Priorities: How should we spend our salary?

[Epiphora]

I'm finishing fellowship in 3 months and the hubby already is an attending; starting in August, we'll both be starting jobs where we'll take home total ~$49k/month after taxes (his salary will be $550k+ bonuses, mine is $475k). Here's a breakdown of our expenses:

 

-I just refinanced my student loans of $334k @4.7% x 7 year fixed, payment will be $4.7k/month. Hubby has no student loan debt

-Hubby pays child support of $2.5k/month, no kids of our own but hoping for in near future

-We are looking to rent initially at around $2.5k/month and save to buy a home (next year or two?) with max budget of $700-900k

-No other debts, no major expenses anticipated, we are both pretty frugal

-Have about $200k in cash/emergency fund now between us, $400k in retirement funds

-Have all our specialty-specific disability insurance & life insurance in place

 

My question is: How would you divide up the money each month? My major instinct is to pay off my loans, and quickly. Was thinking of paying $14k/month (triple payments) and paying them off in a little over two years- or even faster than that. Hubby is concerned that if we do that we might be losing out on returns from putting that money in the market instead. In my mind, saving that interest is guaranteed money in our pockets.

Also, we want to save for a down payment on a house to avoid PMI when we buy- how would you decide what to save per month for this versus what we save for retirement? We had a ball park number of $10-15k/month to bank for savings, but don't know if this sounds reasonable or if we are overshooting here.

Appreciate any input! I didn't handle my student loans in the best fashion (didn't know about forgiveness until I was a third year resident, and deferred payments during the first half of my residency) so I want to make sure we go forward on the right foot here on out.

 

 

 

[Zaphod]

Good news is you make enough money it doesnt matter and sounds like you understand the trade offs of these decisions. I would sit down and discuss both of your valid concerns, and map out the math and see where youre comfortable. You can clearly pay off the loans and build up a large taxable account at the same time, no all/nothing choice needs to be made. Find your happy medium.

Why is your refi so expensive rate wise? Is that the going rate now? I would consider refinancing into a variable term rate given you think you'll be paying off sooner anyway. Its a no brainer.

As far as house savings I'd just add up the time til you want to buy and divide the down payment by that.

[Epiphora]

Thanks for the reply. The 4.7% was the best I could do considering I'm still in training and wanted to defer payments until August. I was only eligible for one company (Common bond) but considering the loans had an average of 7.2% interest between all of them, it was an improvement so I went for it.

I've been told I can refinance once I get that first attending check in August and qualify for better interest rates then, and might go for a variable loan. Would make sense if I plan to pay it off so quickly- I guess in my mind I was factoring in potentially having a baby in the next 1.5 years and scaling back how much I work and take in, so I wanted to allow some wiggle room in case I end up taking longer to repay the loan. Still, if I'm able to pay a significant amount of it down within 12 months of starting working, it would probably just make sense to still do a variable loan.

Thanks again for the input!

[retinadoc]

If it were me, this is what I'd do:

1. Pay off loans right away. Think of it like a guaranteed 4.7% return. I'd take in any market, but would be even more inclined to do so now with current equity valuations *cough*market timing*cough*

2. Keep $100K in your emergency fund.

3. Take the leftover $100K and put in your home fund, plan on building this up to $150-200K over the next 2 years. ~$3-4000/mo.

4. Obviously backdoor Roth, 401(k), etc.

5. Invest any extra (you will have lots :P ) into a taxable brokerage account according your investment plan.

 

Are you planning on loan forgiveness program?

[Epiphora]

Thanks! I am not planning on loan forgiveness because I only have 30 months of payments towards the 120 required, and for me to make standard $4400/month x 7.5 years at this point would cost me. Once my husband and I started filing taxes together, his income kind of screwed my IBR payments. I know, it was a big mistake not planning on forgiveness from the beginning- but from where I am now it makes sense for me to refinance since I'll pay less by paying them off sooner.

Wish I had planned better from the start, although I couldn't have sustained the IBR payments in residency after we were married, and us filing jointly has saved us about $25k in taxes each year so that off sets it a bit.

[Gasemup]

Not that this matter too much, but you didnt mention your age or when you want to be financial independent.  Considering you have 400k in retirement your husband must have been out for a while or this a second career.  Many of the docs on this forum are trying to be FI after 15-20 yrs at 1/3 of your incomes.  If your fugrual, your basically going into the game as the heavy favorite to win.  In other words, you're in great shape to do whatever you want and come out a winner.

-Heres my 2 cents, cut your emergency saving down to 50-100k, you'll make 50k/month with no real expenses.  What emergency will you not be able to cover with even one income?!

-Use the 100k to pay toward your loans a pay the rest in the next 1-2 years.

-Start saving 15-20k / month for the house and pay off your 700-900k home in the next 5 years.

-Be FI within 10 years.  Quick math, with 400k in retirement, if you start putting away 25k/month @6% growth you would have close to 5M in 10 years.

Id say good luck but you wont need it

[PhysicianOnFIRE]

Wow! You're looking at income of > $1,000,000 a year in a few short months.

I would attack the loans and pay them off quickly as you suggested. 4.7% guaranteed is an excellent return.

With take-home pay in the neighborhood of $600,000 a year, you could pay off the loan in one year and live pretty large on half of what's leftover. Once you're debt-free, you could bank all of one income and half of another if you choose. You'd be financially dependent within a decade and can then choose to do whatever you want in life. Upgrade your lifestyle, work less, direct more to charity, plan to leave a legacy, etc...

