Personal Finance 101 for Young Lawyers Forum

[A. Nony Mouse]

I like this post, sans two issues:

1. Small wins in finance matter, I don't think people realize how much they blow on stupid shit they don't care about. Saving even just 1k a month or so by not buying small things you don't really give a shit about can really have a huge long-term impact.

2. "Don't but unless your gonna stay for ten years" seems uneccessarily risk adverse. On a 15 year mortgage with 20% down, you'll likely break even in about three years.

Great post!

I'm sure the bolded is correct, but I think this is going to depend a lot on your individual circumstances/market? I think 30 year mortgages are still way more common, and in some markets even biglawyers are going to have difficulty putting 20% down.

[bk1]

Since you welcome feedback, here's some random thoughts:

1. I think you're too dismissive of controlling minor costs. You also say kinda contradictory advice ("don't avoid lattes to save $1000/year but do cut down your cable bill to save $70/month"). I mean yes you say "big vs small," but that distinction is kind of arbitrary (is $5 small? is $20? is $50? etc). As I note below, the focus should be on what people value not necessarily on whether each individual decision is big or small however you define those terms (if you highly value watching your out of market NFL team, then maybe you buy Sunday Ticket but don't get lattes... if you highly value coffee from a coffee shop, maybe you buy starbucks frequently but don't get Sunday Ticket... etc).

2. You're ignoring Roth IRA conversions for people with high income.

3. The r/pf graphic says 3-6 months for e-fund, but you don't really say that in the text. You say "with kids your e-fund should be higher," but that would already be implicit in 3-6 months expenses (expenses obviously grow when you add people). May want to add that if you have certain potential emergencies then that may warrant a higher e-fund (e.g., a car out of warranty, a house, etc).

4. I think your post overall is just too focused on various options as vehicles for savings (e.g., roommates, no car, cheaper car, etc). The overarching message should be that you have limited funds and you can't have everything (e.g., want to eat out more? maybe you live with roommates, want a nicer car? maybe you don't go to the movies as often, etc). The point should be that people focus on their own personal priorities, whether those are living alone, their hobby, having some luxury goods, or whatever, and cut back in areas that are less important. That said, it's of course fair to suggest options, but harping on them as necessary seems weird to me.

5. You use weird definitions and imply that words don't mean what they mean to get over weird reactions you assume people have (e.g., "emergency fund," "budget," etc). First off, your definitions are literally the same as the word you're trying to get people to avoid so it just comes off as stupid (an e-fund is the amount you need to have to get through financial difficulties). Second, your readers are presumably higher-educated people, if they have a psychological aversion to the word "budget" or don't understand what you mean by "emergency fund," etc, then they have problems beyond personal finance that your post ain't gonna solve.

6. I wouldn't necessarily call an e-fund "cash on hand." Obviously an e-fund should be liquid, but I usually have a lot more cash than my e-fund because I have large inflows and outflows of cash at various times each month (paychecks, rent, cc bill, debt payment).

7. Is it really necessary to take a perfunctory jab at the vast majority of people who congratulate others when they make big purchases for themselves and it comes up in conversation?

8. Not every health plan has an HSA.

9. High interest debt, not sure I'd pick 6%, but I'd note this can come down to personal preference as to what each person feels is "high."

10. Overall, I'd have a huge note at the beginning that the most important part of "personal finance" is that it is "personal." Meaning that people need to do what works for them. Recommendations can only go so far and are not right for everyone.

11. You should give r/pf shoutout (that's where the retirement wrapper graphic comes from iirc).

12. Your student loan advice seems way too categorical and lacking knowledge of options outside of IDR plans. I also suspect that many refinancers don't need a cosigner, and if they do it's not their spouse that covers them (I suspect a family member/parent is more likely for the obvious reason that if you can't cover a refi by yourself then you (1) likely aren't married yet and (2) likely can't be saved by your spouse who likely doesn't make significantly more than you do).

13. No offense, but I don't really see this adding anything that something like r/pf's wiki (https://www.reddit.com/r/personalfinanc ... mmontopics) doesn't except that it's peppered with your personal preferences for saving money and maybe a few FIRE tips/ideas.

[MatMat]

I mean this is cool. But lots of us went into biglaw so we don't have to live on 48k in retirement. Some of us like nice cars, houses, private schools, vacations, etc.

