Work with a financial planner
If your legal career is just beginning, it’s a good idea to sit down with a financial planner, said Kristin R. Brandli, a financial advisor with North Star Resource Group in Minneapolis.
“It’s the same reason that lawyers don’t represent themselves in court or doctors don’t operate on their kids; you need to have an objective point of view,” Brandli noted. “A financial professional can help educate you on your financial options, investment-related tax implications, and ultimately the ripple effects of making certain decisions. That person can help direct you, give you a road map, keep you accountable, and keep you on track to your goals,” she said.
On the other hand, the services of a financial advisor do not come cheap, said Danielle Schultz, principal of Haven Financial Services in Evanston, Illinois. Most fee-only financial planners charge between $175 and $300 an hour, depending on where they work and what the advisor’s focus is, and most advisors will take at least two to three hours to talk with you to discuss your financial goals, Schultz pointed out. Another type of financial planner is one who works on commission; this usually requires that you buy financial products that will generate a commission for them. Such products include mutual funds, insurance, and variable annuities. Furthermore, “you have to do a lot of work to assemble your paperwork for them, maybe more than when you do your taxes,” Schultz said.
Put together a budget
Whether or not you choose to work with a financial planner, putting together a budget makes good financial sense.
According to Brandli, budgets are “reactive” in that “they do a good job of showing where you have spent money, but not always where you should spend money going forward.” She advises new budgeters to separate their fixed expenses like rent, student loans, and utilities—expenses that are the same every month—versus variable expenses like groceries, gas, entertainment, and eating out.
“Once you start keeping track of those things, you will notice a pattern of things that are not in line with where you should be spending money, and those are the areas you should focus on to monitor your spending,” Brandli said.
Keeping your expenses down is another budgeting tip that you should adopt, said Schultz. “Keep your housing costs on the low end, not what somebody is willing to loan you, and not more than 28 percent of your income,” she said. “If you can keep it to that percentage, you will be able to save for other things. And try to pay cash for anything that’s going to go down in value like furniture or a car.” See page 38 for more information on mortgage loans.
Paul D. Edger, 27, graduated from Widener University School of Law in Harrisburg, Pennsylvania, in 2011, and practices in Mechanicsburg, Pennsylvania, specializing in general litigation and family law. He and his wife, Katelyn, 25, a music teacher, live in Harrisburg. “We’re looking for a home,” he said, “but we’re currently still renting a two-bedroom, 1,300-square foot apartment. I drive a Volkswagen Jetta, and we never let our credit card debt get out of control. We have about $3,000 in credit card debt. We usually make sure not to spend above our means and we put away a certain amount each month for emergencies; it ranges from $50 to $150 each month,” Edger said.
It’s not absolutely necessary to track every penny, but keeping a “mental envelope” of what you spend your money on is always a good idea, said Schultz. “I recommend that people divide everything into percentages, like ten percent goes into your retirement savings like a 401K that you don’t touch, another ten percent goes into saving for a goal like a car or debt repayment like a student loan, then I recommend 60 percent goes to fixed living expenses like food and rent. What’s left over, your discretionary money, goes to things like a vacation and charitable contributions: things you could eliminate if you had to. I see people get into trouble in the fixed income category; they get a house that is too expensive,” Schultz said.
Live within your means
It’s always a good idea to live within your means. Your means is whatever income you have coming in each month from any variety of sources, including wages, loans, or investment income. “Figure out what your fixed expenses are—your mortgage, cell phone, utilities—versus your other expenses, and don’t spend lavishly when you’re in law school or as a beginning attorney,” said Brandli. “Be more settled in your career before you buy a house because you might change locations.”
Busy people tend to eat out a lot. She added, “Be aware of what overspending will do to your budget.”
That’s certainly the philosophy that John Nasr adopts as a young lawyer specializing in the areas of bankruptcy, restructuring, creditors’ rights, and commercial litigation with the law firm of Gust Rosenfield in Phoenix. Nasr received joint law/MBA degrees from the Sandra Day O’Connor College of Law at Arizona State University in Tempe, in 2011, and currently lives in a 1700-square foot three-bedroom, two-bath house that he purchased in Phoenix in January 2013.
“The interest rates were low, the Phoenix market was depressed, and home prices were low,” Nasr, 29, said. “It was a good time to buy. My [home] interest rate is under four percent, I only had to put five percent down, there were no closing costs, no private mortgage insurance, and no payments for three months.”
Though Nasr, like many law school graduates, does have student loan debt, he pays extra on that debt each month. To further hold down his expenses, instead of driving a brand new automobile, he cruises around in a 2006 Nissan Sentra that has 110,000 miles on it.
