By Joshua Holt • December 12, 2017•Careers, Law School
It’s the season of first-year associates and newly minted lawyers starting their legal careers. I hope that you’ve successfully passed the bar, moved to the new city and are now beginning to find your way around the office. Beginning your first job summons plenty of emotions and there’s no lack of things to do. Here’s a financial checklist to help make sure you start your career on the right path.
1. Don’t grow into your income.
No matter whether you’ve started in Biglaw or are working for the government, your starting salary is likely larger than anything you’ve earned previously. But, it’s not nearly as big as you think and there’s a decent chance that it will go down in the future. Many lawyers move around during the first five years of their career as they settle into the right fields, so keep that in mind as you’re deciding how to split up your pie.
The key to beginning life with a great financial future is to continue living like a law student for the first 3-5 years out of law school. You’re already used to it, so it won’t seem like such a shock. As most of us know, it’s far more difficult to cut back on your lifestyle than to never increase it in the first place. Don’t let yourself fall into the trap of buying or renting more house than you can afford or getting the nice car because “you’ve worked hard”. Save up to the 20% downpayment for the house and pay cash for the cars.
2. Develop a debt management plan.
If you’ve been afraid to tally up the numbers during law school, now is the time to figure out how much you owe and who you owe it to. The National Student Loan Database is a good place to start to make sure you’re on top of every student loan you’ve borrowed over the years. Believe me, the monster in the room is a lot less scary once you face up to it. Write down every loan balance, the interest rate and and the monthly payment. I recommend setting up a separate checking account at your bank where you will handle student loan payments. Set up automatic payments for all your loans and then make one transfer each month from your regular checking account to the student loan bank account.
Now is also the time to figure out how you’re going to repay everything. Are you pursuing PSLF? Do you plan to pay off the loans? If you intend to pay off the loans yourself, you should consider whether the benefits of refinancing are right for you. Nowadays there are many lenders like SoFi, Earnest and CommonBond that are eager to lend to young professionals. By refinancing your loans, you can save thousands of dollars a year in interest which will save you money and allow you to pay off your loans faster.
If you intend to pursue some type of forgiveness, you should make sure that you qualify for PSLF and that your payments count as “qualifying payments” because you’ll need to make 120 of them to receive forgiveness. Thankfully the laws as currently drafted don’t count the forgiveness of PSLF loans as taxable income, but they do count forgiveness under an Income Contingent Repayment plans (like IBR or REPAYE) as taxable income, which could lead to a hefty future tax bill. You’ll need to become a student loan ninja to make sure you understand the rules for the various plans, but have no fear as there are great resources on the Internet to help you.
3. Learn about taxes.
Too many lawyers don’t take the time to learn about the tax code. It didn’t matter when you were making pennies bagging groceries in college, but taxes will likely be your biggest expense (by far) over the course of your career. Therefore, you are going to get the most bang for your buck by learning a little bit about the tax code.
There’s no better way to lower your taxes that to take advantage of the retirement accounts available to you. Many of them allow you to contribute money today on a pre-tax basis. That money grows tax-free and won’t be taxed again until you withdraw it in retirement. If you’re like most lawyers, your marginal tax rate will be the highest during your working years. The good news is that you can save taxes at your high marginal rate today and pay them at a much lower effective tax rate in the future. This is even more likely if you’re working in a city like New York or San Francisco but think you might retire in the future to a state without income taxes like Florida.
4. Develop an investing plan.
Although it sounds complicated, implementing an investment plan is relatively straightforward. The Bogleheads have put together a great wiki entry showing you how to write out an Investment Policy Statement. It doesn’t need to be long. In fact, you can easily get away with a two page document that has all of your financial data, including things like your marginal tax rate, how you'd like to allocate your 401(k), your savings goals, and other goals.
It’s important to write it down because you’re going to be really busy over the next few years and it’s not something you’ll want to be thinking about every day. I suggest creating one in a Google Doc so you’ll be able to refer to it throughout the year whenever you need it.
5. Review your insurance policies.
Now that you have an income, do you have a spouse or kids that rely on it as well? It might be the time to purchase term life insurance, potentially in the amounts of $1 - $3 million if you want them to be able to rely on it for a long time. It’s also time to review your disability insurance, since the chance of a disability is many times higher than the chance of an early death. If you have a policy through your employer, ask HR for a copy and start to digest what is covered and what isn’t covered. Things you want to look for are whether the policy contains a cost of living adjustment (COLA) so that your benefits increase with inflation and whether the coverage extends to age 65 (among other things, like whether you have own-occupation coverage). In addition to life and disability insurance, it might be time to increase the liability limits on your homeowners or renters policy and your auto policy.
If you start to tackle these five areas slowly over the first year of career, you will be miles ahead of your peers in setting up a solid foundation for the future. Don’t let all of the hard work over the past decade slip through your fingers. Set up a reasonable plan and watch your finances grow.
About Joshua Holt:
Joshua Holt is a practicing private equity M&A lawyer living in Brooklyn and working in New York. He blogs at The Biglaw Investor where he interacts with other lawyers who are trying not to do stupid things with their money. In addition to personal finance, he writes about financial independence, early retirement and investing.