Posted Oct 01, 2008 05:55 pm CDT
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.”