The problem with your post is you assume retirement is the be all end all of the utility curve. But it's perfectly rational to have a personal utility curve that values other things (material and experiencial) that cost money. That's not irrational. It's just a different preference set.

If you want to live a true upper middle class life, take the OP with a big grain of salt.

[Wipfelder]

I like this post, sans two issues:

1. Small wins in finance matter, I don't think people realize how much they blow on stupid shit they don't care about. Saving even just 1k a month or so by not buying small things you don't really give a shit about can really have a huge long-term impact.

2. "Don't but unless your gonna stay for ten years" seems uneccessarily risk adverse. On a 15 year mortgage with 20% down, you'll likely break even in about three years.

Great post!

I'm sure the bolded is correct, but I think this is going to depend a lot on your individual circumstances/market? I think 30 year mortgages are still way more common, and in some markets even biglawyers are going to have difficulty putting 20% down.

Yea, but even like, 10% down on a 30 breaks even (assuming the home's value doesn't change) in seven years or so. I'd put the "rent line" at 5-6 for a 30 year, and 3 for a 15 year.

[A. Nony Mouse]

Yeah, seven is what I had always seen when I was researching this (based on a 30 year).

[AVBucks4239]

Edited to address the past 3-4 posts. Thanks for your suggestions. Some thoughts:

1. Yes, I'm not really saying anything new relative to personal finance, and frankly, everything that needs to be said about personal finance has already been written. But I still come on here and see people--people much smarter than me--asking very basic questions. I just thought aggregating some stuff would be useful for the community here.

2. I went on an early retirement rant in large part to conversations I've been seeing in recent threads. There were multiple posts about people thinking they need $3M to retire, as if this were some number from the gods; I am just trying (probably too hard) to get the point across that no, no magic number is right--your magic number is directly related to fixed expenses. The lower your fixed expenses, the less you need, the sooner you can retire. If you want a higher standard of living, that's a value trade-off, and that's perfectly fine; just know how it affects retirement.

3. Yes, I think people congratulating others for purchasing things is extremely silly in our society. Could probably write a book just on that.

[jchiles]

Good post and thank you for aggregating a lot of useful stuff. I think you're right about cars and how people should avoid looking at a new car as a reward but unless someone has a lot of time to compare used cars, knows a mechanic or is knowledgeable enough to identify a good v bad deal, and can pay cash idk if buying a used car is always the best idea given how cheap and reliable a lot of new cars are and how low interest new car loans are for people with good credit.

[AVBucks4239]

Good post and thank you for aggregating a lot of useful stuff. I think you're right about cars and how people should avoid looking at a new car as a reward but unless someone has a lot of time to compare used cars, knows a mechanic or is knowledgeable enough to identify a good v bad deal, and can pay cash idk if buying a used car is always the best idea given how cheap and reliable a lot of new cars are and how low interest new car loans are for people with good credit.

Ya, I'm not at all getting into the new vs. used car debate. Just being over-dramatic to point out fallacy most people utilize when they get their first real job ("Not a student! New job! New car!")

[star fox]

Really the big takeaways are just:

1) Don't rack up high interest debt (CREDIT CARD CREDIT CARD CREDIT CARDS) dummy
2) Max out your 401K/IRA ya dummy
3) Invest your dollars in the Market and don't just leave them in a 0.5 % interest accruing saving account dummy

If you want to blow your money on cars/clothes/models/bottles/penthouses/Starbucks Lattes that's really a personal preference at the end of the day.

[uvheylaw]

I guess I just understand why not buying a car, not buying a nice house, and not taking any awesome vacations just so you can retire at 45 and not have a car, not buy a nice house and not take any awesome vacations for the rest of your life is a good outcome.

I'm all for saving. I max out my 401k and also save a good amount every month. But holy shit would I rather blow $$ on an awesome Europe vacation with my significant other in my 20s than stash that money away for when I'm 60. Life is not lived on paper, and 30 years from now (or even tomorrow) is not guaranteed for anyone. Live your life.

Not saying you were necessarily arguing against this, but way way too many people are obsessed with minimizing every cost in their life to stash it away for a not-guaranteed tomorrow.

[AVBucks4239]

I guess I just understand why not buying a car, not buying a nice house, and not taking any awesome vacations just so you can retire at 45 and not have a car, not buy a nice house and not take any awesome vacations for the rest of your life is a good outcome.