“A lot of young lawyers work so hard in school and in their careers, and it’s really tempting for them to buy an extravagant car or take a luxury vacation and enjoy the fruits of their labor,” Nasr said. “I’ve decided to forgo the purchasing of a nice car or other nice things until I have my loans paid off. I’d rather be debt-free and achieve financial independence even if I have to drive an old Nissan.”
Good versus bad debt
No debt is great, said Brandli, but there is some debt that is acceptable, she points out. Mortgages are “good” debt because they’re not a revolving sort of a debt, whereas credit card debt is considered “bad” debt, she noted. “Law students and associates ask me when to pay off debt versus when to save, and I say the answer is, you need to do both at the same time, but you need to look at interest rates. If the interest rate is eight percent or higher, then you need to aggressively pay off the debt, and if the interest rate is five percent or less, then it doesn’t represent as much of a problem,” she said.
Templates for budgeting
An online financial template can help control your costs and aid with the planning of a budget.
Brandli recommends Google Docs because it provides a variety of template options. These templates can help law students manage their expenses by creating a budget to track where their money is going, help them pay off their debt by calculating how long it will pay off their credit cards and loans, and help law students and new lawyers grow their savings by finding out how much they should regularly save to reach their goals.
Schultz personally uses Quicken for budgeting, and recommends the software to her clients. She also recommends the online software tool, Mint.com, in which users can see what’s happening with all their accounts—checking, savings, investments and retirements—and set up a budget to create a plan in order to reach their personal financial goals. “But a notebook and pen can work just as well,” she points out.
Take tax deductions
It’s always advantageous to take as many tax deductions as possible.
“If you are paying off your undergraduate student loans, make sure you are deducting the interest paid on your taxes,” said Brandli.
“If you are self-employed, there’s a whole panoply of deductions associated with office expenses and professional memberships,” added Schultz. “For anyone not self-employed, and/or without significant investment income, the best thing is to participate fully in a workplace retirement plan. Many people contribute up to the employer match, but don’t contribute up to the legal maximum, which is one of the few retirement tax shelters for people with high incomes. If, in the early years of their career, they do have income low enough for IRAs/Roths, they should make every effort to contribute while they still have the chance. Even if they contribute for a few years, this money can grow tax-free for their entire careers,” Schultz points out.
Prioritize your debt
When looking at your financial picture, it’s important to prioritize any debt that you may have accumulated. There are two ways to accomplish this, said Schultz: “Put the most effort on the things with the highest interest rate, and use the ‘snowball method’: put the most money on the smallest amount so that you pay that amount off quicker.”
If you have credit card debt, Schultz notes, you should focus on that before paying off your student loans. If you have a few debts, she added, focus on the highest interest debt first. If you have a lot of debts, focus on the smallest balance first.
Brandli concurred: “Pay off the highest interest rate debt first, and also, you don’t want to take a shotgun approach. For example, if you have $400 left over each month and have four student loans, most people will pay $100 toward each loan. It may be more beneficial to take the $400 and put it toward the highest interest rate debt. It cuts down on the length of the debt you have and reduces the total amount you pay.”
If you are a young law student and you’re considering investing your money, it is important to understand where you currently stand. Generally, the younger you are, the more risk you should be able to take on, though it is not vital, nor prudent to put all of your funds into investment funds. If the time you have to invest is 25 years or more, you should consider investment in stocks as a possible financial strategy. If you have a lot of debt and no savings for emergencies, then it does not make much sense to invest in stocks. If this is not the case, think about what you are planning on doing with the money that you are investing. If you are planning on using it in the next five years, you should choose a more conservative vehicle for your money such as a money market account. On the other hand, if you are looking at longer than five years, you can be more aggressive in your investing and consider mutual funds and stocks.
Susan Berson is a banking and tax law attorney in Leawood, Kansas. She’s also the author of The Lawyer’s Retirement Planning Guide and The Modern Rules of Personal Finance for Professionals. She offers these best practices tips to beginning attorneys: “It doesn’t matter whether you’re earning $40,000 or $1 million a year, I recommend a budget be developed that prioritizes realistic short-term and long-term goals. Determining reasonable expectations about earnings requires careful thought about what you want and need for your life. Couples need to discuss what their viewpoints of money are: how to save it, spend it, and earn it, and agree upon goals and the budget to get there. When developing a budget, start calculations with your net income— that’s after taxes, health insurance, and retirement contributions are taken out. For retirement, you should start saving with the first paycheck, no matter how small the amount. Establish an emergency fund in the budget; I recommend 6 to 12 months of expenses as the ideal. Boost your FICO score by paying bills on time, and paying credit card debt off.”