May 01, 2015

Overcoming Debt and Financial Setbacks: Perspectives for Millennials and Gen Xers

The economy finally may have begun to recover, but running a solo law practice or small firm has by no means gotten easy. We are all still feeling the reverberations of the recent meltdown. And whether you are relatively new to the law or have been practicing for a decade or longer, there is no such thing as too much guidance on dealing with the financial bumps in the road that undoubtedly lie ahead. Presented here, then, are two overviews, one aimed at recent graduates trying to avoid the early pitfalls of setting up a law practice, and the other aimed at more seasoned attorneys who have seen their share of economic challenges—and perhaps accumulated more than their share of financial obligations.

Perspectives for Millennials

By Aastha Madaan

Just a few years ago, you were a fledgling attorney eager to take your newly minted bar card for a spin on the highway called a legal career. You soon realized, however, that you were entering a job market oversaturated with attorneys and that finding a job you actually liked was near impossible. So you decided to pave your own way and became a sole practitioner. For a while you were cruising along just fine, but then you encountered a huge financial bump in the road.

While going solo as a new attorney can be the best decision for your career, it can also be financially risky. In addition to the average law school debt of $80,000, you will start incurring business expenses. A car accident, a sickness, or even something as minor as a phone that breaks unexpectedly can seem like a huge financial setback.

It’s important not only to prepare for those unexpected setbacks but also to know how to deal with them as they come along. And come along, they do. So, what are some ways in which young lawyers can prepare?

Communicate. Over-commitment is one of the biggest and most common bumps for young attorneys. Committing to large, recurring expenses that you cannot afford can become a fatal mistake. Whether it is an expensive monthly lease or an overpriced website and SEO maintenance contract, you may find yourself backed into a financial corner.

When a situation like this arises, the best approach to take is the same approach you would take if you had committed to a time-intensive position. Communicate with the other party in the relationship. No business, whether it is your landlord or someone you are in a contract with, wants the extra hassle of losing business because you are unable to pay their bills. Talk to them and try to negotiate lower payments. Negotiating is an important skill for any attorney, and this can be the perfect opportunity for you to be your best advocate.

The best thing would be not to overcommit, but if you see that you have committed to more than you can handle, fix it immediately.

Budget. As uncool as it sounds, having a budget can save you during a financial crisis and help you avoid one in the future. When I sat down to make a budget for the first time as a new sole practitioner, I was surprised to learn what some of my biggest expenses were—and that they were completely avoidable. I was able to identify the problem right away and identify an easy solution.

One of the best things a budget can do for a young attorney is to help you anticipate upcoming costs and determine how much income you will need in order to “stay in the green.” Determine how much your overhead is, including any monthly fees for phone/fax services, and even small expenses such as office supplies. Ask yourself if any of your recurring overhead expenses are avoidable for now. A young attorney I know had just started his law firm and was paying hundreds of dollars per month to a phone answering service to make his firm sound more professional to prospective clients. I asked him how many calls he was actually receiving each month. When he calculated the amount he was paying per call, it turned out not to be a good investment at that point in his career, and he canceled the service to decrease his overhead costs. For the first few months or even years of your practice, keeping overhead low can be a lifesaver. In times of a financial crisis, determine if you have overhead expenses that you can table for a few months or longer.

You should update your budget every few months and adjust it as your circumstances and income change.

Research. The first and biggest financial bump in the road for young solo attorneys can be the amount of financial investment that it takes to start their own firm. You may not have a lot of savings or great credit because of your student loans, which means that time will be your biggest investment and asset. Use it wisely. When you find yourself wondering if you will be able to continue with your plans to start a firm, or if you have started a firm but then encounter financial difficulty, start researching. Research can save your legal career, whether it is reading through the plentiful information available online or asking successful sole practitioners in your local area what they did when they were in a similar financial crisis. Someone you know—in real life or virtually—will have faced a similar financial crisis and overcome it. Ask her what she did when she was in your situation.

If a financial crisis comes upon you unexpectedly, look into your other financial commitments and determine whether any of them can be lowered. Student loans are one such commitment. Student loan payments often begin before you even have a job offer secured. The most recent statistics for the class of 2013 show that the employment rate remains below 84.5 percent until nine months after graduation.

Income-based repayment (IBR) and deferred payments are some of the more popular options among new attorneys looking for jobs. Some options will continue to incur interest if you defer, and there are options to change your interest rate, including refinancing your student loans. Setting up automatic payments can also reduce your interest rate. Refinancing your student loan for a lower interest rate is a newer option, and some online research can quickly help you determine if this is a good choice for you.

Although there is no single solution or path for every single financial bump in the road, the best one applicable in all situations is to be mindful and present. Some financial setbacks are unavoidable, but the rest can be averted with some preparation and risk-benefit analysis in the beginning.

Perspectives for Gen Xers

By Benjamin K. Sanchez

Lawyers who have survived the financial hardships associated with the beginning of their careers are not home free as they mature in the profession. In fact, some of the same financial problems that plague young lawyers may still plague them as they get older. For example, 15- to 20-year attorneys still have to deal with the repayment of student loans, especially if they deferred student loan payments in the beginning of their careers or consolidated their student loans into a mortgage-type single loan repayment plan. Some financial considerations are different for the seasoned lawyer; many remain the same regardless of age or experience.