I'm all for saving. I max out my 401k and also save a good amount every month. But holy shit would I rather blow $$ on an awesome Europe vacation with my significant other in my 20s than stash that money away for when I'm 60. Life is not lived on paper, and 30 years from now (or even tomorrow) is not guaranteed for anyone. Live your life.

Not saying you were necessarily arguing against this, but way way too many people are obsessed with minimizing every cost in their life to stash it away for a not-guaranteed tomorrow.

I mean, enjoying life and early retirement are not mutually exclusive. I don't see myself living a life of deprivation just so I can retire early.

I guess I didn't make this clear so I'll edit. Thanks for the comment.

[NYC2012]

.

[TatteredDignity]

OP's thematic thrust is far more important than the technical stuff. Make conscious decisions about how you allocate your resources. If you truly need to spend $200k per year to be happy, so be it. But if you're spending that much because of mindless, passive expenditures, you're needlessly delaying financial independence.

It's all about how much utility you're buying with your money. To paraphrase one poster above, buying Sunday Ticket could be a great move--from a utility maximization standpoint--for one person, but a relative waste for another person.

OP gets more utility from free time than from stuff, so his $50k annual spending is the best way to maximize his utility. If, conversely, you simply can't be happy without a McMansion, retiring at 45 in a studio apartment doesn't make sense for you.

Just know yourself and make conscious decisions.

[chicharon]

Tag

[EdSaid]

IV. A Brief Word on Marginal Taxes

Taxes Are Marginal: A lot of people screw this up. Taxes are marginal. This means that your tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. It breaks down like so:

In word terms, this means that income between $0 and $9,275 is taxed at 10%. Income between $9,276 and $37,650 is taxed at 15%. And so on.

You want to contribute to pre-tax accounts so you can lower your AGI and thus lower your tax burden.

Easy example: You make $160k in Big Law. The last $18,000 of that is taxed at 28%. Contribute all of that money to a 401k instead and boom, you have all $18,000 of that money invested; conversely, if you invested none of that, $5,040 would have been taxed, and you go home with $12,960. That sucks. Invest the whole damn thing and win.

Note that some people confuse this whole "marginal tax" thing. They think, "If I go from $75k income to $100k, now I'm in the 28% tax bracket and I'll make less." Now you can look at them and laugh because you read on the internet that this is complete bullshit. Almost all of the income will be taxed the same, just the income from $91k to $100k will be taxed at 28%. And if you contribute to your 401k, you will avoid that higher marginal tax rate! BOOM!

Okay, I'm feeling dumb because to me it does seem that your example of going from $75k to $100k results in a substantially higher tax. According to the graphic, you would go from a $5,183 tax liability to a $18,588 liability. For those of us in biglaw, going from $180,000 a year to $190,000 a year would mean going from $18,588 to $46,278 or am I reading this wrong? I understand that anything above the $190,000 would be taxed at a different rate, but it seems like there is a substantial increase in your base liability.

[PeanutsNJam]

To be clear, aren't passive index funds stocks? When you say "invest heavily in stocks," do you mean "invest heavily in passive funds" or "invest heavily in individual stocks you buy on scottrade"?

[nealric]

Good post. For those with similar saving and investment. philosophies, boggleheads.com is a pretty good community to discuss personal finance.

On the IRA side, you should learn about the backdoor Roth. Effectively, it's still possible to contribute $5,500 a year to a Roth IRA even if you are beyond the income limits for contributing to a Roth by contributing post-tax money to an IRA and then converting it to a Roth. This gives you additional tax-advantaged investing space.

I would disagree somewhat on the HSA. You should contribute to the extent you reasonably anticipate actually incurring such expenses. Most young people don't really incur much in the way of health related expenses.

If your health insurance plan has an out of pocket maximum of $5,000 that you never hit, there's no point in putting 5,000 a year in your HSA, year after year.

[AVBucks4239]

Good post. Do you have kids/are you planning?

Yes. Hoping for two kids after we get married this May. Plan is to keep bumping up HSA contributions so as much medical care as possible is pre-tax. Fiance also hates clutter and plans for the baby showers to be gender neutral and loaded with "need" stuff rather than wants.

Great stuff, thanks.

