Personal Finance 101 for Young Lawyers Forum

[Anonymous User]

Hi all,

Apologize in advance for the stupidity (I really should've taken finance in undergrad).

For tax purposes (I'm married, filing jointly), my MAGI is 203k; as a result, I don't think I can take advantage of the traditional IRA, or get the deduction for the 30k+ I've spent on student loan interest (also a second year associate). If so, how is the traditional IRA a benefit? Unless there are some firms that allow you to have your paycheck go directly to an IRA (mine doesn't), I thought you get the "pre-tax" by funding the IRA yourself, and then just getting a tax refund.

Also, is there any other way to lower my MAGI to 200k? I get the extra 3% tax is only on the 3k (I hope at least), but I'd still like to save some money- currently looking at paying about 2k in taxes

[Anonymous User]

Hi all,

Apologize in advance for the stupidity (I really should've taken finance in undergrad).

For tax purposes (I'm married, filing jointly), my MAGI is 203k; as a result, I don't think I can take advantage of the traditional IRA, or get the deduction for the 30k+ I've spent on student loan interest (also a second year associate). If so, how is the traditional IRA a benefit? Unless there are some firms that allow you to have your paycheck go directly to an IRA (mine doesn't), I thought you get the "pre-tax" by funding the IRA yourself, and then just getting a tax refund.

Also, is there any other way to lower my MAGI to 200k? I get the extra 3% tax is only on the 3k (I hope at least), but I'd still like to save some money- currently looking at paying about 2k in taxes

Standard move in your shoes is to max the 401k and then do a "backdoor Roth IRA," which involves making a contribution to the traditional IRA ($5.5 K max / year) as an intermediate step before moving into the Roth IRA through the backdoor. (There are a million articles about how to do this.) The money is post-tax on the way in to the Roth IRA, grows tax free, and is tax free on withdrawal (after 59.5). If you convert to Roth soon after making the non-deductible traditional IRA contribution, it will have zero impact on your taxes in the year you do the contribution/conversion (except for some additional forms you have to fill out, which are tricky at first but some articles explain it very simply if you use e.g., turbotax). At a 7% return, over 30 years of doing it, it's equivalent to $200K+ in tax free money.

[Anonymous User]

Just curious, for budgeting purposes, how much in non-fixed expenses should a BigLaw associate in NYC expect to spend each month? So not including metrocard, gym memberships, etc, but including groceries, clothes, restaurants etc. Say I don’t need to live extravagantly, but I’d like to buy a decent suit or pair of shoes every once in a while. Would $2500 be more than enough? (I really have no idea and I’ve heard anywhere from 1500-4000). Thanks

That should be more than enough. It's a problem if you're dropping $2500 a month on food for one person (clothes should be like 100-200 a month, assuming you already have work gear). Your fixed costs will run around 4k or more a month, assuming no roommate.

My all-in budget in NYC has been consistently in the $45K range for 4 years in biglaw. You can be in the ballpark easily, if you don't live extravagantly, don't spend too much on rent, and only occasionally splurge.

[minnbills]

Just wanted to pop back in and say I paid off all my student loans after 5 months in my biglaw job. Feels pretty good. Its nice knowing I can quit whenever I want, take a big paycut, and still live a comfortable life. Also, I'm on track to save about 100k before the end of the year. So, definitely not regretting my choice.

Best of luck to everyone with their financial goals.

[Anonymous User]

Just wanted to pop back in and say I paid off all my student loans after 5 months in my biglaw job. Feels pretty good. Its nice knowing I can quit whenever I want, take a big paycut, and still live a comfortable life. Also, I'm on track to save about 100k before the end of the year. So, definitely not regretting my choice.

Best of luck to everyone with their financial goals.

Congratulations on paying off the loans, that's very impressive after 5 months. I just paid off my loans as a 3rd year biglaw associate (started with 90k) and definitely feels good. If you don't mind, any tips on how you are on track to save about 100k?

I'm shooting for around 90k - saving 5k/month in a savings account (plan to buy a home in 3-5 yrs) and investing 2.5k a month (for a total "savings rate" of $7.5k/month or roughly 70% of post-tax + post-401k contributions).

Thanks for any tips!

[Anonymous User]

My all-in budget in NYC has been consistently in the $45K range for 4 years in biglaw. You can be in the ballpark easily, if you don't live extravagantly, don't spend too much on rent, and only occasionally splurge.

Agreed. I like living with my 2 roomies (gets pretty lonely otherwise and also I am mostly in my office because NYC big law) and only spend $900 a month on rent in Brooklyn. Because I mostly end up eating dinner at work, my monthly spend has been pretty low at $2400-2500. I don't really feel like I am scrimping because I don't turn down meals with friends or grabbing drinks when I am free on weekends but I am also not popping bottles at clubs or going to fancy speakeasies all the time just because I'm more into casual laid back things. If you're not a big alcohol person it will probably be even easier.

