 6 total loans of about $8k each), target the one with the highest rate and put all payments towards that loan before refinancing them all into a single note.

lhamo

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #5 on: November 08, 2018, 01:43:45 PM »
Can you split the difference?

Max out retirement accounts and cover spending/minimum payments from regular salary draws.

Throw any extra settlement money (less amounts withheld for taxes) at the student loans.

That gives you incentive to drum up more potential settlement cases, esp. in the period leading up to the arrival of the new family member.

Also, just gotta add -- way to go!  I remember how stressed you were about trying to decide whether or not to hang up your own shingle.  So pleased it worked out for you.  Aren't you relieved now that you didn't take that job with the horrific commute?  Esp with a baby on the way....

charis

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #6 on: November 08, 2018, 01:57:55 PM »
You are approaching your debt emotionally rather than practically.  Stop doing that, max tax-advantaged space, make sure you can cover your expenses, dump the rest in SLs.

Boofinator

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #7 on: November 08, 2018, 02:46:23 PM »
Option B. You are going to be in a pretty big tax bracket (up to 24% federal + x% state), so the money saved is going to earn an immediate 1/(1-(24%+x%))-1 return going into a traditional tax savings account (let's say you're 3% state, that works out to a 37% immediate return). After traditional tax savings buckets are full, I would pay student loans at that interest rate before opening a Roth IRA or taxable account. After student loans are paid, as long as you are in the accumulation phase, I would let the mortgage ride and invest in taxable and Roth.

therethere

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #8 on: November 08, 2018, 03:48:57 PM »
Option B. No hesitation. You're making a crapload of money and need to get taxes as low as possible. Max those tax-advantaged accounts.


I'd actually argue for Option C: Max tax-advantaged accounts. Refinance your student loans and keep them around forever. Deposit what you would have paid extra towards them into a brokerage account. If you ever want to pay them off completely you'd have the money sitting there to do so.




J&CWindingDown

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #9 on: November 08, 2018, 04:01:57 PM »
Congrats on putting up your own shingle.  We did that many years ago and remember well how exciting and stressful it was.  We did it after 10 years in big firms, and fortunately were able to have first gotten rid of school debt.  I don't have any particular thoughts on retiring loans v. mortgage, but do have a couple of other reactions to your numbers: (i) surprised at how low your business expenses are: between office rent, malpractice/health/office insurance, lexis, and other misc. office expenses, our expenses are more than $10K/month, and (ii) your liquid savings seem very low.  When we started our practice, it was really important to our peace of mind to have a good cash cushion.  No matter how well things are going, small scale business is unpredictable - we have had major clients acquired by bigger companies and the business suddenly disappear - and it is important to have at least a few months of expenses available (or a line of credit in place). That is especially true with a child coming.  Plenty of time to pay off the mortgage and loans after you build up some reserves.  Good luck.

ReadySetMillionaire

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #10 on: November 08, 2018, 04:29:17 PM »
Thanks for the feedback.  I'm calming down and switching to Option B.  Can anyone do a tax calculation on this?  I'm really having trouble with these numbers.

A couple points:

@GettingClose , MrThatsDifferent Thanks for the advice on slowing down and making sure parenting is number one.  I get laser focused a lot of times and go pretty far down rabbit holes, and my post certainly reads like I'm a career madman, when I'm the furthest thing from it -- I went on my own to have more flexibility in raising my kids, not less.

@nereo I'm certainly going to pay higher loans first, but I'm not sure I want to lose the protections of federal loans.  The SoFi refinance rates have a nominal difference at best right now.

@Boofinator Any chance you can provide the basic setup on tax savings versus interest paydown savings?  I just can't conceptualize it.

@J&CWindingDown My business expenses are incredibly low quite intentionally.  Rent is $400 per month, malpractice is $100, no research subscription, everything runs on Google.  It's a lean, mean fighting machine.

Also, I think of cash reserves differently.  We have $15,000 in straight cash, $11,000 in Roth contributions we can pull from, $10,000 for health emergencies, $15,000 in a credit limit, and ultimately equity we can borrow from the house.  I just don't see a situation where all this comes tumbling down, and if it does, pulling from other assets will be the least of my concerns.

lhamo

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #11 on: November 08, 2018, 04:37:59 PM »
Re:  tax implications, I keep pointing people to this online calculator, and they generally keep thanking me, so I'll do it again:

https://www.olt.com/main/home/taxestimator.asp

It is much easier to use than taxcaster, etc. IMHO.

