Jan 17, 2023
New year, new you: A lawyer’s guide to starting the year strong
Have you noticed a longer-than-normal line at the treadmill lately? It’s January as I write this blog post, and that means perhaps everybody is at the gym trying to fulfill their New Year’s resolution to (finally) get in shape.
But how about your financial health? Now is also a great time to think about what you should be doing to set yourself up for a productive new year on the financial front.
Here’s a short list of practical tips to help you as you try and get (and stay) financially fit this year.
Pay down debt—the days of easy money in terms of low interest rates are apparently over for now. Rates soared in 2022, so if your law school loans have a floating interest rate, you’re likely paying much more in interest than you were previously. To the degree that you have a chunk of cash that is unspoken for, I suggest considering being aggressive in retiring your law school debt as quickly as possible. Investing your free cash into the investment markets might seem more exciting, but eliminating high-interest debt is typically a better first step, in my view.
For income partners
Save for capital buy-in—at the income partner level, you’re likely fixing your eyes on the prize of advancing to the equity partner level. To better prepare yourself for when you get the call inviting you to join those hallowed halls of equity partner-dom, I suggest you aggressively save for your capital buy-in. Each law firm handles this situation a bit differently, but most firms require some type of buy-in when becoming an equity partner. Many lawyers need to borrow at least some portion of that required buy-in from a bank or other lender. Until 2022, interest rates were so low that borrowing was quite attractive. However, since rates have gone up dramatically, those borrowing costs could be multiples higher than in the past. The more cash you can put toward your capital buy-in, the less you need to borrow, and the more you’ll save on interest costs.
For equity partners
Pop quiz—how much money does it take for you to live your desired lifestyle? My guess is that a very small percentage of you reading this blog post have an accurate picture of how much you spend. As an equity partner, it’s critical to know your spending requirement to figure out how much you need to be saving between now and retirement, so that you can continue that comfortable lifestyle after you finish working. I’ve been doing this a long time, and I’ve yet to meet any client who says, “When I retire, I’m really looking forward to cutting back my lifestyle dramatically.”
For a law firm partner, your wealth is generally created through year-over-year compensation growth. Unlike your private business-owner clients, who might sell their company and use the cash proceeds to fund their retirement, we think you should make the most of these high-income years by saving above and beyond, maxing out your firm-sponsored retirement plans. But how much is actually enough? The only way to figure that out is to have a realistic idea of your “burn rate.” Then you can figure out your after-tax annual savings target to ensure you can continue living your best life once you decide to ride off into the sunset.
Hopefully, this short list gives you some ideas of how to get more financially fit in the year ahead, whatever the current stage in your legal career. I can’t help you get to the gym more often, but hopefully this challenges you to make some key adjustments to strengthen your financial health for the future!
ABOUT THE AUTHOR
Justin works closely with clients to design wealth management plans that take into account the full spectrum of their career and personal concerns with a specialization in advising law firm partners. Justin earned his MBA from Northwestern University's J.L. Kellogg School of Business and joined BDF in 2011.
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