By Alana C. Jochum
It is a fact of life: Law students are graduating with more debt than ever before—often layered on top of significant debt from undergrad—and fewer are getting legal jobs right out of school. Most legal jobs do not offer six-figure salaries, or at least not at the beginning. Even if it feels as though every penny is gone before it is earned, sticking your head in the sand about finances as a young lawyer is setting yourself up for disaster.
This article is a guide to some of the financial basics to consider immediately on graduating and while establishing your career. It is for all income earners—whether you are in “big law” or getting started as a solo practitioner—and it is a longterm plan. The steps are listed in order of importance, but your plan should consider all of them simultaneously (e.g., focus on paying down credit cards while paying student loans). Even if you cannot contribute more than a few dollars each month toward these goals, the most important step is to start. Planning for the future should not take a back seat, even if your starting salary is low and your student debt is high.
Make wise lifestyle choices
After pinching pennies through undergrad and law school, it is tempting to want to splurge once you have a paying job. And if you are at a large firm, implicit or explicit pressure can make you feel as though you “need” a nicer car or suit or house to “look the part.” Resist it. Let your good work speak for itself, and take pride in your frugality. You do not need to deprive yourself of all luxuries, but being conscious about your purchases and why you are making them when you do will help your financial well-being and will keep you grounded in a materialism-driven culture. If you do want to treat yourself with something pricey, save for it in advance and purchase it only when you can pay for it out of your savings.
Pay off your credit cards
Interest can be your friend, or it can be your enemy. If you have a credit card balance at the end of the month, it will hinder all your other financial goals. Average interest rates on credit cards range from 14 percent to 28 percent—a far higher rate than school or mortgage loans, and well-above average earnings in the stock market. Although credit cards can be a valuable tool, until you can—and do—pay off the balance at the end of each month they are holding you back from financial freedom. Eliminating credit card balances should be your top priority. Here are some ways you can do that.
Set up a payment plan. Identify all outstanding credit card balances you have, and pay the highest interestbearing balance off first (while paying at least the minimum amount on all balances you have). You should be paying much more than the minimum payment on this high-rate card—you are trying to eliminate its balance entirely.
Do not add to the balance. Put the credit card in a bowl of water in the freezer to literally “freeze” your spending or cut it up until the balance is paid off. By physically preventing access to the card, you reinforce your commitment to your goal. Use cash for your purchases in the interim to eliminate “pain free” credit card spending.
Once paid off, make your card work for you. Credit cards can help you earn airline miles, cash back, and other valuable rewards. Find a credit card with a low (or preferably no) annual fee, use it for your monthly purchases, and then pay the balance off each month. Consider the UPromise credit card, www.upromise.com, which gives you money back toward your student loans from your everyday purchases.
Create an emergency fund
This should be a separate account specifically set aside for emergencies—and upgrading to an iPhone 5 is not an emergency. Generally, this fund should have enough money to cover your expenses for three to six months (and some advisers suggest saving even more). Keep these savings liquid in a high-interest savings account, and pledge not to touch them except in true emergencies, such as unexpected repairs to a car, loss of a job or unanticipated medical bills.
Take advantage of online banking. Online banks often offer higher interest rates than traditional banks. Plus, because you can not visit the bank to make a withdrawal, they can reduce your temptation to access the funds while still being liquid enough for an emergency.
Contribute each month until you make your goal. When you reach your emergency fund savings goal, celebrate! Then, because you are already used to making this monthly payment, put the payment towards a retirement account, student loan debt, or a brokerage account.
Build your 401(k)
The best way to make interest work for you is by saving early. Your 401(k) is money that you put away now before taxes which cannot be accessed (without paying a penalty) until age 59½. Your 401(k) funds can be invested in a variety of stock, bond, and money market plans to grow over the course of your lifetime to help prepare you for retirement. In 2013, the maximum yearly contribution that can be made to a 401(k) is $17,500 (about $730 per pre-tax paycheck on a bimonthly pay cycle). The benefit of funding your 401(k) is that you reduce your overall taxable income while stashing away valuable funds to grow over time. And because the money is automatically taken out from your paycheck before taxes, you will hardly notice it is missing.
Enroll in your employer’s 401(k) plan or open a Solo 401(k) if you are self-employed. Work with your HR representative to set up the account and begin deducting from your paycheck. If you are self-employed, you can open a Solo 401(k) with an asset management company, such as Fidelity or Vanguard.
Take advantage of employer matches. Many companies will match contributions you make to your 401(k) up to 8 percent or more of the maximum $17,500. If your employer matches contributions, at a minimum, contribute an amount that matches this rate. This is free money—even if you cannot contribute the full $17,500 per year, contribute enough to get the free match. Do not make the mistake of passing up this free money, even to pay down student debt!
Deduct the maximum if possible. By contributing as close to the maximum allowable each year, you gain the benefit of those extra years of tax-free compound interest to grow your balance.
Tackle student loans intelligently
Student loans are “good” debt in that they allowed us all to get the education that is our earning power. But they can seem formidable at first. Try these steps to reduce your balance and anxiety:
Do your homework. See if there is a governmental program that can reduce your debt based on your job and years of service. Check out www.studentaid.ed.gov/repay-loans/forgiveness-cancellation to see if you qualify for one of the many plans now available to cancel some or all of your debt after minimum payments are made.
Strategically pay off your loans. List out each student loan you have and rank them by interest rate. Whichever loan has the highest rate—regardless of the base principal amount—should be the loan you attack first. Pay just the minimum amount on all student loans you have, then pay more on the loan with the highest interest rate with extra cash after you have tackled steps 1-4 above.
Reduce your student loan interest rate. Some loan providers will reduce your interest rate by 0.25 percent or more if you sign up for automatic monthly payments. Call your loan servicer and enroll in their auto-pay program. It is free, and it will also prevent you from accidentally making a late payment, which can rack up fees.
Open a brokerage account
A brokerage account is an account with an asset management firm (think Fidelity, Charles Schwab, etc.) that allows you to invest that money in the financial markets. By investing in a brokerage account, you can grow your savings through stocks, bonds, and funds while keeping your assets more readily accessible (e.g., no penalty for early withdrawal like with a 401(k)). Specifically, consider an account through an investment firm dedicated to low investor fees, such as Vanguard. Compare rates of various funds by looking at the “expense ratio,” which is the fee you pay for management of the fund. Index funds, which try to track the stock market long-term rather than beat it, usually have much lower expense ratios than do highly managed mutual funds. Also consider ETFs, which can have even lower fees than index funds. Automatic investment contributions can be set up for your account, and by committing to even a small automatic contribution—say, $10 to $50 per week—you will be amazed at how quickly your investment grows.
The above outlines the fundamentals for young lawyers to reduce debt and build wealth. Even if you cannot contribute significantly to each area of the plan, start by setting up the accounts and making small contributions. Create a budget that includes these steps as part of your plan (www.mint.com has great budgeting tools) and stick to it. You do not need the highest salary to reach financial freedom—discipline and dedication to your goals will get you further than most.
For more guidance on how to take practical steps now to secure your financial future, try these quick and interesting reads.
Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, Andrew Hallam (2011).
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, Thomas Stanley & William Danko (1996, 2010).
The 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying, Suze Orman (2001).
The Truth About Money, Ric Edelman (1996, 1998, 2000).
Alana C. Jochum is an associate attorney at Squire Sanders (US) LLP. Her practice focuses on complex civil litigation, including product liability and commercial disputes. She also assists corporations in developing and implementing global compliance programs.