How lawyers can dig themselves out of debt and plan for a future (podcast with transcript)
Stephanie Francis Ward: Think you might never be out of debt–let alone be able to plan for retirement–what with law school loans, credit card debt and living expenses? I’m Stephanie Francis Ward, and when we return, some financial experts will tell us how getting to a better financial place may be difficult, but it’s not impossible.
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Stephanie Francis Ward: One thing that I am curious about: I think this an issue for many people, not just lawyers, but what are some things young lawyers should do but are not, in terms of saving for retirement? Susan, do you want to take that first?
Susan Berson: Prioritize. Retirement savings is important, but you have to first prioritize what your short-term and your long-term financial goals are. And my suggestion in terms of prioritizing your financial life would be that after you land the job, the financial prioritizing I suggest is to build an emergency fund equal to at least three to six months of your living expenses. Once you get that in place, then look at prioritizing how you’re going to pay off whatever consumer debt that you’ve been living on, and law school, and college, unless a 401K option exists. And then, you’ve got to do some math.
You’ve got to calculate what the tax-deferred deposits would be, along with whatever the employer-matching contribution is to determine overall the financial impact for you on apportioning the money between your consumer debt and your retirement savings.
Stephanie Francis Ward: Susan, just to be devil’s advocate, as soon as you hear that “save three to six months of savings,” oftentimes people’s response is, “That’s impossible.” When you have a client who says that, or when someone says that to you, what do you tell them? How is it not impossible?
Susan Berson: In my opinion, lawyers as a profession have a certain amount of economic fragileness. And it’s in your best interest to have some sort of emergency fund set aside, because being a lawyer does not guarantee that all those accidents and mishaps that we are normally helping clients with won’t happen to us. And it also doesn’t guarantee job security, unfortunately, in this transitioning legal market. So believe it or not, you’re going to be putting yourself in a bigger financial hole if, for example, something happens that’s unforeseen and you have to miss a paycheck. So what I usually tell folks is that you need to look at not just your expenses, but go through and figure out where it is you can carve out just a little bit, even one percent to put towards some kind of emergency fund.
The mistake that I see, not just young lawyers, but young professionals new to investing, is to think “I can sacrifice that emergency fund and just dump it all in my retirement and put it in the market.” Right now when we’re recording the S&P 500 has hit some historic highs, and human nature being human nature, you start to get wound up in the emotion and think “I can just get in on it, too.” And what happens is at some point, you know, I hope an emergency doesn’t happen, but obviously by definition it is an emergency and we can’t tell. So if you’ve got all your money in something that is a retirement vehicle, when you go to cash it out you’re going to put yourself in a bigger financial hole because you’re going to have penalties and likely tax issues.
I deal with tax issues in my practice, so I normally have taxes on the brain, and you’re going to have consequences there, too. So it’s really in your best interest to try and figure out how you can carve out little bits and pieces from already what are the competing demands on your paycheck, but to first focus on getting yourself an emergency find and then go from there.
Stephanie Francis Ward: And what do you—this would be a question for both of you. What do you find people usually can cut out to save money that maybe they don’t realize at first.
Susan Berson: Well, in terms of getting ideas for how you can save, there are different websites that I normally direct some folks to. There’s one called the Ways to Save Calculator. If you want the website it’s www.bills.com/ways-to-save. And what I like about that calculator is you can go in it and just plug in different things, like a latte habit or something like that. Or, if you have some more habits that are better—subjectively I would say better—to be broken, such as smoking, those sorts of things, you can calculate how much you spend on cigarettes and how much that could add up in terms of where that money could be going to helping you financially in your overall health.
So there’s just one calculator as to how you can kind of personalize it. Because really, you know, retirement savings and financial planning is all about subjective, and your own needs and wants, and that’s a good calculator to take a look at.
Stephanie Francis Ward: Anthony, do you have tips on paying down your credit cards other than just put every penny you can towards that debt, when it’s paid off, what are some success you’ve seen people have with that?
Anthony Sprauve: Yeah. I think what some people can perhaps sometimes get overwhelmed in that they might have a couple of cards that are carrying balances. And like which one do I pay first, or do I pay them all at the same time? And it really is—you should take a look at whichever card has the highest interest rate and focus on that one. And so, paying that one down as quickly as possible, because saving on that interest rate is going to save you money. And if you’re putting a lot, relatively a good amount towards paying down a balance on one particular card, you’ll feel good, I think, about seeing that balance come down quickly.
And then when you get that paid off, you move on to the next one with the next highest interest rate. It can sometimes psychologically feel better to get one paid off and then move to the next, versus incrementally just moving all of them just a little bit.
Stephanie Francis Ward: What kind of success stories for the both of you have you seen, where somebody maybe with a bit of a financial mess or rut, didn’t have much savings, had a fair amount of debt, was a lawyer, and they got it fixed so it was better. Do you guys have nay stories you can share with me about situations you’ve seen?
