Seeking general advice

[jbl623]

Hi All,

I'm 30 years old and just started working at a law firm six months ago after graduating from law school last spring. I make 190k/year and my wife makes 65k/year. She has no debt, but I have approximately 85k in federal loans, and about 60k from an inter-family loan. I have approximately 10k in a Vanguard Roth, 11k in my 401k (which I contribute 15% per paycheck to), 5k in checking and 20k in a savings account. We have no kids, and two cars we paid cash for. We live in Texas, and pay 2000/month in rent. I've been paying 2500/month to my federal loans and 1500/month to the inter-family loan. The federal loan I am purely paying down principal on, as interest is still withheld for now of course under CARES. We are trying to save up for a down payment on a house, and was hoping to get some advice on whether what I've been doing makes sense, or if I should be investing more rather than just plunking my spare cash in savings (aside from what I'm throwing into the 401k). Should I make a max Roth payment before I file? Or just hold onto what's in the savings account now to keep building up for the down payment? (I stupidly did not sign up for an HSA during my first enrollment period at the firm, but will do so later this year).

Thanks for helping with my newbie questions, I know I should be more financially literate than I am, but this site helps a lot!

[Dicey]

1. Read JL Collins, "A Simple Path to Wealth" and or follow his blog, which is free, but less organized, says he.

https://jlcollinsnh.com/stock-series/

2. Hop on over the Case Study section and start one of your very own. Lots of smart people will help you.

3. Congratulations.  It sounds like you're off to a good start.

[former player]

Hello and welcome.  There are a number of lawyers who hang around the forum so you have company here, although I think mostly further along in their careers.

The usual forum advice on the order in which to invest money is in this sticky -

https://forum.mrmoneymustache.com/investor-alley/investment-order/

[jbl623]

1. Read JL Collins, "A Simple Path to Wealth" and or follow his blog, which is free, but less organized, says he.

https://jlcollinsnh.com/stock-series/

2. Hop on over the Case Study section and start one of your very own. Lots of smart people will help you.

3. Congratulations.  It sounds like you're off to a good start.

Thank you!

[jbl623]

Hello and welcome.  There are a number of lawyers who hang around the forum so you have company here, although I think mostly further along in their careers.

The usual forum advice on the order in which to invest money is in this sticky -

https://forum.mrmoneymustache.com/investor-alley/investment-order/

Thanks!

[renata ricotta]

You've got a bit of a jumble in the description so not quite sure what you're looking for, but when I was a new biglaw associate making a similar salary (except after clerking, so my base salary was a bit higher + got a clerkship bonus), this is what I did:

- Maxed out my 401(k) every year and usually frontloaded it. (I picked a traditional 401(k), because my taxes at the big firm were likely as high as they were going to get in my lifetime.) If you are asking whether you should "max a Roth [IRA]" before you file, versus a Roth 401(k), make sure you are within income limits. I was way over the income limits the entire time I've worked as an attorney.

- After maxing the 401(k), drove 90% of my savings into a taxable brokerage account with VTSAX. Since I started my biglaw job in 2016 [left in 2019 to take a sabbatical then go to a boutique firm], my brokerage account ballooned to $460k as of this month.

- The remaining money I could save I generally kept in a high-interest online saving account. I tried to keep it under $30k or so, because otherwise it's too much cash to not be invested.

- I saved a LOT. I didn't have student loan payments, but I also lived in a much higher cost living area than Texas, so my guess is that more or less evened out. I set up my rent, cars, etc. to only need a fraction of my paychecks every month and saved aggressively. Annual bonuses in biglaw are substantial, and I never used those to make a big purchase -- they all went into my VTSAX account.

- I graduated from law school in 2013, clerked for awhile, then worked in biglaw from 2015-2019, and now work at a boutique firm still making good money but not Cravath-scale money. (The work/life balance has been worth it.)