MDM's case study spreadsheet would also help with projections.

MDM

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #12 on: November 08, 2018, 05:13:15 PM »
From a quick look at your situation, none of the web-based tax estimation tools will be very accurate because they don't include the Qualified Business Income (QBI) deduction.  Or they include it but ask you to enter the amount, which seems helpful to a very narrow slice of the population (i.e., those who know their QBI deduction but need help with other tax return items).

At this time of year, perhaps your best bet is to get one of the full commercial packages (TurboTax, H&RBLock, etc.) that will be available soon.  Or find an estimation tool that does include QBI.  The case study spreadsheet lhamo mentioned does have some QBI capability.

Boofinator

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #13 on: November 08, 2018, 05:32:14 PM »
For easy-to-use numbers, let's say you can put $50k into tax-deferred 401k or equivalent (not Roth). If you do not put it into tax-deferred savings, you would be taking home (assuming 27% federal + state) $50k*(1-27%)=$36,500. So your choice is this: Invest $50k for the long term (and receive long-term stock returns of probably at least 7%) or put $36,500 into paying off your student loans and get a guaranteed 6.5%. (As far as taxes on the back end for your 401k: As a mustachian, you'll either take out your 401k money tax free if you retire early, or you would have won the game multiple times over if you keep working to normal retirement age and won't be worried about the taxes.) I could do a more sophisticated analysis, but in your case it falls into the no-brainer category.

Another poster (therethere) mentioned refinancing student loans; if you can do this, let us know what rate you can get to see if it makes sense to invest in taxable versus paying them off.

Nick_Miller

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #14 on: November 09, 2018, 07:28:21 AM »
Fellow attorney chiming in...

So you don't have an assistant or anything? Your expenses are so low. Do you anticipate being able to continue without any support staff at all?

Do you have a marketing plan for continuing the pipeline? I assume the billable work comes from at least a few different clients? Where do the contingency cases come from?

I saw your personal checking of $15,000, but does your firm have any assets? Basically, do you have a firm war chest for the slow months? Because there will be lots of slow months. I wouldn't feel comfortable without at least 12 months of cash reserves for expenses (firm and home).

I don't expect you to answer all of these, or even any of them. I'm just tossing stuff out.

And I'll go against the flow and say that if I were you, I'd try to knock out those huge loans relatively soon. Many people woefully under-appreciate how much loans of that size start to feel like an anchor on your entire life. Maybe these people have never had huge student loans, and maybe they have, but I just don't think they get it. Having such a huge ball and chain, not being able to get rid of it in bankruptcy if your career goes south, and not having any "collateral" to pay it off like one could do with a mortgage, it just wears on you.

I wouldn't necessarily pay them at the expense of investments, and I'd look into refinancing, but I'd pay them off ASAP with those caveats.

Laura33

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #15 on: November 09, 2018, 07:44:44 AM »
So your choice is this: Invest $50k for the long term (and receive long-term stock returns of probably at least 7%) or put $36,500 into paying off your student loans and get a guaranteed 6.5%.

This.  You are justifiably excited to see such a ridiculous amount of money rolling in so soon, and HUGE congrats on that!  But you need to play the long game.  And if you want to have the ability to ratchet back in say 10 years to coach Little League, the best way to do that is throw as much cash as you can into your tax-advantaged space as soon as you can -- including whatever you can do by the end of this year to decrease 2018 taxes -- so that it can sit there and compound for you while you're out there coaching your kid(s).

My one caveat is to increase your cash stash before the baby comes.  You don't know how long your DW may need to be off work; you don't know how soon you'll be getting enough sleep to work productively; heck, you don't even know if (God forbid) your baby might end up needing medical care and the last thing you will want to think about is work.  Make sure you have enough cash on-hand so that you can focus on work as you want to, and not because you feel the pressure to keep the income flowing.  And then when everything works out perfectly, you've got a bunch of cash compiled that you can throw into your 2019 tax-deferred savings.

Good luck, and I am very, very happy for you.

therethere

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #16 on: November 09, 2018, 08:08:28 AM »
I had 242k in student loans between DH and I. We have had multiple bouts of unemployment while holding >100k in 9% student loans. I know the anchor more than anyone. That's why I'm holding out on my last 60k and recommending Option C. I've been doing this for 4 years and am around 15k "ahead" on this method versus paying off the student loans. I'm making my loans work for me instead of against me for once.

