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  • What to do with flexible small surplus?

    Graduating resident here.  Got 4.25% 5 yr fixed refi w DRB and about to enter full repayment phase.  New job is IC.  Will be opening Solo-401K soon.  Have about 10k to play with in short time period before accrued interest capitalizes.  Originally, I thought I'd throw it at the loans, but then I was wondering if I should use it as starter money in the solo-K.  The contribution would definitely allow be to put more into the solo-K this year as not sure how much I'll be able to afford with only a half year of attending salary.  The first option probably "feels" better immediately but the second is likely the better one long term as I'm sure I'd beat 4.25% with the S&P.  Thoughts?

  • #2
    What do you mean that you "have 10k to play with?"  Do you have an emergency fund (3-6 months living expenses in cash)?  If not, use it for that and add to it if you need to.  If you already have an emergency fund, I would either throw it at your loans (you didn't mention what your loan balance is) OR put it in a backdoor roth.  5500 this year, 5500 next year.  The reason I say that is because it is already after tax money and makes more sense to put it into a Roth.

    When you do start working as an attending, set up your paychecks to automatically contribute enough money each month to fully max out your 401k (18k annually).  That way you're getting maximum tax savings by lowering your taxable income.  Then continue to contribute to a roth each year. Whatever else is left over should go to loans.

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    • #3
      Emergency fund is set.  Roths are funded.  Loan burden ~200k.  I understand how employer sponsored 401Ks work.  IC can contribute max of 53K / year (18K employee contribution + the employer (self) contribution) to a solo-401K.

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      • #4




        Emergency fund is set.  Roths are funded.  Loan burden ~200k.  I understand how employer sponsored 401Ks work.  IC can contribute max of 53K / year (18K employee contribution + the employer (self) contribution) to a solo-401K.
        Click to expand...


        $54k this year.  Why do you think you'll beat that rate with the S&P over the next 5 years?

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        • #5
          From what I've been able to learn, the avg inflation adjusted ROI for the S&P in recent past has been ~7%.  I guess bear markets can always happen...

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          • #6
            A simple amortizing loan with $200,000 principal, 4.25% APR, 5 year term will result in $22,354.67 of finance charges over that term...that's 11.18% of the principal, annualized over 5 years, a 2.14% annual "gain."

            Think you could out-earn 2.14% with that $10,000 over 5 years?  I'd say it's worth a shot, in my own personal opinion, but I'm playing with house money.

            I am on a crusade to stop people from thinking that paying off a loan at X% is a "guaranteed X% gain."  A shoot-from-the-hip estimate is that you'd gain half the rate with compounding gains to equal what you'd lose to finance charges.  I'm not saying people shouldn't pay their loans quickly, nor that there are not other reasons to pay down debt quickly, but make sure you're using proper math to make your decisions.

            Honestly: re-re-finance now that you're out of training.  While whether to pay them down early is a matter of opinion, it is a definite fact that you *should* be able to get a significantly better rate than 4.25% without cost.  SoFi is currently giving as good as 2.615% variable or 3.350% fixed.  Dropping that fixed rate by 0.9% will save you $5,733.69 in finance over 5 years for free; actually, they'll even pay you $300 to do it.

            With the variable rate, I can't tell you what it would be in the end, but interest rate risk is lower with shorter terms (like 5 years) and you want the interest rate the lowest when the principal is the highest.  With a 0.735% spread, I'd very strongly consider the variable if you're comfortable with it.

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            • #7
              If you have an emergency fund its a fine idea.

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              • #8
                Re-re-finance is a great idea.  Was exploring this with SoFi earlier this year but they wanted employment contract within 90 days of start date.  Will re-apply with them.

                So seems like consensus is likely fund 401K over paying the loan?

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                • #9




                  Re-re-finance is a great idea.  Was exploring this with SoFi earlier this year but they wanted employment contract within 90 days of start date.  Will re-apply with them.

                  So seems like consensus is likely fund 401K over paying the loan?
                  Click to expand...


                  I'm still concerned by the term "play with". If that is simply a turn of phrase that means you have a few extra months of money sitting in an account and you won't need it back in the short term (< 5 years), then either works for me.

                  I really don't understand what makes you so sure that you will beat 4.25% with the S&P. Underperformance is a lot easier to accomplish than you think.
                  Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    I hear you Johanna.  "Play with" means exactly what you said; meaning that after trying to the best of my ability to shore myself up upon residency graduation (disability, life, umbrella, roths funded, EF funded, loans refi, saving a little extra for taxes, plus living like a human) I have this little chunk of change that isn't expressly allocated for anything yet.  I think I might play it conservatively and just throw it at the loans tbh.

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                    • #11
                      If you can get your rate into the 3's or better with another refinance as suggested, I would just hold on to the cash and put it in a backdoor Roth.

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                      • #12
                        i think emergency fund is a different thing for physicians than perhaps other occupations.

                        if your employer is solid and you have the job skills your training says you are supposed to have, the things that can derail young careers are (lack of) ethics and behavioral variances.  people are not always self aware.

                        assuming those things are not in play, i see lots of the young graduates here (imo) try to optimize things too tightly.

                        if you have a few bucks, live a little.  if you can't bring yourself to do that, save for a down payment for a house.  yes i realize, you can get the money back from a roth, but there are frequently other expenses once you buy a home that crop up.  save a little more and retain flexibility for larger purchases that are coming.

                        or not.     people don't like to hear contrarian advice and usually the backfire effect occurs.

                        good luck to you.

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