Business of Law
About That First Check ...
Manage your money now so you can gloat later
Posted Oct 1, 2008 11:55 AM CST
By Susan A. Berson
If you believe your firm offers a treadmill paved with gold and all you have to do is work hard to get your share of the fortune, this article is for you. The potential exists for an emotionally and financially rewarding career, but if you’re like most recent graduates, you have yet to learn the most important lesson: how to manage your money wisely.
The crucial subject of the do’s and don’ts of spending your paycheck is not taught in law school, and most employers will only educate you on how to increase your billable hours. Your paycheck is important, but it should not be your focus. Whether you’re earning $40,000 at legal aid or $160,000 on Wall Street, memorize the following rule: Focus on what you’re spending (and learning), not on what you’re earning.
This may seem counterintuitive, but I know of what I speak. I was in your shoes more than a decade ago. I have worked in government, been a partner at a top law firm and am now a partner in a firm I founded. To help you build wealth and enjoy a lifelong career, I offer the following seven suggestions.
1) Reward yourself: You are to be congratulated for all the hard work you’ve done and the sacrifices you’ve made. Not only have you successfully graduated from law school; you have successfully conquered the job market. While exciting, this can also be stressful, tiresome and just plain exhausting. So do reward yourself by budgeting in something more than a pat on the back.
Yet notice I used the B-word, budgeting. Everyone needs a budget. Yes, I know you’re going to be earning the highest annual salary you’ve ever experienced. However, the secret to financial success is not investing in the next hot stock pick but planning what your money will be used on. The budget is that plan.
Please note that a high-priced car only qualifies as a reasonably priced, budgeted trinket if you are debt-free and have three times the car’s sticker price in the bank.
I know you need transportation—that’s the rationalization every new associate uses to buy a new car. And it’s not just a new car. It’s a top-of-the-line, make-my-college-friends-envious, I’m-worth-it, high-end automobile.
I’m not saying that you can’t have or don’t need transportation—just not a $50,000 model, especially if you have student loan or credit card debt. To those who give you grief about driving your pre-owned Honda instead of the new, partner-size BMW, consider telling them to spend more time in the office instead of wandering around the parking garage. (Besides, as rap stars say, you’re not a real “playa” until you can afford a Bentley, so why waste money on something that will only pale in comparison?)
2) Do the debt: According to ABA statistics, if you’ve graduated from a private school you could be more than $78,000 in debt; for a state school, around $51,000. Should you be a member of one of these statistical groups, do not spend anything until you contact your student loan provider about what options exist for getting the best interest rate and a manageable monthly payment. You should also consider whether the tax benefits outweigh an early payoff.
Never default on your student loan. As Harvard law professor Elizabeth Warren once said, “Student loan debt collectors have power that would make a mobster envious.” This means if you should find yourself in such dire circumstances that you have nothing left to pawn for loan payments, contact your lender to see what options exist before the loan goes into default.
3) No charge: Don’t live your life on loan. In fact, you should be focused on paying off your debt. Only use a credit card when you know you can afford to pay off the balance when the statement arrives at the end of the month.
4) Max out on retirement: With age comes wisdom; with youth, compound interest. The earlier you start making contributions to your retirement account, the better. If your employer has a matching retirement program, enroll in it; otherwise you’re walking away from free money. Should you be really strapped for cash, consider that at 25, scraping together a $200 monthly contribution to an IRA could earn you nearly $500,000 by age 65, assuming 7 percent interest.
5) In case of emergency: Lawyers are not immune to becoming victims. A financial safety net cushions the blow, especially in the event of job loss. Understand that even though you excelled at law school, you are going to spend the next five years learning how to practice law. Being No. 1 in your class means nothing if you can’t keep the client happy. (Please note: Whether you’re in government or private practice, keeping the client happy means getting a favorable outcome, not giving the right answer to the legal issue.)
Once you are in the enviable position of having no debt after maximizing your annual retirement contribution, start an emergency fund equal to six months of your pay.
6) Rent, don’t buy: Unless you have a two-year guarantee that you will be living in the same location and earning at least the same amount of money (even with inflation), rent. Consider that in most cities, if you have to sell within five years, it is unlikely that you’ll have sufficient equity to recoup everything that went into purchasing your house, condo or townhouse.
7) Achieve, then acquire: While survey after survey reveals that most 20-to-30-year-olds prefer the Jerry Maguire-type mission statement of fewer hours and less money, the reality is that you need to make sure you add value. At a law firm, adding value translates to bringing in money. The best way to bring in money is to generate new and existing client business.
If you’re not from a wealthy family or lack well-connected friends, then value will have to mean skills for which the firm’s existing clients can be billed before your own rainmaking abilities kick in. (And in government, adding value is not quantified in dollars, but in legal skills.)
You have to be responsible for your own career satisfaction, and you have to spend your own time learning the area of most interest to you, especially when your employer needs you to work elsewhere. Find another 200 hours to research and write articles in the practice area you want to gain expertise in, and let partners in that area know of your willingness to help out.
You may even have to look outside the firm for opportunities. For example, I know someone who used up a week of vacation to serve as a volunteer trademark enforcer at the Olympic Games to gain experience in intellectual property matters.