The Golden Handcuffs. “The Golden Handcuffs” is a term most often thrown about when talking of big firm lawyers, but it is equally applicable to solo and small firm attorneys. The term describes the situation when an attorney spends money to match his inflated income; soon, the attorney cannot afford to change career paths because he has to maintain a certain lifestyle. Many big firm attorneys who start their careers making six figures get trapped into buying luxury items, taking extravagant vacations, and getting locked into exorbitant mortgages for expensive living arrangements. Later they send their kids to high-tuition private schools, pay for high-dollar extracurricular activities for their children, and then have to prepare to pay for their teenagers’ college tuition. Because of the large amount of spending associated with their lifestyle and children, these attorneys are handcuffed into maintaining a career that pays for it all and thus are unable to break free to do something else when they lose interest in their work or want to slow down from the daily grind.

Such Golden Handcuffs can apply to any attorney who incurs a large amount of debt or has an extravagant lifestyle to maintain and thus limits his or her career choices in order to meet these financial obligations. It is important for attorneys who age in their careers to think about giving themselves the freedom to be flexible by not overspending or locking themselves into a lifestyle or debt that cannot be easily paid. While many of us have families to maintain and we certainly want the best for our families, we sometimes do a disservice to ourselves and our children by living in such a manner. The Golden Handcuffs generally require so much time at work that we sacrifice our personal life or the ability to enjoy the riches we have amassed. Attorneys who are locked into a golden lifestyle must keep their nose to the grindstone day in and day out; all they can do is look up for a minute or two to see what’s out there before putting their head down again and getting back to work. Some abhor such a life; others believe the sacrifice is worth it. It’s a personal choice of money versus freedom—which do you value more?

Buried in overhead. Regardless of the Golden Handcuffs syndrome, many seasoned solo and small firm attorneys have to deal with a growing or larger practice. The number-one consideration for them on a regular basis is the size of the overhead to maintain their practices. Whether as a solo attorney working in higher-rent offices in the downtown area of a major metropolis or as part of a small firm that has grown over the years to include staff and more office space than originally envisioned, we all have overhead considerations to manage.

I am a member of a few national and international online groups of attorneys, and I see the regular dilemma attorneys face as they get older, especially as they get more successful. We want to expand in space to treat ourselves, or we feel the need to expand to accommodate more staff to handle the increased workload we have owing to our success. Sometimes we want to move to better offices. We employ a cost-benefit analysis when considering hiring additional staff. For a solo such as myself, even the thought of hiring one staff member to assist me can be daunting.

I suggest maintaining the least overhead you can for the longest amount of time you can, unless this means passing up a deal that you will later regret not having taken. During my 17 years as an attorney, I’ve had everything from a home office to a large 4,500-square-foot office suite complete with conference rooms, kitchen, storage, and window offices galore for my associates and staff. In autumn 2012 I moved from these luxurious offices back to a home office because I had decided to change the scope of my practice and lay off my employees. (I made a conscious decision not to get locked into the Golden Handcuffs I mentioned earlier.) In spring 2014 I was ready to take on office space again and looked for cheap space in a prime location. Personally, I believe location matters more than luxurious accommodations. I found a three-room office suite in the heart of downtown Houston on Main Street, just eight blocks from the main courthouses and right on the Houston METRORail line, a growing mass transit rail system. For the past year I maintained a lobby, conference room, and my office. Recently, I decided to hire staff. I started with a part-time staff person whom I eventually helped get a full-time job with one of my corporate clients, and then I replaced her with a full-time law school graduate who will be taking the Texas Bar exam in July.

I am blessed that my workload has increased owing to new and existing clients’ trusting me with their cases. Recently, when talking to my next-door neighbor in the office building, I learned that she (also an attorney) and her law partner had a falling out and that she was stuck paying the full rent while using only one office. Her space is almost a duplicate of mine, but smaller, so her rent is cheaper than mine. I am locked into four more years on my lease and discovered that her lease ends in a year. Knowing that I want to stay at this location while still looking to expand in the future, I asked my neighbor if she would allow me to take over her partner’s half of the lease and have the building management create a passageway between our two offices. She and the building management agreed, and now I have almost doubled my space for less than a 50 percent increase in my monthly lease. Additionally, once her lease ends next April, I will be able to lease the rest of her office space,thus allowing me the space to accommodate my future growth without changing my address or worrying that someone else will come in and snatch the space away when my neighbor’s lease is done.

Overhead considerations are a big dilemma for many seasoned attorneys, but when you make sensible decisions based on planned growth, you can work wonders in your budget.

Reflect your values in your financial decisions. As my final advice for seasoned attorneys, I suggest that you let your financial decisions reflect your values. Some of us do value a more opulent lifestyle than others, while others value more freedom at the expense of luxury. Neither is wrong. Whatever your values, you should make your finances reflect them so there is not an internal tug-of-war that leads to career dissatisfaction and depression. By the time we are seasoned attorneys, the newness of law practice has worn off and we are in the throes of the daily grind. We should be happy with our lives, and our professional and personal lives should be congruent with our values. It is hard enough to make a go of it as an attorney, so don’t put extra pressure on yourself by living out of sync with your true self. Spend wisely and live happily!