Physician Cash Flow, Debt Priority, and the Upgraded House
Priya, 38, is a hospital-employed physician with a $310,000 salary and a 6% 401(k) match. She has $180,000 in federal student loans at 6.8%, a $520,000 mortgage at 6.25% with a $4,850 monthly payment, $22,000 in credit-card balances at 24.99%, and $2,400 monthly childcare for two children. Her savings account holds $8,000; her 401(k) balance is $210,000. She contributes 6% to the 401(k), drives a leased SUV at $720 per month, and spends about $1,900 monthly on dining, travel, and subscriptions. She wants to buy a $1.2 million house next spring, saying the payment will be about the same. Her only insurance is group term life of one times salary and group long-term disability. She asks whether she should pause 401(k) contributions to pay down debt and save for the down payment.
1. Prepare a framework cash-flow analysis and assess Priya's savings rate and emergency reserve.
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Start with annualized fixed outflows:
- Gross salary: $310,000.
- 401(k) deferral: $18,600 (6%).
- Mortgage: $58,200.
- Childcare: $28,800.
- Lease: $8,640.
- Credit-card minimum at roughly 2%: about $5,280 per year.
- Student loan payment on a 10-year standard schedule: about $24,900 per year.
- Discretionary spending: about $22,800.
Fixed obligations plus discretionary spending consume roughly $148,600 before income taxes, food, utilities, and insurance. The household saves 6% of pay, all inside the 401(k), and holds $8,000 of cash-less than two months of fixed obligations. The 401(k) is not an emergency fund. The first task is to build a three- to six-month reserve for essential expenses, then redirect excess cash flow. The analysis should distinguish essential from discretionary spending so the client can see that the lease and $1,900 of discretionary spending are the available funding sources.
2. Evaluate whether Priya can afford the $1.2 million house next spring.
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A $1.2 million purchase with 20% down leaves a $960,000 mortgage. At 6.25%, principal and interest are about $5,910 per month. Adding property taxes, insurance, and maintenance, the payment is likely $7,500 to $8,000 per month-not about the same as $4,850. She would need $240,000 cash to close plus reserves; she has $8,000. She is not in a position to buy next spring without selling the current home, using a bridge loan, or delaying.
Use an affordability test: housing payment no more than 28% of gross monthly income ($7,233) and total debt no more than 36% ($9,300). The proposed payment likely breaches both once student loans and the credit-card minimum are included. The current mortgage should also be compared with the new rate and transaction costs. Recommendation: delay the purchase until debt is reduced, reserves are funded, and the payment is tested against a realistic budget.
3. Recommend a priority order for the 401(k), credit cards, student loans, and emergency fund.
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- Keep the full 401(k) match. At 6%, she is capturing it. The match is an immediate return and should not be paused for low-interest debt.
- Build the emergency fund. Redirect the $1,900 discretionary spending and lease savings toward three months of essential fixed expenses, roughly $25,000 to $30,000.
- Pay the credit cards. At 24.99%, this is a risk-free 25% return. A 0% balance transfer is reasonable only if the fee is low and payoff discipline is realistic.
- Evaluate the student loans carefully. Federal loans at 6.8% may qualify for Public Service Loan Forgiveness or income-driven repayment. Do not refinance federal loans without understanding the loss of forgiveness and hardship options.
- Delay the house purchase until credit-card debt is gone, reserves are funded, and the payment fits the affordability test.
- Add individual disability and term life coverage. Group coverage is not portable and may be capped; one times salary is not enough with two young children.