I'm 18 months into big law now. According to mint, Day 1 of the job I had about $36k to my name (fortunately 0 student loans/debt) and am at $264 k as of this morning. All of that increase was just brute saving and being 100% in stock. Though I have been bringing my equity exposure down this year to reach more of a 90-10 asset allocation (and maybe even down to 80-20)...mostly just by putting new money into bond funds and money market instead of into stock funds.

[JohnnieSockran]

For those in Biglaw looking to buy a house, FlagStar Bank offers a JD Mortgage loan for lawyers (due to the fact that a lot of us graduate law school with salaries that are much higher than our savings).

They will lend to qualified applicants with 0-10% down. PM me if you'd like more info or a referral. The person I worked with was great.

[Anonymous User]

For those in Biglaw looking to buy a house, FlagStar Bank offers a JD Mortgage loan for lawyers (due to the fact that a lot of us graduate law school with salaries that are much higher than our savings).

They will lend to qualified applicants with 0-10% down. PM me if you'd like more info or a referral. The person I worked with was great.

How are rates compared to other lenders?

[Anonymous User]

For those in Biglaw looking to buy a house, FlagStar Bank offers a JD Mortgage loan for lawyers (due to the fact that a lot of us graduate law school with salaries that are much higher than our savings).

They will lend to qualified applicants with 0-10% down. PM me if you'd like more info or a referral. The person I worked with was great.

How are rates compared to other lenders?

[minnbills]

Just wanted to pop back in and say I paid off all my student loans after 5 months in my biglaw job. Feels pretty good. Its nice knowing I can quit whenever I want, take a big paycut, and still live a comfortable life. Also, I'm on track to save about 100k before the end of the year. So, definitely not regretting my choice.

Best of luck to everyone with their financial goals.

Congratulations on paying off the loans, that's very impressive after 5 months. I just paid off my loans as a 3rd year biglaw associate (started with 90k) and definitely feels good. If you don't mind, any tips on how you are on track to save about 100k?

I'm shooting for around 90k - saving 5k/month in a savings account (plan to buy a home in 3-5 yrs) and investing 2.5k a month (for a total "savings rate" of $7.5k/month or roughly 70% of post-tax + post-401k contributions).

Thanks for any tips!

Thanks! In addition to the regular monthly saving and bonus, I am counting on the increase once I hit the max social security contribution and a summer bonus (the latter is probably not a safe assumption). I am also counting the 401k contribution in that 100k total.

It works out as follows:

28k (end of year bonus after taxes)
5.6k (summer bonus after taxes)
38k (regular monthly savings from here to end of year)
12k (remaining 401k contribution)
3.5k (increase once social security max hit)
8k (increase once 401k max hit)

for a total of about $95,000. These are pretty rough numbers.

[JohnnieSockran]

For those in Biglaw looking to buy a house, FlagStar Bank offers a JD Mortgage loan for lawyers (due to the fact that a lot of us graduate law school with salaries that are much higher than our savings).

They will lend to qualified applicants with 0-10% down. PM me if you'd like more info or a referral. The person I worked with was great.

How are rates compared to other lenders?

My rate was 4.5% initially (I think, maybe slightly higher), but I paid down my rate to 4.375% for like $3500 (they offer points).

[nealric]

For those in Biglaw looking to buy a house, FlagStar Bank offers a JD Mortgage loan for lawyers (due to the fact that a lot of us graduate law school with salaries that are much higher than our savings).

They will lend to qualified applicants with 0-10% down. PM me if you'd like more info or a referral. The person I worked with was great.

How are rates compared to other lenders?

The only way to really compare is to actually get quotes. Mortgage rates are a moving target even week to week, and can also vary a significant amount by location and type of loan. When I shopped for loans, the "lawyer loans" weren't a very good deal, but YMMV.

You can also get 80/10/10 loans from a number of lenders if you are looking to do a smaller down payment but don't want to deal with PMI.

[Anonymous User]

Starting a. New job in the fall. Going to be jobless for like two months. Have 140k in loans. Should I take the max salary advance (20ish K) to pay down loans quicker? I could live and travel off of like 8 and then throw 10k on the loans automatically. Is there any downside to that?

If it helps the Q, the firm will deduct 2-3k a month from my paycheck and the rest from my year-end bonus.

Again, is there anything I’m missing here (ie tax issues?) Should I do this or should I not?

