It would be easy to assume that young lawyers have little to worry about when it comes to money. Recent law school graduates can command high salaries and they’ve studied contracts, estate planning, and other financial technicalities. Why, then, do young lawyers so often struggle when it comes to managing their own money?
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One problem is the crushing weight of student loans. Young lawyers frequently graduate with over $100,000 in debt, and many law firms reduced their hiring and even laid-off newly-minted lawyers during the recent recession. Also, because lawyers start their careers after years of schooling, earning a decent salary for the first time often coincides with other major life decisions, such as starting a family and buying a house.
Consider Mitch, a 29-year-old attorney profiled in my book Generation Earn. After graduating from Wayne State University and landing a job, he found himself wondering whether he should continue living like a poor law school student so he could pay off some of his substantial debts, or if it was time to finally upgrade his lifestyle. With about $130,000 in total debts from law school and undergrad work and interest rates ranging from 3.8 to 7.9 percent, he decided he wanted to unload it as soon as possible, especially because he wanted to get married and start a family before too long.
“Living with a crushing amount of debt is not enjoyable. The peace of mind I would have from living debt free is more valuable to me than trying to maximize my investments,” says Mitch. If you find yourself facing similar financial questions, consider these six tips:
1) Get on top of student loans. Given the relatively low interest rate environment, it can be tough to earn much by keeping your money in savings accounts. Instead, consider paying off higher interest rate student loans (anything over 5 percent) off early, as soon as you have the extra cash to make bigger payments each month. As for your federal loans, be sure to check to see if you’re eligible for any benefits under the 2007 College Cost Reduction and Access Act. If you work in the public sector or are putting more than 15 percent of your after-tax income toward loans, then you might be eligible for a break. Visit the Education Department’s financial aid site to learn more; your law school’s financial aid department might also be able to help you navigate the various rules.
2) Pay off any credit card debt immediately. Whether you used plastic to float yourself a loan while studying for the bar or to fund some much-needed celebration at an actual bar afterwards, credit card debt costs too much to keep it around for long. Paying it off is a top priority as soon as you have the means to do so.
3) Pick a few select items to upgrade. Few people enjoy denying themselves all material pleasures, and living like a Spartan can eventually lead to an uncontrollable urge to splurge. Instead of letting frustration build, choose a few items to reward yourself for all your hard work. Perhaps it’s weekly Belgian beer, a piece of artwork, or a trip to Cancun. Pick something that will make you happy.
4) Catch up on retirement savings. If you finish law school and land your first job in your late 20s or 30s, as many law school grads do, then you have some catching up to do when it comes to retirement savings. If possible, try to max out your tax-advantaged retirement savings into 401(k) or similar accounts. The limit is $16,500 this year. If that number sounds overwhelming, especially while you’re trying to manage all that debt, then start slowly. Put just 2 percent of your salary into a retirement account and then slowly increase that percentage. Don’t forget about after-tax savings, too. In addition to your retirement fund, you should have an emergency fund with at least three months worth of expenses.
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5) Consider keeping money separate from your romantic partner, at least until marriage. In theory, young lawyers should be well-equipped to navigate the intricacies of relationship economics. They should be well-versed in the dangers of combining bank accounts before the legal protections of marriage, signing onto someone else’s credit card, or taking out a mortgage together without the proper legal documents in place that explain what happens if the relationship goes south. But just like other young professionals, young lawyers often make these classic mistakes that end up hurting them financially. To protect yourself, consider keeping your finances—including credit accounts and loans—separate until you have the proper documents or legal protections of marriage in place.
6) Brainstorm on your big goals. Do you want to retire at age 40? Start your own law firm? Create a hot new social networking website for young lawyers? Start a nonprofit dedicated to giving back in your community? You have the education and means to make a difference in the world, so put some thought into what’s important to you.
As for Mitch, he discovered that he was eligible for one of the new income-based repayment plans, which is helping to lower his loan payments. His new plan? To pay off his pricey private loans soon, while making slow and steady progress on his low-interest federal loans.
Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.