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Saving for downpayment vs. liquidating college debt vs. maximizing retirement

Home Personal Finance and Budgeting Saving for downpayment vs. liquidating college debt vs. maximizing retirement

  • Avatar trebizond 
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    Clinical fellow here who with anticipated pay raise next year and moonlighting (fixed, scheduled, and distributed into monthly pay), I am anticipating an annual salary of ~95-100K starting this summer.

    I have no money saved for an apartment/house downpayment.

    I am contributing 6K yearly to a Roth IRA, and have saved up 17K thus far.

    There is a residual 14K of college debt (interest: 2.25-5%). No med school debt.

    Currently I am contributing 5% of my income to my 401K, which is 5% matched by the employer.

    I’m generally frugal and have typically net ~1-1.5K each month to use towards things like college debt repayment, finishing off paying a CC, etc. That said, new debts (but manageable) are always around the corner, such as recent 1K in car repairs and next year’s board exam of 2.5K+.

    Any input regarding increasing my 401K contributions to 19K for next year? By my calculation this would essentially consume whatever the net income raise there is from the pay raise and moonlighting. This would leave me to pay off the college debt as I am – minimum payments or piecemeal, and again to delay saving up for a home purchase.

    #205948 Reply
    Avatar Peds 
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    Status: Physician
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    Joined: 01/08/2016

    Yea a home is not important so get that out of your head.
    Pay off the CC.
    If you are making 100K, you can do 6K rIRA and 14K 401k for retirement
    Then the rest college loans.

    #205960 Reply
    Avatar jhwkr542 
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    Status: Physician
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    Joined: 02/15/2016

    Yes, do the retirement contributions. Once an attending, you’ll be able to just smash that last bit of student loans. Retirement account space is use it or lose it, so I’d prioritize that. High interest credit card debt is the only thing that would probably trump that

    #205967 Reply
    Avatar JBME 
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    from what you said about the car repair, it sounds like you need an emergency fund. Not sure of your exact age but you seem young. So I’d do the 401k and Roth IRA contributions as peds outlined and the min college payments. then get an emergency fund that has ~3 months of expenses in there. Then throw the rest to the loans. Once you get rid of the loans and have your emergency fund and fully fund the 401k at 19k instead of 14k and the Roth IRA, then you can start saving up for a down payment

    #205970 Reply
    Faithful Steward Faithful Steward 
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    Max out the 401(k), now. Knock out the student loans. Then, you can direct previous student loan payment and extra cash flow toward saving up your down payment.

    I recommend you don’t buy a home for at least your first year as an attending, anyhow. You need at least a year to make sure your first attending job is a good fit. Plus, you should take a year in your new location to learn the area and make a smart decision on in what neighborhood you should buy your home.

    There’s no rush. You’re doing good things, financially, so far. Keep it up and be patient regarding buying a home.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #205980 Reply
    Avatar ZZZ 
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    “That said, new debts (but manageable) are always around the corner, such as recent 1K in car repairs and next year’s board exam of 2.5K+.”

    Those aren’t debts, those are expenses. If those are turning into CC debt for you, you’re doing something wrong.

    Pay off the 5% student loan debt ASAP. Let the low interest stuff ride.

    Your after tax pay should be around 70k. 25k to roth plus 401k leaves 45k.

    14k in college loans could have easily been put down last year. How are you spending 4k/month by yourself?

    “I’m generally frugal.” No, you’re not. You’ve been out of medical school at least 4 years with no medical school debt and trivial student loans. You’ve saved 17k plus your 401k. You’ve made at least 200k, probably more. Figure out where your money is going.

    #206002 Reply
    Lordosis Lordosis 
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    Joined: 02/11/2019

    These are little things that will not have a huge impact on your future financial success.  The big thing is what you do with your first year out.

    To answer your question I suggest make sure you have E fund, Do the roth,  If you have a roth 401k then do that otherwise get the match and finish off the loans.

    “Never let your sense of morals prevent you from doing what is right.”

    #206024 Reply
    Liked by Tim
    Avatar trebizond 
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    Joined: 12/31/2017

    Thanks guys for all of your advice, very helpful, I think I’ll try to starting with maxing out the 401K and pay off the 5% student loan, then build more of an e-fund and finish up the Roth for the year.

    #206044 Reply
    Avatar trebizond 
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    Joined: 12/31/2017

    “That said, new debts (but manageable) are always around the corner, such as recent 1K in car repairs and next year’s board exam of 2.5K+.”

    Those aren’t debts, those are expenses. If those are turning into CC debt for you, you’re doing something wrong.

    Pay off the 5% student loan debt ASAP. Let the low interest stuff ride.

    Your after tax pay should be around 70k. 25k to roth plus 401k leaves 45k.

    14k in college loans could have easily been put down last year. How are you spending 4k/month by yourself?

    “I’m generally frugal.” No, you’re not. You’ve been out of medical school at least 4 years with no medical school debt and trivial student loans. You’ve saved 17k plus your 401k. You’ve made at least 200k, probably more. Figure out where your money is going.

    Click to expand…

    Had to respond to this, because you make some inaccurate assumptions. I’ve always charged those things on interest free credit cards. I can’t remember the last time I paid any interest on any payments (for car repairs, board exams, vacations, etc.). I agree it would be better to save up cash and pay with that, but functionally for the last 10+ years it’s extremely rare that I’ve had debt on a credit card after the 0% APR period was over.