[tsmcdona]

Leaving my clerkship for a "real job" soon and want to get my loans done. Here are my numbers:

Loans: $94k

Income: $104k with a variable bonus from 5k-16k based on billables. (I'm guessing I'll probably end up somewhere around 110-115 total income

I'm living fine off my current salary of $38k (low COL area), so I'm thinking I bump my "living salary" to 50k and throw the other 60 directly at loans? Obviously this is all gross income, so that affects it for sure. Maybe I should just keep my effective salary at 38k and throw everything at loans?

Firm will match 401k up to half of the first 6%. Is that the same as a 100% match of the first 3%? This shit is all new to me. I'm planning on maxing out the 6% though.

I will *hopefully* be able to avoid lifestyle creep and get loans paid off in 2 years.

[Anonymous User]

Maybe I should just keep my effective salary at 38k and throw everything at loans?

YES

Firm will match 401k up to half of the first 6%. Is that the same as a 100% match of the first 3%? This shit is all new to me. I'm planning on maxing out the 6% though.

Mathematically the employer's contribution is the same, but you need to put in 6% to get the match, as opposed to 3%. You should really max out whatever they let you (which could be higher)

edit: sorry,didn't mean to reply anon

[Anonymous User]

Looking for advice.

I married my wife while in law school and only spent 2k on her engagement ring+wedding band.

She makes about 70k a year in a secure job.

I am making about 100k from various sources with another 150k (not doing big law) annually with about 200k (I did sticker and intentionally maxed out all the loans they'd let me) in student loans but also about 500k in liquid assets (think index funds) with an investment property (which is generating about 10k/year post expenses) that's worth unknown amount.

How big should upgrade to her engagement ring be? My mother is literally telling me 40k. I think she's insane. I look up NYC average diamond size and that says 1.45 carats, with good quality + 2k setting, that's still 14-16k and I still think that's crazy. That's not to mention I suspect even by NYC standards, I am doing pretty well and may be expected to get slightly bigger.

What should I do? How much did you guys spend? I'm literally thinking about just going to her workplace and asking her coworkers how much their husbands spent on their rings.

[nixy]

That seems to me a completely personal decision that only your wife can answer. Does she *want* an upgrade? My engagement ring/wedding band were about $2700 together and I've never ever had any interest in upgrading. On the other hand, if there's a particular size/quality that she wants, what other people do won't mean anything.

[Anonymous User]

That seems to me a completely personal decision that only your wife can answer. Does she *want* an upgrade? My engagement ring/wedding band were about $2700 together and I've never ever had any interest in upgrading. On the other hand, if there's a particular size/quality that she wants, what other people do won't mean anything.

Yeah, I get that.

She says she doesn't, but I've seen her look at my mother's (... it's a beast) and her boss' ring so I feel like I should get her something more... uh, presentable?

Trying to get a gauge on what is typical for biglaw associates (maybe senior associates?)

[dabigchina]

Def personal, but have you thought about cz or mossanite (sp?)

They are cheaper and have superior clarity. Unless uour friends are jewelers or u want to cut some glass, I'd give it serious thought. Run it by your wife first, obviously

As far as what is "typical," none of the people I know in biglaw splashed out for giant engagement rings. 3k is the most I have heard of anyone spending. It's just old fashioned to spend 3 months salary or whatever Bs rule debeers made up

[Anonymous User]

Finance question, but please just accept a couple assumptions: I am able to invest at about a 8-9% post-tax return (real estate) and am not super concerned about this changing much in the next several decades, so please assume it won’t for the sake of my question. Mayyybe it’ll go down to 7%.

Debt paid (thank you tls for convincing me to go t20 with virtually no debt) and market or more biglaw salary plus bonuses. FWIW likely will be in biglaw another 4
Plus years. I have 400k at the aforementioned 8-9% returning me a good supplement to that income plus another 100k or so in stocks etc at generally 3% (diversification and so on). As a result, I am able to put away like 200k/year.

Maybe the goal is to get savings to the point where I can live off interest maybe not. Either way, I keep saving and reinvesting in one of the 2 buckets I just described.

So here’s the question: does it make any sense for me to do standard retirement stuff (402k, Roth, yada yada) when my firm doesn’t match or supplement in any way? Or should I be putting the 18.5k or whatever the max is is in one or both of the investments I described above in order to reach that theoretical goal I described where I can just live off like 100k/year or more in interest.

Ultimately I feel like the assumption underlying the whole idea of this retirement money is to one day live off the principal...but where I am approaching (or intending to approach) a spot where I can live off interest alone, does it make sense as a concept?

[jsnow212]

So here’s the question: does it make any sense for me to do standard retirement stuff (402k, Roth, yada yada) when my firm doesn’t match or supplement in any way? Or should I be putting the 18.5k or whatever the max is is in one or both of the investments I described above in order to reach that theoretical goal I described where I can just live off like 100k/year or more in interest.

