Thomas A. Haunty, CFP, RHU, REBC, ChFC, is a senior partner with North Star Resource Group in Madison, Wisconsin, and a registered representative and an investment advisor representative with Securian Financial Services, Inc., and CRI Securities, LLC, registered investment advisors, members FINRA/SIPC. Securian Financial Services is affiliated with CRI Securities. North Star Group is independently owned and operated. He also serves as a volunteer financial advisor, supporting Young Lawyers Division members, for the American Bar Endowment. He can be contacted at email@example.com
As a young lawyer, you probably have never faced an economic downturn like the one we’re in now. Gone are the days of reaching your goals by simply moving to a higher-paid position at another firm or relying on credit, which is now much more difficult to obtain. To survive financially through these tighter times, you need to implement strategies that get the most out of your current paycheck.
Cut back. You can’t control the economy, but you can control your spending. It’s time for a harsh reality check about what you “have to” buy. Your goal should be to develop a budget that allows you to live on at least 20 percent less than what you earn. Identify all expenses that can be trimmed, such as your clothing budget, and cut out frills such as eating out for lunch. What you call a “need” versus a desire must be drastically redefined so you can start spending less.
For a while, you may have to use all cash—no credit or debit cards—to pay for everything you can as a form of spending control. You also can escrow money each month into a savings account to pay for larger expenses that arise during the year, such as car maintenance and insurance, so you won’t have the opportunity to spend the money on luxuries.
Another area to reign in is any overpayment of income taxes on your paycheck. Overwithholding produces annual tax refunds that could be better used to make savings a monthly habit, decrease debts sooner, and invest regularly. Boost your take-home pay by increasing your exemptions on your W-4 form and refiling it with your payroll department. One reason to do this now is that some states facing budget crises of their own are holding back on paying out those refunds this year.
Protect yourself. One of the first places to save those extra dollars is in a separate bank savings account. This will be your accessible emergency fund to protect you against unexpected bills, lower-than-expected bonuses, or a pay cut. Safety of principal and liquidity are more important than the interest rate on the account. You should save several months’ worth of expenses in case you become unemployed.
Another way to increase your financial security during this time is to use personal insurance plans. Take control by maintaining individual-owned life and disability insurance programs that are portable between jobs. You can no longer rely solely on your firm’s benefits package, which can be reduced during tighter economic times or lost completely if you are laid off. The pressure to cut expenses can tempt you to eliminate these protections, but this often undermines the increased security that you are seeking.
Think long-term. Use the extra cash flow from cutting your expenses to reduce those credit card balances from law school. Do not overlook paying off small debts first to kick-start the momentum of your debt-reduction plan. Review your student loan debt terms and take another look at loan repayment programs available to you. Properly addressing your debts will enhance your credit rating, which is something that is becoming more vital in securing car and home loans in today’s tight credit markets.
Young lawyers cannot afford to focus only on debt reduction. It can cause you to miss out on the advantages and potential returns from diverse accumulation vehicles. For example, do not miss adding to your firm’s 401(k) plan as it provides you tax-deductible contributions, tax-deferred growth, and even the firm’s matching contributions. Despite what many believe, now also may be an attractive time to add more to investments given the general market conditions.
Delegate. A lack of time and career pressure may delay young lawyers in addressing these important financial issues, so it is important to seek the help of a trusted financial advisor who can give you the accountability you need to stay on the right financial path.
Implementing these strategies now, at the beginning of your law career, develops the right financial habits that, if consistently applied over time, can build wealth. Start now to get your financial house in order so you can not only survive this recession, but actually set a strong foundation for the future.