- I just this week liquidated $200k of my brokerage acct for a down payment on a house I just bought in my HCOL area. I definitely benefitted from needing the cash out of it during a high point in the market. I bought an expensive house in an expensive city, but I can comfortably cash flow the mortgage from my paychecks and still have a quarter of a million left in my investment account, and another quarter million in retirement accounts (401(k)s, a Roth IRA from before I was a lawyer under the income limits, and an HSA account from biglaw). Now that my work/life balance is comfortable, with lots of flexibility for long vacations and working from home, I find satisfaction in my job and don't feel the need to retire super early (just regular early, like 50), so am ok with having a pricey house for at least the medium term.

Overall, pretty happy with how I played it from a money perspective (other than a divorce in the middle of it that took a chunk of cash -- unrelated to my job).

[jbl623]

You've got a bit of a jumble in the description so not quite sure what you're looking for, but when I was a new biglaw associate making a similar salary (except after clerking, so my base salary was a bit higher + got a clerkship bonus), this is what I did:

- Maxed out my 401(k) every year and usually frontloaded it. (I picked a traditional 401(k), because my taxes at the big firm were likely as high as they were going to get in my lifetime.) If you are asking whether you should "max a Roth [IRA]" before you file, versus a Roth 401(k), make sure you are within income limits. I was way over the income limits the entire time I've worked as an attorney.

- After maxing the 401(k), drove 90% of my savings into a taxable brokerage account with VTSAX. Since I started my biglaw job in 2016 [left in 2019 to take a sabbatical then go to a boutique firm], my brokerage account ballooned to $460k as of this month.

- The remaining money I could save I generally kept in a high-interest online saving account. I tried to keep it under $30k or so, because otherwise it's too much cash to not be invested.

- I saved a LOT. I didn't have student loan payments, but I also lived in a much higher cost living area than Texas, so my guess is that more or less evened out. I set up my rent, cars, etc. to only need a fraction of my paychecks every month and saved aggressively. Annual bonuses in biglaw are substantial, and I never used those to make a big purchase -- they all went into my VTSAX account.

- I graduated from law school in 2013, clerked for awhile, then worked in biglaw from 2015-2019, and now work at a boutique firm still making good money but not Cravath-scale money. (The work/life balance has been worth it.)

- I just this week liquidated $200k of my brokerage acct for a down payment on a house I just bought in my HCOL area. I definitely benefitted from needing the cash out of it during a high point in the market. I bought an expensive house in an expensive city, but I can comfortably cash flow the mortgage from my paychecks and still have a quarter of a million left in my investment account, and another quarter million in retirement accounts (401(k)s, a Roth IRA from before I was a lawyer under the income limits, and an HSA account from biglaw). Now that my work/life balance is comfortable, with lots of flexibility for long vacations and working from home, I find satisfaction in my job and don't feel the need to retire super early (just regular early, like 50), so am ok with having a pricey house for at least the medium term.

Overall, pretty happy with how I played it from a money perspective (other than a divorce in the middle of it that took a chunk of cash -- unrelated to my job).

Thanks, the bit about how much spare savings to put in VTSAX was helpful.

[zolotiyeruki]

Well, you're off to a great start.  $250k/year in a state with no income tax is niiiiiice!

What's the eventual interest rate on your student loans?
Personally, I'd want to demolish that personal (family) loan ASAP.  Yeah, you could invest instead, but to me, maintaining that familial trust would be important.  But that's a personal decision.

I'd say max out your 401ks, contribute to a Roth IRA if you can get your income low enough, max out the HSA, and plow the rest into taxable VTSAX.

[soily]

I know the idea of paying rent can be difficult but home ownership is expensive (shit breaks, closing costs, lawn care, remodels, etc.)! I would get to where you are comfortable with your debt then worry about a house. Trying to juggle a house and debt can be stressful.

[draco44]

Congratulations on your new(ish) job! That's wonderful that you have such a high income stream on hand to funnel towards whatever goals you choose.

The others provided good investment advice (definitely max. out any tax-advantaged buckets you qualify for!) but re. paying down debt vs. saving for a house specifically:
People have different levels of debt tolerance (check out that investment order post), but I agree with @soily that reducing debt would be my my priority over saving for a house right now. Or at least actually purchasing a house. It caught my eye that you just started working at a law firm six months ago. I'm not a big law person but my impression is that many people burn out after a few years or, in a less dramatic change, end up leaving for another firm that's a better fit. If that were to happen in your case, you might need to move to a new location for your next position, and doing so would be less painful if you are just moving out of a rental rather than selling a recently purchased house.

