Part of building a solid financial foundation is determining goals and working toward achieving them systematically. This does not necessarily mean that you need a firm budget. Your expenses may change monthly, and living on a firm budget can lead to stress. However, having a ballpark figure of your monthly spending is vital for planning because it will allow you to determine if reaching your goals is reasonably achievable. Once you are systematically saving toward goals without having to think about it each time, you can treat yourself to nice dinners, nights out with friends, and vacations guilt-free because money left over is for your own discretion.
An emergency fund is important because life can be unpredictable. One of your clients may dry up, or you may have unforeseen expenses arise (e.g., you may need a new roof, have a medical emergency, etc.). Generally, a new lawyer should aim to save three to six months of expenses. The available funds should not be in a retirement account, credit card, or home equity. Remember that establishing your emergency fund does not need to occur all at once. If saving three months’ expenses seems impossible, that may be a sign that you are living beyond your means.
Understand your student loan repayment or potential forgiveness options. Loan forgiveness options are attractive, but slow down loan repayment. Additionally, most plans are structured toward a percentage of income. Refinancing your student loans may also be an option in the current market. Look at what the blended rate of your loans is and compare the payments you would make on those loans to what they would earn if you saved the money in a different manner (e.g., market-driven portfolio). If your blended rate is more than 6 percent, consider paying it off early; if the rate is closer to 4 percent, you may have a higher probability of doing better in other opportunities, such as a market-driven portfolio over the same period.
Understanding Your Financial Packages at Your New Job
Ensure your withholding is correct on your W-4. If your withholding is not correct, you could receive a big surprise come tax season. The goal is not to get the biggest refund possible. While it is nice to get a large lump-sum in April, it simply means you paid too much during the year. This means that it wasn’t there for opportunity or emergency throughout the year, and you received no interest on the extra amount you paid.
If you are eligible for an employer-sponsored retirement account, contribute to the account if you have established your emergency fund. Your priority should always be establishing your emergency fund (after eliminating “bad” debt such as credit cards). Additionally, if your employer offers a match, contribute up to the match at least, otherwise, you’re leaving free money on the table.
Your Old Retirement Plan
You have several options regarding your old retirement plan:
- leave it there
- move it into your new plan
- roll it over tax-free to an IRA
Generally, leaving it at the old plan is least attractive, and the other options have some pros and cons such as the ability to take loans in a 401(k), but not in an IRA; greater investment options and flexibility in an IRA than a 401(k); and, the opportunity to engage a professional for management advice in an IRA, but not in a 401(k). These are important options that deserve personalized advice and attention.
You may want to consider using a Roth IRA. If you qualify from an income standpoint, this will let you save money after-tax. The funds inside of the Roth will then grow tax-deferred and come out tax-free during retirement. This is different from a traditional IRA and your traditional 401(k); those vehicles offer the ability to save money before-tax (deduct from today’s income), grow tax-deferred, and then come out as taxable income in retirement. Because you do not know what your tax rate will be in retirement, it’s often a good idea to use both Roth and traditional vehicles. Your firm may offer a Roth 401k option as well.
Within your retirement plan(s) you’ll need to select options in which to invest. One popular way to invest is through “target-date funds.” These funds will start aggressive and become more conservative as you get closer to retirement. Often folks like this option when starting out or starting a new plan because it’s a simple way to get diversification and outsource the day-to-day investment management.
When reviewing your employment benefits, including health, life, and disability insurance, remember: you’ll likely want to supplement with personal coverage, and your benefits may not move with you if you decide to transition jobs. For example, your group life insurance will usually end when your employment does, so if you don’t have any supplemental personal coverage, you will most likely be unprotected during an employment gap.
Consult with your human resources team and CFP to understand your financial position, and to evaluate what options are best for you. Between the HR department and trusted fiduciary, they can help you build a good foundation. Pay attention to your financial situation now to save time and reduce stress in the future.