tag:blogger.com,1999:blog-3521318064826848712.post5695502044811441433..comments2023-10-19T04:51:53.516-05:00Comments on The Legal Dollar: Financial Choices As An Associate Determine Your FutureManaging Partnerhttp://www.blogger.com/profile/05130017520583425490noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-3521318064826848712.post-47212518908914099992010-01-01T17:05:45.708-06:002010-01-01T17:05:45.708-06:00Hi Coder Emeritus,
Thanks for your comments! Her...Hi Coder Emeritus, <br />Thanks for your comments! Here are some thoughts:<br />With regard to 1, you mention that leasing can be less expensive than buying. That is certainly true in the first year of new car ownership when the new car loses a lot of value as you drive it off the lot. Further, over the first three years, you are right that either one could be cheaper depending on how the numbers break down. By the time you get to 5 years, though, I have not see a single lease that beats buying new. In that regard, possibly more important than the lease/buy question was SA's selection of expensive foreign car as opposed to less expensive domestic, and SA's decision to upgrade the cars frequently.<br /><br />With regard to 2 - yep, if you can drop your interest rate then lengthening your student loans can lower your monthly payment. It may increase the total interest paid, but you will be paying that interest with future dollars (assuming that you have them). If instead of putting the money toward the loan, the attorney invested the money for a higher return, then that would be great. However, in practice most associates are not that disciplined. The money that is freed up is instead used as play money - which is certainly what SA was doing.<br /><br />With regard to 3, from an initial financial standpoint, you are right. However, if SA got foreclosed on, then that would likely impact his rates on several of his existing credit lines - or at least the availability and rate on any new credit line. Getting foreclosed on will be on his credit report for a long, long time.<br /><br />With regard to your comments about debt, I think that you are right that there is "smart" debt and "dumb" debt. Smart debt buys assets. Dumb debt buy consumption. That being said, I admit that I carry a mortgage. I could cash out investments and pay it off today, but the rate on the mortgage is so low (especially considering that it is deductible) that I get a higher return on investing.<br /><br />One interesting thought here, though. Mortgages (in my state and most states) are not personally secured. That is, the mortgage debt does not follow me. If something happens, I can walk away and all they get is the house. Conversely, you can't walk away from student loan debt. <br /><br />Admittedly, the rates were higher when I was paying off my student loans, but I don't regret paying them off for 1 minute.<br /><br />Finally, the whole "X month's salary" is apparently advertising by DeBeers, the diamond cartel that supplies most of the market. It started out at one month and has been raised as people become greater suckers,... er, consumers.<br /><br />See here, for example:<br />http://www.groomgroove.com/the_engagement/two_months_salary_on_diamond_engagement_ring.php<br />http://www.slate.com/id/2167870/<br /><br />(As an aside - Man, I wish I had a business where I could just jack up the prices like that!)<br /><br />Let me rephrase your question - is it extravagant for a person with a negative net worth - who can't even contribute to a 401K - to buy an engagement ring costing $16K? Answer - YES! Yes it is. As I mention in a later post, associates should base their determination of financial reasonableness on their net worth, not their income. They really don't know how many years they are going to get that income - and the sad truth is that 70% of them in big firms are going to be kicked out in 5 years - and their compensation at that time will likely be less.<br /><br />Alternatively, instead of using the advertiser's valuation method, we can value our purchase price based on the average spent - which is $3200 from the articles.Managing Partnerhttps://www.blogger.com/profile/05130017520583425490noreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-64806872360369098482010-01-01T14:16:29.396-06:002010-01-01T14:16:29.396-06:00The general lifestyle seemed a bit too much, but i...The general lifestyle seemed a bit too much, but in my opinion, there were actual nuggets of smart moves in what SA did:<br /><br />1. Leasing vehicles is sometimes the smarter thing to do compared to buying the vehicle on a car loan. As with everything, it depends on the particular vehicle and the prices.