Anthony Sprauve: I don’t have any particular stories, but it’s amazing how quickly just kind of putting and keeping your nose to the grindstone can make a difference. The good news is that your FICO scores are continually being evaluated and can change both up and down. So by applying good credit management habits and sticking to them, you’ll start to see improvement in your score fairly quickly. And that goodness sort of reinforces more good behavior. And so even though someone could come out of law school with a lot of debt, whether it’s loans or credit cards, because they’ve been living on their credit cards, and can feel like, “oh, I’m never gonna get out of it,” in a relatively short amount of time—in a few years even—someone can be debt free, can have a great FICO score, and can be in a really strong financial situation. Having some savings for that emergency, having access to low-cost credit when they’re ready to do that, and having low debt.
Stephanie Francis Ward: Tell me in terms of credit scores, how do they figure in for young lawyers in terms of retirement plans?
Anthony Sprauve: Well, I think a good credit score allows you to access credit at a low rate. And so a lot of times you will find people as they’re nearing retirement thinking that they don’t have to worry about credit, but thinking about that possible emergency. Maybe, the car that you’ve paid off suddenly dies and you have to purchase a new car. Or something else happens where you have to apply for some credit. It’s always good to have a good FICO score, a good credit score, in order to be able to get the best deal possible for any kind of credit you may need at any point in your life, whether it’s as a young lawyer starting out or, a lawyer in retirement, or near retirement.
Stephanie Francis Ward: Let’s talk again back to the savings, and retirement, and paying down debt. I’m curious for both of you, do you see many young lawyers who do have the good big-firm jobs and are getting bonuses, or even the smaller firm jobs that give bonuses, do you see very often those folks using that money just for savings, or just to pay down loans, or debts?
Susan Berson: My advice is always that with bonuses you do your future self a favor by using at least some of that bonus to pay down consumer debt. You know, that being said, there’s no shortage of opinions and methods on how best to invest that money. But paying down your debt is always what I recommend because the money that you’re paying on interest is money—you know, every dollar you pay on interest is a dollar you’re not getting for whatever your goals are.
Stephanie Francis Ward: I’m going to assume you would probably advise paying down consumer debt and then paying down law school loans, is that correct?
Susan Berson: You’re gonna want to attack the student loans. More people are graduating with both debts; student loans and credit-card debt. So it’s pretty common for them to have both as young lawyers.
Stephanie Francis Ward: And Anthony, do you have thoughts on that?
Anthony Sprauve: Yeah. I actually—I absolutely agree with that. I mean, because typically you’re going to see a higher interest rate on consumer debt, so you really want to wipe out that consumer debt as quickly as possible in order to have more income available to pay down student loan debt. And to the point to with the goal of ultimately getting debt-free, because the money that you’re spending on interest rates isn’t helping you at all. It’s just flying into the wind. So you really want to get out from under those interest rates and be able to apply your money to your retirement, your savings, and the things that you want to do with your life.
Stephanie Francis Ward: What advice do you have for the young lawyers who are not as lucky as others with finding the jobs that pay a fair amount and give bonuses? I’m thinking a lot of those folks, they really feel burdened right now with credit-card debt, and law school loans, and maybe undergraduate loans, as well.
Anthony Sprauve: Well, certainly you don’t want to—if you’re feeling overwhelmed with debt, you certainly want to do everything you can to avoid taking on new debt. And making some of the sacrifices necessary to paying down that debt. Giving up something as simple as—maybe giving up those lattes every day, you know that kind of thing. And looking at—setting out a plan and a strategy and saying what are my debt-reduction priorities? What am I gonna tackle first? And keeping track of that, so you feel like you’re making progress and you feel like you’re chipping away.
Susan Berson: There seem to be two different camps. There are lawyers who graduated into this recession with a job and debt. And then there are lawyers who are still looking for jobs. If you’re a lawyer who graduated with a job and debt, I think saving and paying down that debt is certainly attainable. As to retirement, it’s certainly attainable; it just may seem kind of elusive right now, depending on what your expectations are and the amount of debt you have. So for those folks, either way you’ve got to get a hold of how you’re going to handle your debt. And if you’re a couple, if you’re married, if you’re contemplating marriage, what I always stress is that you’ve got to sit down as a couple and truthfully, calmly, realistically, determine how best you’re going to handle that debt.
And come to an agreement as to what your plan is for tackling debt. When you’re talking about tackling student loan debt it means looking at repayment options, consolidation, humanitarian and public sector job searches. Of course, you know, those are eligible for loan forgiveness. And then, income-based repayment plans. There are all sorts of opportunities out there for you to try and find out how best to find an opportunity that will work for you.