You should absolutely put 18-19k (I think this is the new limit) in your 401k each year if you can. At the higher tax brackets, you are saving $6,000 per year on taxes. That's a 1-year THIRTY-PERCENT RETURN. That saved money will additionally compound over your life as you can deploy it into your non-401k investments.

There are income limits on the Roth/Personal IRA that so you can't invest in them, but 100% put as much as possible into the 401k.

Ultimately I feel like the assumption underlying the whole idea of this retirement money is to one day live off the principal...but where I am approaching (or intending to approach) a spot where I can live off interest alone, does it make sense as a concept?

That's usually the point, but the returns are there regardless of the middle-America oriented-nature of the 401k. You won't miss that 18k/yr, but it's going to objectively be one of the best investments possible solely because of its tax-advantaged basis. You can pass the income from that retirement stuff off to your kids, it's going to return a ton over decades since you are artificially pumping up the principal invested by keeping Uncle Sam away from it.

[Anonymous User]

So here’s the question: does it make any sense for me to do standard retirement stuff (402k, Roth, yada yada) when my firm doesn’t match or supplement in any way? Or should I be putting the 18.5k or whatever the max is is in one or both of the investments I described above in order to reach that theoretical goal I described where I can just live off like 100k/year or more in interest.

You should absolutely put 18-19k (I think this is the new limit) in your 401k each year if you can. At the higher tax brackets, you are saving $6,000 per year on taxes. That's a 1-year THIRTY-PERCENT RETURN. That saved money will additionally compound over your life as you can deploy it into your non-401k investments.

There are income limits on the Roth/Personal IRA that so you can't invest in them, but 100% put as much as possible into the 401k.

Ultimately I feel like the assumption underlying the whole idea of this retirement money is to one day live off the principal...but where I am approaching (or intending to approach) a spot where I can live off interest alone, does it make sense as a concept?

That's usually the point, but the returns are there regardless of the middle-America oriented-nature of the 401k. You won't miss that 18k/yr, but it's going to objectively be one of the best investments possible solely because of its tax-advantaged basis. You can pass the income from that retirement stuff off to your kids, it's going to return a ton over decades since you are artificially pumping up the principal invested by keeping Uncle Sam away from it.

JSnow, I really appreciate your input. It sounds like you are much more knowledgeable about finance than I am and your numbers-based analysis definitely sounds like it makes sense.

Can we tweak the assumption slightly. Let’s assume I don’t have kids, never will. As a result, I have nobody that I would ever want to pass anything onto. I get where you’re coming from—from a purely numbers perspective—can you tell me, though, how the interest stats I provided for the amount I might be putting away for the next five years might compare to whatever you think I’m saving by using the 401k from my firm?

What if I am going to pull the money at age 50? Does that change the analysis entirely?

[nealric]

There are income limits on the Roth/Personal IRA that so you can't invest in them, but 100% put as much as possible into the 401k.

This is not quite accurate. While you cannot contribute directly to a Roth IRA at high income, you CAN contribute to a traditional IRA and then roll that money into a Roth IRA, which is effectively the same thing with an additional required account and step. Google "Backdoor Roth." If you are lucky enough to have a 401k that allows post-tax contributions and in-service roll overs, you can stuff over $30k into a Roth per year, regardless of your income.

That said, at biglaw income levels, I'd prioritize 401k contributions over a Roth. Ideally, max out all of your tax-advantaged space.

[nealric]

Can we tweak the assumption slightly. Let’s assume I don’t have kids, never will. As a result, I have nobody that I would ever want to pass anything onto. I get where you’re coming from—from a purely numbers perspective—can you tell me, though, how the interest stats I provided for the amount I might be putting away for the next five years might compare to whatever you think I’m saving by using the 401k from my firm?

What if I am going to pull the money at age 50? Does that change the analysis entirely?

Why would you pull the money at age 50? Ideally, you should be maxing out your tax advantaged space and also contribute some to a taxable account. If you retire early, you live on the taxable until you can tap your tax-advantaged accounts without penalty. If you don't have kids, you presumably are at least going to want to retire someday. In fact, not having kids should accelerate when you can afford to retire. My two kids are going to cost me something like $500,000 in just college and childcare costs- you will be able to put that into retirement funds instead. You may also be forced to retire someday, and would be nice not to be one of those desperate 50-somethings who are jobless and can't find a job due to age discrimination.

[Anonymous User]

Hey all,

As a new SA in TX, what steps should I take now to be smart with my money? Was thinking of maxing out my 401(k) contribution and paying off some higher interest loans I have left over from undergrad. Anything you all wish you started doing this early?

Thanks for the help!