Cheers!

-PoF

[jhwkr542]

I think the biggest variable that needs to be decided is when you want the new home.  If it's in a year, that's a different savings timeline than in 2 years.  Try to pin that date down better.  That will allow you to know when you need to have the money at hand and will allow you to know how aggressive you can pay down loans.  This really only applies to your emergency fund because I doubt you need that much cash on hand.  So if you're moving in 2 years, throw $100-150k of the EF at loans.  If it's in a year, only use $50-100k.  You'll be able to replenish the EF/downpayment cash in no time.

I wouldn't go in the market right now because you have a guaranteed 4% return on money right now.  Also, you will never need to have a huge exposure in the market because you don't have to take on that risk with your income.  Most of us want help from the markets to make our portfolios grow so we can reach FI earlier.  When you're bringing in that kind of earned income, you don't need to have huge returns on your money in the market.  You want safer investments.  You'll reach FI very, very quickly just from your income alone.

[Craigy]

Just payoff your loans aggressively.  You are bringing half the money to the table so you should be able to do that without him complaining.  Worst case, he'll whine about it for a year but then they'll be paid off.

How much do you need for a house down payment?  Sounds like you're already there with $200k in cash.  You should be able to avoid a PMI with a doctor loan if you have to.

With that much salary, worrying about student loans and saving a down payment is just a matter of dragging your feet for a few months or a year.

[Hatton]

Congrats.  You have a great future with that much income.  My two cents make sure both jobs are stable and that you both like them.  Watch for burnout.

[childay]

You don't mention your current monthly spending overall.  Unless you are living REALLY large you shouldn't even be worrying about this.  I would however spend some of your EF (on your loans), we don't keep that much cash on hand.  This is assuming you have own occ disability insurance for both of you.  You will be able to pay for the house and pay off your loans no problem.

[RogueDadMD]

Epiphora wrote:

I’m finishing fellowship in 3 months and the hubby already is an attending; starting in August, we’ll both be starting jobs where we’ll take home total ~$49k/month after taxes (his salary will be $550k+ bonuses, mine is $475k). Here’s a breakdown of our expenses:

 

-I just refinanced my student loans of $334k @4.7% x 7 year fixed, payment will be $4.7k/month. Hubby has no student loan debt

-Hubby pays child support of $2.5k/month, no kids of our own but hoping for in near future

-We are looking to rent initially at around $2.5k/month and save to buy a home (next year or two?) with max budget of $700-900k

-No other debts, no major expenses anticipated, we are both pretty frugal

-Have about $200k in cash/emergency fund now between us, $400k in retirement funds

-Have all our specialty-specific disability insurance & life insurance in place

 

My question is: How would you divide up the money each month? My major instinct is to pay off my loans, and quickly. Was thinking of paying $14k/month (triple payments) and paying them off in a little over two years- or even faster than that. Hubby is concerned that if we do that we might be losing out on returns from putting that money in the market instead. In my mind, saving that interest is guaranteed money in our pockets.

Also, we want to save for a down payment on a house to avoid PMI when we buy- how would you decide what to save per month for this versus what we save for retirement? We had a ball park number of $10-15k/month to bank for savings, but don’t know if this sounds reasonable or if we are overshooting here.

Appreciate any input! I didn’t handle my student loans in the best fashion (didn’t know about forgiveness until I was a third year resident, and deferred payments during the first half of my residency) so I want to make sure we go forward on the right foot here on out.

 

 

 

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As long as you aren't already spending massive amounts on a fancy lifestyle the order of operations doesn't matter much.  A $200k cash emergency fund is overboard unless you have massive expenses to cover.  You could use half of that and monthly cash flow to pay off loans in under a year.  If you need the home soon for some reason then plow more money into that fund for the downpayment, hit that goal and then pay off loans.  At that point maximize your retirement accounts and go crazy like Physician on Fire making a massive investment account and you can retire in 10-15 years or back off your work in 5-10.

[Kamban]

Can you both live on his salary alone for 1 year. If so, then you can pay $100K from your emergency savings to bring the loan to $224K. You can then pay off the rest from your salary of the 1st year, even after taxes are paid and your retirement accounts are funded.

This way, should you decided to have a baby in 2 years and want to cut down the work load a bit you are not worried about student loans. You can save enough in year 2 for the down payment of the house.

[Dicast]

I would take whatever your budget line is for the loan payoff vs invest and split it 50/50 for payoff and investing.  If the market tanks then you can be happy half of it held its value and if the market rockets up you can be happy that you didn't miss the ride.  In 10 years it probably won't matter much as the income is so much higher than the overall debt.  If you are really frugal people, amassing a massive horde of money should not be a problem.  The question really is "what can you do to prevent yourselves from having a crazy surplus?".  Watch your fixed expenses.  Before long you may think a 1.5-2 million dollar home isn't much of a stretch...because it probably won't be crazy on an income to debt level if you're both working.

As others have said, I would re-estimate the needed size of your emergency fund.  You both have disability coverage that hopefully would kick in long before you could deplete that fund of 200K.  200k/12 months is 16k a month.  16k-child support-rent-loans=7k left over to live on each month.

[Hatton]

Dicast makes some good points.  I like use half of the emergency fund now.  Refinance to low variable rate when you land a job. Then use excess 50/50 to invest and payoff loans.  You will be more than fine.