If you go to a website I like, it’s called SmarterBucks.com. They have some blogs written by folks who have conquered their student debt. And when I say conquer, I mean they’ve paid it off within five years. And they can share with you different stories about what worked for them.
And I think that’s a good idea, of looking at those sorts of things, because oftentimes I meet with young lawyers who are just overwhelmed by all the new demands on their time in the practice of law. And then you add the fact that student debt and credit card statements are coming. They’ve got to find a way to not just prioritize, but get a handle of things. You’ve got to focus on what you can control first.
Stephanie Francis Ward: Well, it’s the young lawyer who’s in the situation where they have a lot debt, and they have a hard time finding a job, or a job that pays a wage they can live on. And they say, “Susan, I don’t know if I’ll ever be able to retire.” What do you say to them?
Susan Berson: Well, if that’s the question—I mean, as I said retirement is possible, it just means that you’re going to have to figure out first and foremost what your expectations are for it, and the amount of debt. The personality of being a lawyer is such that you conquered three years of law school. Law school is rough for anyone, but it shows you how the determination, the drive, to make things happen. So you got to look at your debt and figure out how aggressive you can really be in getting that consumer debt paid off. If you’re looking for work, if that’s what your status is right now.
I tell folks that, obviously retirement is not going to be on your radar because you have to figure out how to pay your daily bills and tackle those debts. But you still have to know what your options are for student loans in terms of deferment and consolidation. And job search wise, my suggestions are always to get involved in whatever groups you have available to you; alumni networks, local bar associations. The bar associations I’m involved in, we have mentorship programs and career advice. If you’re interested in hanging out your own shingle, there are programs offered by all sorts of state and local bar associations on how to do so.
I’m involved in women’s professional organizations. We’ve put on all kinds of programs about how to start your own business and develop a business plan, and do so with student loans. And to conquer those issues, if you are receptive to trying to find some time to make opportunities for volunteering there are lawyer-dominated volunteer efforts like CASA and Wheels for Heroes Foundation, even Food From the Bar. The point of making that time—even though you’re already looking for jobs and consumed by that kind of issue—the fact is when you’re making that time and you’re volunteering activities include other lawyers, you’re making those connections to try to advance your career forward. And your most established lawyers are always happy to sit down and talk with you about what worked for them if you’re willing to make the time to listen and connect with them.
If you’re willing to relocate, there is a planner that I like. It’s called esplanner.com. The basic version is free. The reason I like it is because you can go on it and manipulate different numbers and learn—if you’re willing to relocate, what your expenses would be in say a different city. If you’re living in New York or D.C.—where I started my career out in D.C.—how there’s a Starbucks on every corner. Well, in D.C. there are 20 lawyers on every corner.
So if you’re in a city where there are a bunch of lawyers and they’re all doing exactly what you want to do, you’re going to have to make some decisions about either how you’re gonna separate how you can add value to a client, or how you’re gonna figure out how to adjust whatever it is you’re doing to still get business while there’s so many other lawyers out there doing what you do.
Stephanie Francis Ward: I think a lot of young lawyers who are maybe struggling right now would be surprised and perhaps heartened to know that the really successful lawyers with small and solo firms that we think of now, they struggled, too. So, it’s not—it’s different times, but it’s not just you, if you feel like you’re having a terrible time. It’s not just you. Would you agree?
Susan Berson: I would agree. And it depends on how long you’ve been looking for a job. I mean, if you’re pondering how to better your job search, or if you’re pondering are there other things, other pursuits you can do with a law degree, there’s another website called jdcareers.com out there. It has different postings, and different tips, and different alternatives. And in this market, it’s just a situation where you have the Millennials that really haven’t had the benefit, I think, of having a good economy yet. So when you graduate into a recession, your eyes are a bit more wide open than perhaps some of the previous generations.
But there are opportunities, it’s just unfortunately you’re going to have to work a little bit harder to try and find them than perhaps previous generation of lawyers had to.
Stephanie Francis Ward: Okay, that’s everything that I have. I want to thank you both so much for your time.
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It might not be easy, but young lawyers can dig themselves out of debt, start an emergency fund and even save for retirement, financial experts tell ABA Journal reporter Stephanie Francis Ward.
ABA Journal: “Road to retirement: Ways to make retirement anything but resignation” (January 2014)
In This Podcast:
Susan A. Berson
Susan A. Berson is an attorney and author of several finance and tax books for lawyers. She is also the author of “Road to retirement: Ways to make retirement anything but resignation,” the January 2014 cover story and the first in a new ABA Journal series on how lawyers can prepare for retirement. She may be reached at [email protected].
Anthony A. Sprauve
Anthony A. Sprauve is senior consumer credit specialist and director of public relations for FICO. Previously, he was Microsoft’s director of public relations and analyst relations.