And really, with that income, put it on AutoPay and you basically forget about it. Once you're in the safe stage with some cash reserves (vs the normal minimal funds while going full blast on loans) it makes pretty much zero difference. And if you get really pissed at them one day, just raid the brokerage account and pay them off! It's also money you could access, unlike if you paid down the loans or the mortgage. Have a great opportunity and need funds? It's there. Have a major crisis or want to take time off work? It's there.

FYI: Sofi seems to give the best rates for high income. Earnest for assets. I've also been offered good rates from Citizen's Bank also, but had already locked in lower. I bet you could refinance your loans into the 4.5-5% range.
« Last Edit: November 09, 2018, 08:19:15 AM by therethere »

Boofinator

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #17 on: November 09, 2018, 08:12:01 AM »
There have been a few comments about liquidity. In my opinion, it comes second to maxing out tax-advantaged accounts. Worst-case (which is very unlikely but possible) you may need to pull out some money to pay off an emergency. Let's say that's $20k. So in a 401k account you need to pull out $31,750 ($20k/(1-24%-3%-10%)) to account for federal, state, and penalty taxes. You still have $18,250 in the account (from a $50k initial investment). If you instead had wanted liquid assets and did not invest in tax-deferred, you'd have $37,500-$20,000=$17,500. 401k wins even with the huge 10% penalty in this case.

Can't emphasize the power of tax-deferred accounts enough.
« Last Edit: November 09, 2018, 08:17:36 AM by Boofinator »

ReadySetMillionaire

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #18 on: November 09, 2018, 09:04:25 AM »
There have been a few comments about liquidity. In my opinion, it comes second to maxing out tax-advantaged accounts. Worst-case (which is very unlikely but possible) you may need to pull out some money to pay off an emergency. Let's say that's $20k. So in a 401k account you need to pull out $31,750 ($20k/(1-24%-3%-10%)) to account for federal, state, and penalty taxes. You still have $18,250 in the account (from a $50k initial investment). If you instead had wanted liquid assets and did not invest in tax-deferred, you'd have $37,500-$20,000=$17,500. 401k wins even with the huge 10% penalty in this case.

Can't emphasize the power of tax-deferred accounts enough.

In response to all the comments about liquidity, the above is basically my analysis as well.  If shit really hit the fan, there's money there in the tax-deferred accounts and credit limits. And there's also family close by with lots of assets. And there's life insurance.  I think we have a lot of this covered.

But, I will concede -- you guys have made priority number one increasing cash reserves until the baby arrives.  We can get our monthly expenses down to about $3,000 per month, so I want at least double that in reserves by the time the baby comes.

Fellow attorney chiming in...

So you don't have an assistant or anything? Your expenses are so low. Do you anticipate being able to continue without any support staff at all?

Do you have a marketing plan for continuing the pipeline? I assume the billable work comes from at least a few different clients? Where do the contingency cases come from?

I saw your personal checking of $15,000, but does your firm have any assets? Basically, do you have a firm war chest for the slow months? Because there will be lots of slow months. I wouldn't feel comfortable without at least 12 months of cash reserves for expenses (firm and home).

I don't expect you to answer all of these, or even any of them. I'm just tossing stuff out.

And I'll go against the flow and say that if I were you, I'd try to knock out those huge loans relatively soon. Many people woefully under-appreciate how much loans of that size start to feel like an anchor on your entire life. Maybe these people have never had huge student loans, and maybe they have, but I just don't think they get it. Having such a huge ball and chain, not being able to get rid of it in bankruptcy if your career goes south, and not having any "collateral" to pay it off like one could do with a mortgage, it just wears on you.

I wouldn't necessarily pay them at the expense of investments, and I'd look into refinancing, but I'd pay them off ASAP with those caveats.

As for my business, I'm officing with a bunch of colleagues who are friends.  I'm a month-to-month tenant.  If I wanted out right now, I could pack up my things and be done, and my office expenses would be about $150/month.

I'm modeling my practice after a guy I office with, who makes about $250,000-$300,000 per year.  No assistant, just pays rent, malpractice, office supplies.  He has a great practice. Note, however, that we all share a receptionist here, so she answers our phones, takes messages, etc., and that's obviously a help.  But she gets paid from our collective rent.