Here is a question for you: My SO and I are both in biglaw and expect to stay for at least 2 more years. She is c/o 2014, I am c/o 2013. We have about 50k in liquid assets, own our cars, and have no student debts. We currently rent but would like to buy in the next 1-2 years. How do you think we should save/invest/plan for this?

Read as much about home ownership as possible. It has its perks but its downsides. The whole concept of being able to do what you want in a home costs a lot of money. My fiance and I live in a small home and we've spent thousands of dollars on things we wouldn't need if we had an apartment (lawnmower, leafblower, fertilizer, paint, fixing random shit, etc.).

Also make sure you are buying in a market in which you plan to stay for a long time. I thought I was settling pretty nicely here and bought a house, but then a friend from a nearby bigger market emailed me with a potentially available job. I respectfully declined, in part, because I just bought a house (and also for many other reasons). If it were a better opportunity, I would have considered the opportunity much more, and then may have lost a ton of money on the house we just bought.

Lastly, again this is my personal opinion, but do not buy a "starter home" just because you want to buy a house. The term "starter home" is a BS term invented by real estate agents. A "starter home" is almost certainly going to cost you a ton of money in repairs, maintenance, renovations, and transactional costs if you sell it within 7 or so years. You're better off buying one house you think you can stay in for a long time.

Again, just my two cents, and this is extremely opinion/personal oriented, and you should do you.

[Anonymous User]

Good post. Do you have kids/are you planning?

Yes. Hoping for two kids after we get married this May. Plan is to keep bumping up HSA contributions so as much medical care as possible is pre-tax. Fiance also hates clutter and plans for the baby showers to be gender neutral and loaded with "need" stuff rather than wants.

Great stuff, thanks.

Here is a question for you: My SO and I are both in biglaw and expect to stay for at least 2 more years. She is c/o 2014, I am c/o 2013. We have about 50k in liquid assets, own our cars, and have no student debts. We currently rent but would like to buy in the next 1-2 years. How do you think we should save/invest/plan for this?

Read as much about home ownership as possible. It has its perks but its downsides. The whole concept of being able to do what you want in a home costs a lot of money. My fiance and I live in a small home and we've spent thousands of dollars on things we wouldn't need if we had an apartment (lawnmower, leafblower, fertilizer, paint, fixing random shit, etc.).

Also make sure you are buying in a market in which you plan to stay for a long time. I thought I was settling pretty nicely here and bought a house, but then a friend from a nearby bigger market emailed me with a potentially available job. I respectfully declined, in part, because I just bought a house (and also for many other reasons). If it were a better opportunity, I would have considered the opportunity much more, and then may have lost a ton of money on the house we just bought.

Lastly, again this is my personal opinion, but do not buy a "starter home" just because you want to buy a house. The term "starter home" is a BS term invented by real estate agents. A "starter home" is almost certainly going to cost you a ton of money in repairs, maintenance, renovations, and transactional costs if you sell it within 7 or so years. You're better off buying one house you think you can stay in for a long time.

Again, just my two cents, and this is extremely opinion/personal oriented, and you should do you.

Just a note on starter homes/purchasing -

I recently bought a home in the area I planned to spend about five years working an engineering job. Life changed pretty rapidly and my desire to go into law came back with a renewed ferocity. The house I purchased I got well below market value (like $20k+ below comparable houses in the neighborhood) and I have fantastic credit, so I got an excellent rate and closed with minimal transactional costs b/c of an excellent agent.

I'm going to be looking to either rent it out long term through a broker or sell when I start LS (either this fall for fall '18), but either way, because of the bargain find, I will make money on the move.

I know it's anecdotal, but if you buy below your means and only pull the trigger on a truly 'great' deal, you don't have to get screwed by buying a 'starter' home.

[Wipfelder]

I know it's anecdotal, but if you buy below your means and only pull the trigger on a truly 'great' deal, you don't have to get screwed by buying a 'starter' home.

A great deal, if one worried about having to "up and move" would be a home where the monthly income from rent would cover:

Mortgage and Taxes
2% of the value of the home per year in maintenance
Property Management Fees
1/12 of one month's expenses (to cover vacant months)
50 bucks, because dumb shit happens.

Anything less than the amount needed to cover the above is a losing proposition, as in you'll lose money, but could still be better than renting.

