Tips For Young Lawyers
You’ve done it! You made it through undergrad despite all the partying, finished law school with your eyesight a little worse for wear, and hopefully passed the bar…if not, get back to studying! Now, you’ve landed a great job and are earning a steady paycheck. But wait, before you go spend it all on a fancy new car, understand that a high salary does not equate to a high net worth. What should your financial priorities be?
Boring. But, before we do anything we need to know how much you have left over after you pay your bills and feed yourself. Create a budget spreadsheet starting with your monthly take-home pay. Then, list all your fixed expenses (rent/mortgage, utilities, loans, insurance, cell, etc.), estimate your variable expenses (groceries, gas, dining out, etc.), and calculate what’s left.
What happens if you lose your job or get sick and can’t work…Aflac? Nope, an emergency fund keeps you from calling on mom and dad who have long since tired of footing your bills. Take a portion of that money left over each month and set up an autodraft into a savings account to cover 3-6 months of living expenses. Try to get it fully funded within 6-12 months. Keep it in cash – no Kramer’s stock picks! You can also use this money for other emergencies – new tires, home repairs, Vegas – wait, I lie this is not fun money. When you deplete it, restart your autodraft until it is rebuilt.
I know you’ve just started working and retirement seems like a million years away…and it will be if you don’t start saving now! At minimum, take full advantage of any employer match. Ideally, you should maximize your retirement contribution. But, first, you might need to concentrate on building that emergency fund and paying off expensive debts. Then max your retirement contribution because if you don’t save it, you will spend it. Plus it is a great tax deduction.
Unless your parents spoiled you rotten, you probably have some hefty student loans, some expensive credit card debt, a car loan, and maybe a mortgage. What should you pay off first? Pay the highest interest rate debts first, usually your credit cards. Consolidate your student loans at the lowest rate possible. Your car loan is probably at a higher rate, but student loans can take an eternity to pay off and could reduce your borrowing capacity for a new home, so consider splitting between the two. Mortgage is a good tax deduction so I wouldn’t worry about paying this off yet. However, you should pay off an expensive home equity loan or a second lien.
Now that you’ve done all the boring, responsible work, let’s have some fun! Set up a fun savings account for vacations, a new car, shopping spree, boat, whatever. If you are thinking about getting married and buying a new home, you should start building up savings for a ring and a down payment. I recommend 20% so you don’t have to get the expensive second lien and can have equity in your home.
With a new large paycheck, it is so easy to spend it all and wonder where it went. If you take the time to prioritize and crunch a few numbers, you will be leaps and bounds ahead of your peers who don’t. You are a lawyer; competition is in your blood. So the race is on to build that net worth!
Gelasia Steed, CFP® offers independent financial planning and investment advice for individuals and small businesses. She is the owner of Steed Investments located in Fort Worth, Texas and can be reached at firstname.lastname@example.org.