As for the pipeline, my cases come from a wide variety of referral sources.  If I've done anything right in my brief five year career, it's getting out there, getting known, and I get 4-5 referrals a month on cases ranging from $500 -- $10,000.  Speaking of, the settlement I just got yesterday ($7,700 for me) was from a referral.

I had 242k in student loans between DH and I. We have had multiple bouts of unemployment while holding >100k in 9% student loans. I know the anchor more than anyone. That's why I'm holding out on my last 60k and recommending Option C. I've been doing this for 4 years and am around 15k "ahead" on this method versus paying off the student loans. I'm making my loans work for me instead of against me for once.

And really, with that income, put it on AutoPay and you basically forget about it. Once you're in the safe stage with some cash reserves (vs the normal minimal funds while going full blast on loans) it makes pretty much zero difference. And if you get really pissed at them one day, just raid the brokerage account and pay them off! It's also money you could access, unlike if you paid down the loans or the mortgage. Have a great opportunity and need funds? It's there. Have a major crisis or want to take time off work? It's there.

FYI: Sofi seems to give the best rates for high income. Earnest for assets. I've also been offered good rates from Citizen's Bank also, but had already locked in lower. I bet you could refinance your loans into the 4.5-5% range.

This is what's getting at me.  I'm strongly, strongly leaning towards an Option C -- put a lot towards tax-advantaged space, but set a reasonable payoff goal (five years) and attack the debt.  It's a hybrid between the correct math decision, and what I also think is the correct emotional decision.  Personal finance is personal, yadda yadda.

Speaking of, I just got this via PM:

Quote
Around here, there can be noise from the engineer types. It's all good and well to know the 100% optimal thing under some controlled circumstance. But, that isn't always how it goes.

Anyway, that's another way of saying you should do some hybrid of taxes and debt repayment. It does not have to be engineered to the final degree. No, I wouldn't say fill 53k, plus your wife's 401k, plus "a bunch of stuff." It's got to be a balance. But the idea that tax savings are a form of return on investment is important to keep in mind.

I think that's how I'm thinking.


I'm really enjoying the discussion, especially the parenting advice, so keep it coming.

therethere

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #19 on: November 09, 2018, 09:26:04 AM »
To get the best and reasonable interest rates in a refinance you will need to choose a 5 or 7 year term anyway. I've found beyond that the rates start creeping towards 6% anyway.  So it's a forced hybrid approach. Best of luck!

*Disclaimer* Yes, my advice is from an engineer with a very intense spreadsheet evolved over 10+ years. But, that also means I lived and proved the Option C approach. I've tracked the net benefit very closely on a month by month basis since I started the brokerage v loans in 2014. I also have near full details of my loans since repayment began. The only thing I didn't do was track the net benefit of maxing my tax-advantaged accounts over paying down loans. But I have the data to do so if I was inclined. To me the tax savings were too obvious to need to track the benefit over time.

ReadySetMillionaire

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #20 on: November 09, 2018, 10:05:01 AM »
To get the best and reasonable interest rates in a refinance you will need to choose a 5 or 7 year term anyway. I've found beyond that the rates start creeping towards 6% anyway.  So it's a forced hybrid approach. Best of luck!

*Disclaimer* Yes, my advice is from an engineer with a very intense spreadsheet evolved over 10+ years. But, that also means I lived and proved the Option C approach. I've tracked the net benefit very closely on a month by month basis since I started the brokerage v loans in 2014. I also have near full details of my loans since repayment began. The only thing I didn't do was track the net benefit of maxing my tax-advantaged accounts over paying down loans. But I have the data to do so if I was inclined. To me the tax savings were too obvious to need to track the benefit over time.

Here's my attempt at figuring out the net worth numbers here:

Option A (Immediate Debt Payoff)

-Retirement Savings Right Now: $123,000
-No contributions for two years, sprint to pay off student loans
-Value of retirement accounts after two years (w/ no contributions): $141,000
-Value of retirement accounts after contributing max ($71,500) for next three years: $418,000
-Net Worth After 5 Years ($418k retirement accounts, $140k house, $105k mortgage): $453,000

Option C (Pay Off in Five Years)

-Retirement Savings Right Now: $123,000
-Significant Contributions to Retirement Accounts All Five Years ($60,000/year), Value of Retirement Accounts After Five Years: $542,000
-Net Worth After 5 Years ($542k retirement accounts, $140k house, $105k mortgage): $577,000

---

The difference here is exponential after five years, which means it would be even larger after another 10, 15, 20, 25 years, etc.

