Going to grad school, help for a good financial transition?

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throwitawaynoww
Posts: 5
Joined: Fri Mar 12, 2021 6:49 am

Going to grad school, help for a good financial transition?

Post by throwitawaynoww »

I'm 34 and was recently accepted to be a funded PhD student for 3 years. I have a few more months of earning good money and I want to make sure I'm in a decent financial situation. I have some options, it's somewhat complex.

As I wrap up working, I can either put $15k into my 401k to max it out or receive it as about $12k cash (after taxes).

I have a nice car, I don't need a lecture about valuing a nice car. I could either keep making the $700/mo payment, refi to a $480 payment, or cash out refi to keep the same payment and get $10k as cash. It doesn't make sense to me to lose value on a trade in for a beater when my post-grad income is expected to be 6 figures.

I own 2 well-producing rentals and a primary home, so I do need a little cash on hand to keep them churning. The rentals cover my primary mortgage after expenses.

I want to max out my 401k for this year, and if I did, I would have no e-fund come April 2022 (paying taxes). However, my stipend and rental income nets me about $600/mo after all expenses including the $700 car payment, so I would be able to stay afloat. This leads me to want to cash out refi my car to get what amounts to a 2% student loan. This would give me a comfortable enough cash reserve (~$10k).

But there are other options and I want to hear if I should think about them more. I could not max out my 401k and take as cash reserve or even pay down the car to refi to a $300/mo payment. But being in the 22% bracket, that doesn't seem attractive.

I could also max out the 401k, refi my car to a slightly lower $480/mo payment, and live without amazing cash reserves, and in the case of a real emergency, I see some stuff or withdraw from my Roth IRA.

I dunno, lots of options. If you got this far, thank you for reading. Any help would be appreciated.
Jack FFR1846
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Re: Going to grad school, help for a good financial transition?

Post by Jack FFR1846 »

Having been through grad school myself while renting out my home, here's what I would do if Doc Brown shoved me into the DeLorean and sent me back to 1987: Sell the house.
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finfire
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Re: Going to grad school, help for a good financial transition?

Post by finfire »

Finding it difficult to discern what you need? Do you need more cash reserves? In this case it's easy: get rid of expensive car.

A phd is difficult enough, I wouldn't stress over funding retirements, but if you have some left over, contribute....
Topic Author
throwitawaynoww
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Joined: Fri Mar 12, 2021 6:49 am

Re: Going to grad school, help for a good financial transition?

Post by throwitawaynoww »

Jack FFR1846 wrote: Fri Mar 12, 2021 7:45 am Having been through grad school myself while renting out my home, here's what I would do if Doc Brown shoved me into the DeLorean and sent me back to 1987: Sell the house.
...and...rent? Ehh. My mortgage payment is 1150 for 1800sqft, and it is a long commute, but I don't need to commute every day. I like my house a lot. 1-2 bedroom apartments are maybe cheaper by $200 on average at best. I didn't mention, but I'm advertising for a roommate at my primary, and if I pick one up, any second thought about money vanishes.
Topic Author
throwitawaynoww
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Joined: Fri Mar 12, 2021 6:49 am

Re: Going to grad school, help for a good financial transition?

Post by throwitawaynoww »

finfire wrote: Fri Mar 12, 2021 7:51 am Finding it difficult to discern what you need? Do you need more cash reserves? In this case it's easy: get rid of expensive car.

A phd is difficult enough, I wouldn't stress over funding retirements, but if you have some left over, contribute....
Man, yeah, I've been thinking about the car. I wouldn't hate the idea of trading in but here are the details on that:

-It has dents from acorns and cracked headlights because I'm an idiot with a pressure washer. So those are losses in value I have to realize if I do anything with it. They're unrealized losses if I just keep driving it.
-It has a 5 factory year warranty, but also isn't amazing on gas, however very comfortable, high tech/safety, and fun to drive.
-To go hard, I could get a car with a loan probably for $15k-$20k after rolling negative equity. It would be reliable and a little better on gas, but lose most of the comforts/warranty.
-If i went with a cheaper car, I wouldn't be able to use it as a money printer, I would just have a lower payment, maybe going from $700 to $300. I could make that happen by foregoing my 2021 401k max and paying down the nice car, or, I could get the cheaper car and max the 401k.
-I have a 2.5 hour commute to campus round trip at least 2 days/week.
DocInColo
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Re: Going to grad school, help for a good financial transition?

Post by DocInColo »

throwitawaynoww wrote: Fri Mar 12, 2021 8:22 am
finfire wrote: Fri Mar 12, 2021 7:51 am Finding it difficult to discern what you need? Do you need more cash reserves? In this case it's easy: get rid of expensive car.