[Tiago Splitter]

IV. A Brief Word on Marginal Taxes

Taxes Are Marginal: A lot of people screw this up. Taxes are marginal. This means that your tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. It breaks down like so:

In word terms, this means that income between $0 and $9,275 is taxed at 10%. Income between $9,276 and $37,650 is taxed at 15%. And so on.

You want to contribute to pre-tax accounts so you can lower your AGI and thus lower your tax burden.

Easy example: You make $160k in Big Law. The last $18,000 of that is taxed at 28%. Contribute all of that money to a 401k instead and boom, you have all $18,000 of that money invested; conversely, if you invested none of that, $5,040 would have been taxed, and you go home with $12,960. That sucks. Invest the whole damn thing and win.

Note that some people confuse this whole "marginal tax" thing. They think, "If I go from $75k income to $100k, now I'm in the 28% tax bracket and I'll make less." Now you can look at them and laugh because you read on the internet that this is complete bullshit. Almost all of the income will be taxed the same, just the income from $91k to $100k will be taxed at 28%. And if you contribute to your 401k, you will avoid that higher marginal tax rate! BOOM!

Okay, I'm feeling dumb because to me it does seem that your example of going from $75k to $100k results in a substantially higher tax. According to the graphic, you would go from a $5,183 tax liability to a $18,588 liability. For those of us in biglaw, going from $180,000 a year to $190,000 a year would mean going from $18,588 to $46,278 or am I reading this wrong? I understand that anything above the $190,000 would be taxed at a different rate, but it seems like there is a substantial increase in your base liability.

Let's say hypothetically income from 0 to 180k is taxed at 10% and everything above 180k is taxed at 20%. That would mean someone making 180k pays 18k in taxes and someone making 190k pays 20k in taxes (18k on the first 180k and then 2k on the last 10k). That is how marginal rates work. You only pay the higher rate on the income above each threshold.

[Lacepiece23]

I know it's anecdotal, but if you buy below your means and only pull the trigger on a truly 'great' deal, you don't have to get screwed by buying a 'starter' home.

A great deal, if one worried about having to "up and move" would be a home where the monthly income from rent would cover:

Mortgage and Taxes
2% of the value of the home per year in maintenance
Property Management Fees
1/12 of one month's expenses (to cover vacant months)
50 bucks, because dumb shit happens.

Anything less than the amount needed to cover the above is a losing proposition, as in you'll lose money, but could still be better than renting.

As someone who invests in RE, an easier way to do it is to just multiple the price of the home by 1% for rent. For example, if a home purchased for $200,000 will rent for 2k a month, then you will likely cash flow once you move out after all of your expenses. Ideally, 2% is a great deal, but 1% should still keep you from losing money.

[Danger Zone]

I know it's anecdotal, but if you buy below your means and only pull the trigger on a truly 'great' deal, you don't have to get screwed by buying a 'starter' home.

A great deal, if one worried about having to "up and move" would be a home where the monthly income from rent would cover:

Mortgage and Taxes
2% of the value of the home per year in maintenance
Property Management Fees
1/12 of one month's expenses (to cover vacant months)
50 bucks, because dumb shit happens.

Anything less than the amount needed to cover the above is a losing proposition, as in you'll lose money, but could still be better than renting.

As someone who invests in RE, an easier way to do it is to just multiple the price of the home by 1% for rent. For example, if a home purchased for $200,000 will rent for 2k a month, then you will likely cash flow once you move out after all of your expenses. Ideally, 2% is a great deal, but 1% should still keep you from losing money.

Gonna guess this doesn't fly in NYC or else I'd be paying something like $9,000 a month in rent

[Lacepiece23]

Yeah, well I mean people don't really buy in NYC either. This was mostly directed at people in other markets. You'd be luck to get a .5% deal in NYC. But NYC is all about appreciation rather than cash flow.

[bruinfan10]

3. Yes, I think people congratulating others for purchasing things is extremely silly in our society. Could probably write a book just on that.

i'm with you, especially re: cars. living in LA, people take the car-as-status-symbol thing to an incredibly annoying extreme. i have a friend out here who's in debt up to his eyeballs who almost caved to his fellow associates' ribbing about his perfectly acceptable older-model american car and went to a saab dealership (ffs, of all the stupid overpriced cars to buy). i talked him off the ledge, but it blew my mind that an otherwise sharp guy would make such a completely indefensible decision based on consumerist peer pressure.