---

I still don't have the tax angle down, but I'm obviously paying less in taxes and my retirement accounts show that, so is this generally the right way to think about this?

Laura33

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #21 on: November 09, 2018, 10:29:10 AM »
Well, I didn't really think of "Option C" as a separate approach, more as a continuation of B.

With a $250K income and about $50K in expenses, you are going to have a lot of cash left over, even with higher tax rates.  And your tax-deferred space is limited.  So when I suggested stash everything you can in your tax-deferred accounts first, that's still going to leave you a big chunk of extra cash lying around, which I just assumed you'd throw at the loans -- you literally cannot throw all of that extra income into your tax-deferred accounts, because those contributions are limited to around $70K.  That's very different from Option A, where you could in fact throw every extra penny at the loans.  So I saw Option A as "throw every extra penny at the loans and skip the tax-deferred investments," and Option B as "put @$70K toward the tax-deferred investments and throw the rest at the loans."

Example:  I just went to a tax calculator on the web, extremely simplified, standard deduction, MFJ with one dependent.  I assumed you made $250K and socked $70K away pre-tax for you and DW, bringing your income down to $180K.  Without any other income or deductions, that gave me a federal tax owed of $24K.  Add some more for the state taxes, and you still have a net income of around $140K-$150K.  Your expenses are 1/3 of that!  So based on that extremely-simplified math, you could throw $70K at your tax-deferred accounts and still have close to six figures left to throw at your loans! 

And btw, if you throw all of your extra income at your loans instead of the tax-deferred accounts, that same calculator says you'd owe over $40K in federal taxes (and comparably more in state taxes as well).  So choosing to max out your tax-deferred space gives you somewhere between $15-20K/yr left in your pockets to throw at the loans.  I call that a win-win.

Obviously, YMMV depending on other incomes and deductions and such.  But that really shows the power of the tax deductions, doesn't it?  Knocking $70K off of a $250K income is going to put a lot more cash in your pocket, so you can both save for the future AND knock the loans out in a couple of years.

Boofinator

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #22 on: November 09, 2018, 12:57:31 PM »
To get the best and reasonable interest rates in a refinance you will need to choose a 5 or 7 year term anyway. I've found beyond that the rates start creeping towards 6% anyway.  So it's a forced hybrid approach. Best of luck!

*Disclaimer* Yes, my advice is from an engineer with a very intense spreadsheet evolved over 10+ years. But, that also means I lived and proved the Option C approach. I've tracked the net benefit very closely on a month by month basis since I started the brokerage v loans in 2014. I also have near full details of my loans since repayment began. The only thing I didn't do was track the net benefit of maxing my tax-advantaged accounts over paying down loans. But I have the data to do so if I was inclined. To me the tax savings were too obvious to need to track the benefit over time.

Here's my attempt at figuring out the net worth numbers here:

Option A (Immediate Debt Payoff)

-Retirement Savings Right Now: $123,000
-No contributions for two years, sprint to pay off student loans
-Value of retirement accounts after two years (w/ no contributions): $141,000
-Value of retirement accounts after contributing max ($71,500) for next three years: $418,000
-Net Worth After 5 Years ($418k retirement accounts, $140k house, $105k mortgage): $453,000

Option C (Pay Off in Five Years)

-Retirement Savings Right Now: $123,000
-Significant Contributions to Retirement Accounts All Five Years ($60,000/year), Value of Retirement Accounts After Five Years: $542,000
-Net Worth After 5 Years ($542k retirement accounts, $140k house, $105k mortgage): $577,000

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The difference here is exponential after five years, which means it would be even larger after another 10, 15, 20, 25 years, etc.

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I still don't have the tax angle down, but I'm obviously paying less in taxes and my retirement accounts show that, so is this generally the right way to think about this?

You don't seem to be capturing all of the variables, because if you are choosing Option A then you have less cash flow years 1 and 2 (paying extra into the debt) and more cash flow years 3-5 (since the debt has been paid off). You need to account for these cash flows and their returns (and perhaps risk) to make an apples-to-apples comparison.

