I've gotten myself in a pickle (and first post!)

[hoodedfalcon]

I've been lurking long enough. I decided I need the advice of some Mustachian badasses. Here goes...

When I was a teenager, I read Your Money or Your Life. It had a profound effect on me. However, I decided to do something reckless anyway - I went to law school, financed completely by federal and private student loans. If I had to do it over, I wouldn't. But we are past that point....

I am nearing 6 years out of law school. Just for background, here is my financial breakdown:
35 yo, single, low COL area.

Take home pay after taxes/etc: $3200/month. I am in a fairly new job that pays about 10K more per year than my previous job. I am only recently able to save/invest any money.

Student Loans:
60K in private loans at 3.5% (until July at least, at which point they will probably jump): I pay $550/month (min. payment is $307)
90K in federal loans at 3.25%: I am on IBR and my payment is $400/month. I work for a non-profit and hope to take advantage of PSLF in about 7.5  years and the remaining balance on the federal loans should be forgiven. I am still paying off accrued interest. Principal isn't moving.

Home:
Owe 60K @3.25 - mortgage is $550/month. I tend to sporadically pay extra on my mortgage.

Investments:
Various CDs totaling $3500 (semi-emergency fund)
Mutual Fund: $1500 (part of emergency fund)
401K: I contribute 7% and my employer matches 5%: 14K
ROTH: Vangaurd index: 8K
Savings: $400 (I just had to purchase a new HVAC and it wiped out my savings)

I am working on reducing my monthly expenses. Currently, I have about $500-600/month that I have been putting into a savings account for emergencies. I was about to get to my ideal number when I had to drain the account for the HVAC just last week.

Here is some additional information:
1. I would like to have about 12K in an emergency fund. Currently I have $3500 in CDs, and another $400 in savings, and $1500 in a mutual fund. So, I am very far from that number.
2. In 7-8 years, my federal loans will be forgiven (assuming I stay in public service, which I plan to).
3. In about 10 years, my house will probably be paid off or close to being paid off.
4. In about 8-10 years, I will be very close to paying off my private loans.
4. I have near perfect credit with a 20K credit line @6% (no CC debt).

Questions:
1. Since I have 20K in available credit, should I just forego the emergency fund and throw the extra money I have at the end of the month towards my private student loans? I hate the idea of not having an emergency fund, but I also hate my student loans.
2. My fed loan payment is based on my AGI. I am tempted to contribute more to my 401K in part to lower my AGI (and my fed loan payment). I figure it's a win-win since it will be invested, even if the resulting reduction in payment is minimal. If I do this, I will have less take home pay and therefore less money to throw at my private student loans.
3. Should I even bother paying more on my mortgage, or just concentrate on student loans?

Any advice or feedback is welcomed.

[matchewed]

1. Using Credit Cards as emergency funds has gotten many people into trouble. Your emergency fund is to cover you in the event of losing a job, a major medical issue, or a large unplanned expense. Generally it is meant to cover your expenses until you are back at work, getting into more debt in the meantime can spell disaster. That's my take anyway. So I would keep paying down the private loans as you have been. See where you can cut down in your expenses first prior to dipping into your emergency fund.

2. What is the breakdown for it? Will you see a benefit and if so how much?

3. I wouldn't put any extra into the mortgage but I'd still pay it. :P But yes minimal payments and throw the remaining money at the private loans.

After the private loans are gone I would then start with investment since as you said you can get the federal loans forgiven and you can find better yield than the mortgage interest rate. Focus on minimizing your expenses to get to your goal on the private loans.

[hoodedfalcon]

1. Ideally, I don't want to use my credit cards in this manner. I guess the difficulty I have is choosing between paying down student loans v. stockpiling cash for the random emergency. I am much more comfortable with an emergency fund than without. I will certainly continue to cut expenses and go from there.

2. My federal loan payment = 15% of my discretionary income. Discretionary income is defined as AGI minus 150% of the federal poverty guidelines. For instance, if I can reduce my AGI by 10K/year, my monthly payment would go from $400 to $270. So, I would pay $130 less per month, and contribute 10K more to my 401K.

3. I plan on paying my mortgage. :)

Once the private loans are gone I will have significantly more money to invest/save. The federal loan is an annoying $400 every month but I am not overly concerned about the 90K in principal bc of PSLF.

[matchewed]

I'd math out # 2 a bit more.

Assuming you mean 10k total not 10k more - Remember the 401k contributions are pre tax. Assuming you make ~50k gross your current contributions brings you to taxable income of 46500. Already at 3500. Run the numbers with an additional 6500 being contributed and see what you take home would be like. Can you still meet all of your obligations that way? Does that 130 less per month towards your federal make up for your loss of take home? That may kill two birds with one stone by increasing your investing and savings while reducing the amount of money you need to pay on your federal loans. Compare that against your current situation and see which would drop your private loans faster.

[hoodedfalcon]

I was calculating at a 10K reduction of my current (2012) AGI, so an additional 10K. If I reduce by 10K total, the monthly payment would be roughly $310/month. So, that would be an additional $542 monthly contribution to my 401K, and a $90 reduction in my monthly loan payment. Currently, that would reduce my take home pay to the point where I would basically be breaking even every month (assuming I don't reduce expenses, which I plan to do though it's unknown to what extent at this point). No money for emergency fund, and I would maintain my private loan payment of $550 (perhaps applying the additional $90 I freed up on the fed loan).

Does that sound correct? I feel like I am missing something obvious.

[hoodedfalcon]

I guess the question I have is this: Assuming I have $600 left at the end of the month, which is the better way to spend it:

1. Build up emergency fund and then apply extra to private student loan (would take just over a year to do this).
2. Stop building emergency fund and immediately start applying extra $600 to private student loans (will reduce payoff time from 11 years to 5.5 years).
3. Reduce AGI by contributing additional $600 to 401K, put money saved on fed loan payment towards private loan ($90) - note: my fed. loan payment wouldn't be recalculated until Sept of 2014.

[Jamesqf]

My vote goes to building up emergency funds.  Loans at 3.5%?  That's darn near free money.  If you accumulate the money in the EF, where you can access it if needed, you can always take it out and pay down the student loan when/if the rate goes up significantly.

[hoodedfalcon]

Thanks everyone!! I feel safer working on rebuilding my emergency fund, but it's always nice to have confirmation.

[Togoshiman]

Depending on your background (perceived prestige of law school, experience, what firm you're at now) you may be able to relocate for a few years to a high-earning jurisdiction, e.g. Dubai.  Work like hell, save like hell, come back and settle down with a turbo-charged savings in a few years.  Something to consider.  Otherwise, live like a college student for as long as you can handle it, but don't let on too much to colleagues and clients.

My pro tip as a lawyer myself: consignment shops for nice suits and dress clothes.  I spend max 20% of retail for the same stuff (less to purchase, but dry cleaning and tailoring eat up a bit).  I drink the associate fuel coffee instead of Starbucks and just generally stay under the radar about my much lower spending than those around me.  If you're in a standard firm and doing well, remember that the partners love nothing more than to hear you are getting married/buying a house/leased a BMW, etc. because it means you will have to work like a dog continuously.  Live the double life and financial freedom will come relatively quickly.