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Personal & Financial

Financial Advice for New Lawyers Starting or Transitioning to a New Job

Scott Greenberg

Financial Advice for New Lawyers Starting or Transitioning to a New Job
Chunyip Wong via iStock

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As you prepare for your first job or as you transition to a new job, establishing a financial plan can help ensure that you maximize your financial position and reduce finance-related stress.

Establishing a Stable Financial Status

Ask yourself how knowledgeable you are with financial planning. Be honest with yourself to ensure that you start out on the right foot and avoid costly errors. Are you confident in what you know about investing, risk management, and available options? Have you taken any personal finance classes? How much of your free time do you want to devote to this? If you don’t have the background or knowledge, you should consider hiring a certified financial planner professional fiduciary. Can you afford to hire a professional to assist you? Can you afford not to?

Monthly Expenses

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.

Emergency Fund

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.

Student Loans

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

Tax Withholding

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.

Employer-Sponsored Retirement

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.

Roth IRA

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.

Investment Options

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.

Benefits Package

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.

Based on brand new survey data, the ABA YLD has issued a landmark report on the current state of law student loan debt. Among the many findings, we learned that more than 75 percent of respondents had over $100,000 in student loan debt, and almost 90 percent of respondents said their debt had a major impact on important life decisions. To learn more about the report’s findings and proposed solutions, watch our new webinar replay Understanding and Navigating the Student Debt Crisis. (Replay is free for ABA members. Login required.)