Regardless, max your tax-deferred retirement accounts. I'd make this recommendation for anyone and everyone in your tax bracket, with perhaps an exception if you had hair on fire 20% credit card debt, but you're nowhere near that guy. You cannot beat the expected return, and the risk is minuscule that you'll look back and have made less money. Running the numbers, you'd need somewhere around a 10% stock market drop every year for the next few years for the result where paying the student loan debt would come out on top. Possible? Yes. Probable? Extremely unlikely. This is like the casino offering you to play roulette, but instead of having to pick red or black you get to have both. And if you win, you get 5x your bet, but if you lose you only lose your dollar. Max your tax-deferred 401k. (Since you probably cannot deduct traditional IRA due to gross income, you can probably safely ignore funding your Roth IRA for now. The benefits are negligible if any over a taxable account for a Mustachian.)

After you completely max your tax-deferred, I think you're ok paying off debt at 6.5% if that's a goal. This is somewhat lower than historical long-term equity returns, but in my opinion its a good bet to reduce risk (though others here may disagree). The other option is to invest in equities. Neither one is a bad choice in my opinion, so do which one feels better.

I would not advance payments on the mortgage at your stage in the game. After the student loan is paid off, start pumping into equities. At your mortgage rate, I might consider paying it off if I was getting close to retirement, otherwise I would funnel everything into equities.

Don't get too hung up over liquidity, since you already have $15k. Maybe bump the total amount up some if it makes you sleep better, but lower the amount in 'checking/savings' to two months' expenses and put the rest somewhere where you'll get a decent return. I like everything in stocks, but that makes some people nervous; if that's the case you can do short- or intermediate-term bonds.

GettingClose

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #23 on: November 09, 2018, 01:09:21 PM »
Quote
I'm really enjoying the discussion, especially the parenting advice, so keep it coming.

This is not parenting advice so much, as something to think of:  In the unlikely and unfortunate case that the new baby needs any special care (NICU, transfer to another hospital, etc.) do what you can to make sure that facilities and providers are in-network, especially if your wife is on a different insurance policy than the one the new baby will be placed on.   You can have a NICU in the same hospital that is entirely subcontracted out, and not in-network, which can result in truly alarming charges.  Same with the anesthesiologist in the case of an epidural or C-section.  Or even the nurses in a NICU which is in-network ... it's a minefield.

Honestly, in the stress of an urgent situation, it's very hard to think about these things, or even do anything once they're apparent, but worth an effort.

I speak as someone who had to pay $1600 to have 4 superficial stitches put into a child's finger, because the emergency room was in-network, but the physician wasn't...

freya

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Re: $250,000 Income, $52,000 Expenses, and $274,000 in Debts
« Reply #24 on: November 11, 2018, 10:26:19 AM »
It's not about long-term investment projections.  You need MUCH more readily accessible cash reserves, for three reasons:  1)  homeowner with not enough equity to consider a HELOC, 2) baby on the way, and 3) starting a small business.  Having just $15K lying around is asking for trouble, IMHO.  If I were you I'd shoot for an emergency fund in the $50-80K range.

My suggestions differ slightly from the investment order recommendation:

1.  Do not pay down the mortgage.  Don't even think about it.  It's off the table at least until all other debts are paid off, your business is stable, and you have lots of taxable savings.
2.  Fully fund your HSA and back-door Roth IRA contributions.  The Roth will eventually become the home of a large chunk of your emergency fund, because you will need to shelter the interest income - taxes on that are hellacious at your income level.
3.  Save up that emergency fund.
4.  It's a tossup whether you choose to maximize your 401K contributions or speed up student loan repayment.  Do whatever makes you feel better and don't worry about optimizing to the last penny:  max the 401K contributions, throw it all at the student loan, or split the difference.  Having that much in loans can feel like a weight on your shoulders, and it's priceless to be able to get rid of it.

If you haven't done so, I strongly recommend opening a solo 401K.  You get to contribute not only the standard 401K amounts ($19K/person), but also 20% of your business profit off the top.   Don't go for a traditional or SEP IRA, as that will make it impossible to do back-door Roth contributions.

Not sure how the pass-through deduction will work for you as a lawyer, but could be a nice extra bonus this year.  I don't know if you can forecast your taxes accurately until the new tax forms are finalized though.