A phd is difficult enough, I wouldn't stress over funding retirements, but if you have some left over, contribute....
Man, yeah, I've been thinking about the car. I wouldn't hate the idea of trading in but here are the details on that:

-It has dents from acorns and cracked headlights because I'm an idiot with a pressure washer. So those are losses in value I have to realize if I do anything with it. They're unrealized losses if I just keep driving it.
-It has a 5 factory year warranty, but also isn't amazing on gas, however very comfortable, high tech/safety, and fun to drive.
-To go hard, I could get a car with a loan probably for $15k-$20k after rolling negative equity. It would be reliable and a little better on gas, but lose most of the comforts/warranty.
-If i went with a cheaper car, I wouldn't be able to use it as a money printer, I would just have a lower payment, maybe going from $700 to $300. I could make that happen by foregoing my 2021 401k max and paying down the nice car, or, I could get the cheaper car and max the 401k.
-I have a 2.5 hour commute to campus round trip at least 2 days/week.
We need more info...

1. Are any of your properties paid off?
2. What are your monthly expenses, including all mortgages, debt, car payments, etc.?
3. What is your monthly income?
4. When you say you "net" $600 a month, is that after paying EVERYTHING including money for groceries, your 401k contribution, etc?
5. How much longer do you have on the car note? $700 a month for what sounds like a pretty dinged up car you are underwater on is insane.
6. No e-fund or only $10k when you have two rental properties is also insane. What are you going do to if something major happens and it costs $5-6k to repair? Wipe out your entire bank account? What happens if tenants stop paying rent and you don't have income for a couple/few months while you try to evict them?

Sorry for being harsh, but it sounds like you have a financial mess on your hands. I would not be concerned about maxing out your 401k until you had less expenses and more of a liquid cushion. Consider selling one of your rental properties, they are not always going to be a cash cow.
Topic Author
throwitawaynoww
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Joined: Fri Mar 12, 2021 6:49 am

Re: Going to grad school, help for a good financial transition?

Post by throwitawaynoww »

DocInColo wrote: Fri Mar 12, 2021 9:22 am
We need more info...

1. Are any of your properties paid off?
2. What are your monthly expenses, including all mortgages, debt, car payments, etc.?
3. What is your monthly income?
4. When you say you "net" $600 a month, is that after paying EVERYTHING including money for groceries, your 401k contribution, etc?
5. How much longer do you have on the car note? $700 a month for what sounds like a pretty dinged up car you are underwater on is insane.
6. No e-fund or only $10k when you have two rental properties is also insane. What are you going do to if something major happens and it costs $5-6k to repair? Wipe out your entire bank account? What happens if tenants stop paying rent and you don't have income for a couple/few months while you try to evict them?

Sorry for being harsh, but it sounds like you have a financial mess on your hands. I would not be concerned about maxing out your 401k until you had less expenses and more of a liquid cushion. Consider selling one of your rental properties, they are not always going to be a cash cow.
1. No
2. Monthly expenses: about $5.5k/mo, includes capex/repairs saving for duplexes and all tax payments
3. Monthly income will be $6.5k/mo gross
4. Sorry, actually, the net $600 included monthly Roth contributions. As 2 and 3 here show, before IRA contributions, come out with about $1k/mo, and assume 500/mo IRA contributions, so about 500-600/mo after that. Yes, so after everything.
5. When I transition to grad school, I will owe $30k on it with 4 years left. I could refi down to a $480 payment, or trade in for an enjoyable less expensive car for a $350 payment. Or I could get a Ford Fiesta with a $250 payment. Or, cash out refi the current car to get $10k cash.
6. I have some moderately liquid assets and and 100k in 401k to draw on in a real emergency. It's not uncommon to not carry a true e-fund in those circumstances, only a smaller cash pool to keep things moving, which is what I feel pretty safe with. The scenarios you say are true and worth consideration, but my risk tolerance is such that a 10% hit on early withdrawal, or withdrawing from my Roth IRA, or setting up a HELOC in the next couple months to use, doesn't seem worth keeping cash out of the market. Dunno, foregoing maxing my 401k for 2021 is an option, it just doesn't feel great missing out on tax advantaged space.
Topic Author
throwitawaynoww
Posts: 5
Joined: Fri Mar 12, 2021 6:49 am

Re: Going to grad school, help for a good financial transition?

Post by throwitawaynoww »

I think options boil down to this:

1. Max 401k + cash out refi current car = $9k cash after year 1 of school
2. Forego 401k + cash out refi current car = $21k cash after year 1
3. Forego 401k + trade in car or refi balance = between $13.5k to $16.5k after year 1 (depending on car)
4. Max 401k + trade in car or refi balance = $1.5k - $4.5k after year 1 (depending on car)

This all assumes IRA contributions, so there's an additional $500/mo on the table.
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