Also, the CARES changes to your federal loan interest provisions are a historically unique opportunity to crush your debt. That allowance is almost certainly going to expire eventually, so I'd want to take advantage of it while it's available. And I second the earlier comment about wanting to pay back a family loan on a reasonable timeline regardless of financial return as a matter of honor and trust. It sounds like you've got a good repayment schedule going currently.

[jbl623]

Thank you @zolotiyeruki @soily and @draco44 for the comments. Yes, definitely trying to crush that debt. The family loan is out of a family trust at approximately 2% interest, so paying into that is sort of a win-win because it helps out my dad in his retirement and builds up family wealth. The federal loan, once the interest kicks back in, will be the typical horrendous 7-ish%, prior to refinancing at least. Your comments help me realize the benefits of pumping the brakes on a house too, until we know we are really ready to commit.

[zolotiyeruki]

Whoa, 7% on the student loans?  Well, then, I revise my earlier recommendation--max out the 401k, demolish the personal loan, and then take care of the student loans.  Yeesh, that's a guaranteed 7% RoR.

[ChpBstrd]

Whoa, 7% on the student loans?  Well, then, I revise my earlier recommendation--max out the 401k, demolish the personal loan, and then take care of the student loans.  Yeesh, that's a guaranteed 7% RoR.

I'd take the guaranteed 7% ROI right after maxing out the 401k. Today's risk-free rate for investments is something like 1%. That's a huge spread.

Here's why I said max out the 401k first: With a married-filing-jointly income of $255k, the OP is over $47k deep into the 35% tax bracket. If their retirement bracket will be something like 24%, delaying taxes would be an 11% savings, which is greater than the 7% ROI on loan payoff.

Both loans should be wiped out in a couple of years with a 190k income, minus $19,500 for 401k. Paying off the family loan early is very important despite the bargain interest rate, or else it will hang over the relationships for a long time and eventually erode them.

If you're paying $2k in rent, I assume you are in a fairly medium/high-cost area (or maybe it's just a really nice place in a LCOL area?). At the age of 30 and on my first career job, I would be reluctant to take on a half-million or so in debt while locking myself into place geographically. Once you kill those loans, you'll be in a position to become a millionaire within 7-8 years - all while renting. That's also about the minimum time to recover closing costs and break even against renting in a typical housing market anyway. What will you want to do in 7-8 years? Don't even try to guess because you cannot know, but being a quarter of the way through a mortgage while getting quotes for sewer line replacement is probably not it.

It also doesn't help to get caught up in the trappings of homeownership such as maintenance, decorations, and lawn care, when you're earning $190k. Let your landlord handle that crap while you become a millionaire. Make all the money you can and have all the fun you can, but stay out of Home Depot.

[zolotiyeruki]

Whoa, 7% on the student loans?  Well, then, I revise my earlier recommendation--max out the 401k, demolish the personal loan, and then take care of the student loans.  Yeesh, that's a guaranteed 7% RoR.

I'd take the guaranteed 7% ROI right after maxing out the 401k. Today's risk-free rate for investments is something like 1%. That's a huge spread.

Here's why I said max out the 401k first: With a married-filing-jointly income of $255k, the OP is over $47k deep into the 35% tax bracket. If their retirement bracket will be something like 24%, delaying taxes would be an 11% savings, which is greater than the 7% ROI on loan payoff.

100% agreed.  OP should be looking to max out BOTH 401k's, destroying loans, and then looking for every opportunity to cut down on taxable income.  That said, I'm assuming OP and their spouse are MFJ, which puts the top of the 24% tax bracket at about $330k, so they still have a *little* breathing room there.  Either way, any opportunity to defer taxes should be taken at this point.

[Kayad]

One tiny bit of arbitrage:  While federal loans have no interest (and payments?), you should be paying the minimum required and putting the rest of your dedicated payment into a high yield saving account, mentally earmarked for the loan.  Then make the payment just before interest kicks back in.