    Take home pay for the last 9 months has been ~3800/month. Of that, 1900 is spent on rent. I live in one of the top 3 HCOL areas in the country, rivaled only by Manhattan and SF. Trust me, the apartment is nothing special, dates from the 70s. The remaining 1900 monthly is spent on things like gasoline, food, utilities, paying off CC debt (you know, like nearly 5K for 2 board exams (internal medicine and pediatrics), state licensing fees, and application fees/traveling for fellowship interviews), and maxing out my Roth IRA. I’ve eaten out 5 times in the last 9 months, 2 times paid for as a work function. So no, I don’t think I’m particularly splurging. And in fellowship, between my 401K (started 2018, employer matched 100% to 5%), Roth IRA, and employer pension contributions, I currently pay ~31% of my income to retirement, which I think is more than reasonable.

    Med school was not paid for by someone else. I did an MD/PhD program during which my stipend ranged from 21K to 28K yearly. I had no pay raise from 25K for a full 5 years. No employer matching for anything. My roommate was my sister, herself a public interest lawyer with some 150K+ of law school loans, and I covered all her living expenses for those 8 years so she could focus on paying off her loans. There was step 1, step 2 ck, step 2 cs, and application/traveling fees for residency. These all came to many thousands of dollars.

    I bought my first car just before starting residency, used public transportation/walking before then. New car cost 28K due to various warranties and protections, could have been 24K. Paid off the 5 year loan in 3.5 years. Paid off 3K of moving expenses. Took my parents and sister on a family vacation to Northern California for nearly 2 weeks (just before residency) – paid that 5K off too. And paid off 11K of my 25K of college debt. I did start my Roth IRA in 2016 and maxed it out, only to empty half of it when my father had a precipitous illness and our family’s finances almost imploded. Ended up spending 7K of my own money to help pay off my parents’ car loans and educational loans they took on our behalf. My residency program did not have an employer match, so I did not start my 401K that year. Managed to max out Roth IRA in 2017-2018.

    I don’t know where you get 200K from for the last 4 years? I was paid on average ~55K in the 4 years of residency. Post tax this came to ~38K yearly, which is 152K net income over my 4 years of residency. I did spend on average 2-3K yearly on vacations. No flying, no international travel. 1-2 weeklong road trip vacations + weekend trips. I have no regrets whatsoever, especially as I have some of my fondest and most cherished memories of my parents and sister during those vacations. My mother can no longer hike because of crippling spinal disease. My father is in hospice with end stage dementia since 2017. I’ll never again be able to enjoy someplace like Yosemite with them.

    Don’t know why I felt the need to say all this to you, because I’m nobody to you and you’re nobody to me. Just had to get it off my chest because I have made a lot of sacrifices to get where I am, was paid in the 20-30K income range for nearly 10 years (age 19 to 29), with no employer pensions or even 401K matching, as a graduate student and medical student, and I don’t think anyone who knows me would characterize me as a spendthrift.

    #206059 Reply
    Liked by Tim, SLC OB
    Avatar SLC OB 
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    You will be fine, hang in there. Sorry to hear about your mom and dad. Glad you prioritized being with them.

     

    #206064 Reply
    Avatar jz 
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    Status: Physician
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    Joined: 01/09/2016

    Retirement uber alles.   Why? because 1) you are older and already lagging in retirement savings years.   2) it will lighten your tax burden slightly. If single, you’ll be in the marginal 12% bracket.  Every $100  in your 401k will save you $12 in federal taxes, then add state taxes.

    Saving for a down payment should be your lowest priority.

    #206065 Reply
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    2) it will lighten your tax burden slightly. If single, you’ll be in the marginal 12% bracket.  Every $100  in your 401k will save you $12 in federal taxes, then add state taxes.

     

    Click to expand…

    This is the lowest tax bracket the OP will be in possibly forever.  I am not sure I would stuff more then I had to into pretax.  He has better uses for his money. Even if it is just to pay off the 5% loans.

    “Never let your sense of morals prevent you from doing what is right.”

    #206097 Reply
    Hank Hank 
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    medical school scholarship sponsor

    Does your employer offer a Roth 401(k)? Hopefully your income won’t be this low for years to come.

    #206170 Reply
    Avatar Tim 
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    Status: Accountant
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    Joined: 09/18/2018

    “Don’t know why I felt the need to say all this to you, because I’m nobody to you and you’re nobody to me.”

    You choose a really runway for your career.
    You helped your sister taking off in her career.
    You are helping both your parents land safely.

    Realistically, you haven’t taken off yet. Can the thought of saving for a house. That’s a different journey.
    Make sure your Efund is full. Then pay yourself. Fill your retirement buckets, nobody else is going to do it.
    Chip away at the loans only as you can.
    Once you finish training you can finish the loans.

    At this point, building a sound foundation for YOUR career. I can’t think of a son that would make parents prouder. You are awesome.

    Advice, don’t buy anymore “new cars”. Think about exiting HCOL area. Long term, lower compensation and higher costs can lead to poor financial results for you.

    Strong character is due to your parents sacrifices. Thank them while you have the opportunity. Good things will come your way.

    #206253 Reply

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