Finally, the best reason to work on becoming the best lawyer you can be is so that you can actually practice law anywhere. Right now you may love even your security key card with the bad photo and cannot envision a Monday morning when you will not be at your desk preparing award-winning legal arguments. But let’s take a brief departure from the Isle of Happiness and visit the Land of Disenchantment: A law degree does not render you immune from employment fluctuations. In fact, attorneys change jobs at least twice in their careers.
Should you decide to take the optimistic, that-won’t-be-me approach many new associates take after they receive their first big paycheck, please do yourself one favor: Hold off on throwing money toward acquiring the accoutrements of wealth until your debt is paid off and your annual retirement contributions are maxed out. Five years from now you will be thankful that you did—I guarantee it.
Follow these seven suggestions and you can avoid the common financial mistakes that new lawyers make, as well as the financial setbacks that often result. You have the opportunity to become one of the fortunate attorneys who are prone to stating “I get to work” instead of “I have to work.”
What kind of spender are you?
The questions below are designed to provide an illuminating snapshot of the emotions and thought processes that may drive your buying decisions. Circle the answer that applies.
MOSTLY "1's" Investment Shopper-Generally, you're a smart shopper. You don't fall for the bells and whistles that are unneeded, and you don't buy cheap things that won't last. Things that have stood the test of time hold the greatest interest. You're in a place where you can truly appreciate quality over flash and fads. Let other people fall for the disposable, mass-produced look, you're too unique. Once you have a clear vision of what you want, you make a plan to get there. You likely break down big goals into smaller steps that make them feel more attainable. With each small step completed, you feel the satisfaction of accomplishment, and it helps maintain your motivation to stay on budget and move toward accomplishing your financial goals.
MOSTLY "2's" Impulse Shopper: You may understand that it's possible to look hot without melting your credit cards; however, even though you may only charge small amounts, or withdraw small amounts of cash, your money seems to leak out of your pocket almost instantly. When money is in your wallet, or in your bank account, you feel either compelled to, or fine with, spending it. Psychological studies suggest that many impulse shoppers range from frustrated 'creative' types who have imaginations that can fuel their shopping sprees to individuals with low self-esteem who may feel that they do not deserve to be prosperous. When you hand over your cash, you are handing over responsibility for your life or decision-making. Still doesn't sound like you, then maybe you are the deprived child. If treats were the cure for blue days, or if you were deprived as a child and always dreamed of getting yourself the reasonable things you were denied, you could be associating the purchase of inconsequential nothings with feeling good. Unfortunately, that good feeling likely ends when you look at your bank account balance. The good news is that while impulse shoppers may dig themselves into debt, they can recover. Try viewing the process of getting out of debt and managing money as a challenge, and use your creativity to find more satisfying ways to fill yourself up than mini- shopping sprees. Extending your creative ways to your financial world will give amazing results. If you can start to see saving your money as a challenge, then you may have fun finding creative ways to do so, and it can help you become more materially comfortable. Otherwise, being in debt for you will be like having a large ship steered by a very small rudder. You're staying afloat, and moving, but not going very fast and not getting very far ahead. If it helps to equate getting out of debt and building a savings program like work project, treat it like a challenging document production or due diligence task. Initially the mountains of documents and electronic information can be overwhelming, but when you break it down into smaller steps, completing the project becomes more attainable. Break your debt down into small pay offs, or your savings program into small deposits. With each small step completed, you feel the satisfaction of accomplishment. As you break your debt down into small pay offs, while building your savings up each month, with each small step completed, you'll feel confident and motivated to continue becoming debt-free and build your wealth.
MOSTLY "3's" Emotional or Vanity Spender: You're using retail therapy to fill a void. "I deserve to treat myself" or "If I only had that, my life would be better" are the classic lines. Whether it's insecurity, acceptance, anxiety or loneliness, the sooner you realize that money can't buy you a sense of peace for any of these feelings, the sooner you'll be able to become debt-free, financially stable and build wealth. Until then, you'll continue to use credit cards to supplement your income, regardless of whether you're earning $60,000 or $1 million, and you'll never get to where you need to be for financial success. Your purchases are largely the creation of vanity, rather than a logical need. Money can't buy love, or so goes the song. But, it also can't buy true respect or acceptance. Psychological studies suggest that emotional shoppers tend to search for these intangibles with the tangible. Splurges may be triggered by an insecurity or guilt, with the true motivation being reassurance. When you don't feel validated at work or home, if your first thought is to buy something to make yourself feel better, in lieu of spending, try substituting something else that normally makes you happy. Some emotional shoppers may also have a tendency towards the "Daddy Warbuck's" attitude; meaning, price is no option when it comes to my friends or family. Just because your love may be equivalent to Cartier doesn't mean that you have to break your bank account to buy a gift there, especially when you're charging it and won't have the cash to cover it when the statement arrives. Nor does it mean that the expensive gift will guarantee the return of true feelings towards you. For you, dealing with debt and risk is like anything else in life, you have to know where the line is that you won't cross, because there's always going to be someone bringing out some emotion that is ready to push you over that line, and if you haven't decided where your line is, you're going to get yourself in serious financial trouble. For all types of shoppers, a good software program can revolutionize, and streamline your budget planning to help you stay on track and achieve your financial goals.
Susan A. Berson is a partner with the Banking & Tax Law Group of Leawood, Kan. She is the author of The Modern Rules of Personal Finance for Professionals.