Perhaps only a matter of a few $100 this late in the game, but that is free money.

It’s really hard to know your trajectory <1 year in to Big Law.  You could easily be burnt out in two years (raises hand) , or squeezed out, or who knows.  Still a time of potential significant change.  So I think it’s fine to aim that cash hose into a few different pots (including some cash savings for a home in a year or two, if that is part of your family’s goal).  Agree with others that for the retirement savings piece, at your tax bracket, it’s a no-brainer to fill up the pre-tax accounts before worrying about the Roth.

[jbl623]

Whoa, 7% on the student loans?  Well, then, I revise my earlier recommendation--max out the 401k, demolish the personal loan, and then take care of the student loans.  Yeesh, that's a guaranteed 7% RoR.

I'd take the guaranteed 7% ROI right after maxing out the 401k. Today's risk-free rate for investments is something like 1%. That's a huge spread.

Here's why I said max out the 401k first: With a married-filing-jointly income of $255k, the OP is over $47k deep into the 35% tax bracket. If their retirement bracket will be something like 24%, delaying taxes would be an 11% savings, which is greater than the 7% ROI on loan payoff.

Both loans should be wiped out in a couple of years with a 190k income, minus $19,500 for 401k. Paying off the family loan early is very important despite the bargain interest rate, or else it will hang over the relationships for a long time and eventually erode them.

If you're paying $2k in rent, I assume you are in a fairly medium/high-cost area (or maybe it's just a really nice place in a LCOL area?). At the age of 30 and on my first career job, I would be reluctant to take on a half-million or so in debt while locking myself into place geographically. Once you kill those loans, you'll be in a position to become a millionaire within 7-8 years - all while renting. That's also about the minimum time to recover closing costs and break even against renting in a typical housing market anyway. What will you want to do in 7-8 years? Don't even try to guess because you cannot know, but being a quarter of the way through a mortgage while getting quotes for sewer line replacement is probably not it.

It also doesn't help to get caught up in the trappings of homeownership such as maintenance, decorations, and lawn care, when you're earning $190k. Let your landlord handle that crap while you become a millionaire. Make all the money you can and have all the fun you can, but stay out of Home Depot.

Yes I agree. We are in a mid-low COL area (Dallas), so the 2k/month rent is because we are in a fairly nice 2 bed/2 bath right near downtown. A bit extravagant for what we really need, but we got six weeks free, so the actual monthly cost is slightly less than 2k with that spread across the year.

[PassMMM]

I think the advice so far here has been pretty spot on, but thought I'd share my perspective as someone who was in a very similar situation. I have a case study in the forum somewhere with more detail, but I started biglaw end of 2017 and was thinking about buying a house in early-mid 2019. I decided to stop putting 100% of my post 401k/HSA/expenses money into my investment brokerage account (which I had been doing up until that point), and started funneling it into my savings, which held 6 months of expenses as an emergency fund. This was to fund the down payment.

My rationale at that time was the market was at an all-time high so it didn't seem as if I was missing out on some historic buying opportunity (debatable now), but more importantly we had been a decade into a historic bull run and I didn't want to get caught needing to fund a down payment by selling stocks right after a crash. Obviously, I happened to be conservative with this thinking and probably cost myself thousands by doing this. Hindsight is 20/20 and at the time I had peace of mind and honestly would recommend doing the same.

The one thing I'd caution is to set your home price budget now, understand what goes into closing costs in your area, and once you hit the figure of down payment + closing costs + emergency fund in your savings, go right back to investing again, regardless of whether you've found your home. From the biglaw income perspective, it only took me about 8 months to hit my number, with some contribution from my wife who made 65k at the time.

[yachi]

(I stupidly did not sign up for an HSA during my first enrollment period at the firm, but will do so later this year).

If you mean you selected a 'normal' healthcare plan, you'll have to wait for another enrollment period.  If you meant you selected an HSA-qualified HDHP plan, but somehow didn't open an HSA as well, then good news: You can open an HSA at any point so long as you are on a qualifying HDHP.  If your employer won't let you into their plan, you can open one on your own instead, you just won't get an employer match.

Here's a link: can i open an hsa mid year