<br /><br />2. Lengthening your student loans to 20 years (or 30, which I've never really seen) can be beneficial depending on your rate. I know of law grads who have consolidated their loans and their rates are at or lower than 2%. There's no reason to pay those loans back in a hurry as opposed to dragging out the payment period and using your money wisely to invest in something.<br /><br />3. Although I probably wouldn't play around with interest only loans, his tack might be okay as long as those interest only payments are less than what he would've paid out as rent anyway. In a sense, he's just renting his home. This guy might get foreclosed on, but he would be in no worse a situation than if he had rented his home in the first place. Though, I would've stayed in the 350k condo.<br /><br />Debt is not always a bad thing. I know I sound like a typical American by saying that. Although I was born in America, I come from an Asian family. For whatever reason, Asians are obsessed with debt. There's smart debt and there's idiotic debt, and the key in life is to differentiate between the two. Many Asians I know are constantly looking into getting debt at low rates and then pumping their income into high return opportunities instead of paying down the debt. It's not always the stereotypical "pay down your debt right now!!" mentality.<br /><br />p.s. I know I will regret saying this if I ever get married in the future, but is $16k ring really that extravagant for SA? I've always heard that the rule of thumb is 3 months salary.Coder Emeritusnoreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-88984514869554686772009-12-31T12:46:50.448-06:002009-12-31T12:46:50.448-06:0010:48 - Thanks for commenting! It's good to k...10:48 - Thanks for commenting! It's good to know that associates are reading this and it is helping them. Actually, I think I am going to do a post on how easy it is for new lawyers to miss out on paying off their loans, even at biglaw salary.Managing Partnerhttps://www.blogger.com/profile/05130017520583425490noreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-70090703736558583382009-12-30T22:48:22.575-06:002009-12-30T22:48:22.575-06:00Thanks, I appreciate this post. As a new associat...Thanks, I appreciate this post. As a new associate, it's good to be scared straight every now and then. This is high octane nightmare fuel. I cannot imagine earning biglaw money for five years and not managing to pay off my student loans and maximize 401(k) contributions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-29948210441774677422009-12-29T18:40:42.090-06:002009-12-29T18:40:42.090-06:005:05 - I think that you are right and that SA'...5:05 - I think that you are right and that SA's lifestyle is not one to emulate. It is certainly not the life I want to live. I don't know if I can call is "abuse," though - it seems a little more complex to me. He did have the income to support the payments (at least at that time). SA certainly made a choice on how he wanted to live his life - and his choice brought him a mountain of debt from which he would not easily be able to escape. It also brought him a lifestyle where he ended up paying far more for his possessions because he bought them on credit and has to pay interest. It also bought him a far more "risky" life in that if he stumbled, then the debt would eat him. <br /><br />One of the weirdest things to me was that he made his choices consciously. It wasn't a case of just using the credit card and not looking at the balance. He knew exactly how much his debts and payments were. He was just living a lifestyle that was pretty much completely alien to me.Managing Partnerhttps://www.blogger.com/profile/05130017520583425490noreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-70631391772517044482009-12-29T17:05:44.574-06:002009-12-29T17:05:44.574-06:00This is a classic case-study in "keepin' ...This is a classic case-study in "keepin' up with the Joneses". Far too many people abuse the easy credit available to today's generations.<br /><br />People over-extending themselves on credit just makes it worse for everyone else because it artificially jacks up the prices of just about everything (home prices being the prime example IMHO).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-18333697762776391242009-12-25T16:17:45.154-06:002009-12-25T16:17:45.154-06:003:34 - Nope, this is real - at least as far as I c...3:34 - Nope, this is real - at least as far as I can remember (it's been 10 years). I remember his attitude and situation very clearly, but I could be off a little on specific amounts. For example, it might have been a $15K ring rather than a $16K ring. <br /><br />This is certainly the most extreme example of this attitude that I have seen, but I have seen several people making $250-$350K/year who can't "afford" to make a 401K contribution. They may not be accumulating massive debt like SA, but they are not really making any progress toward financial freedom.Managing Partnerhttps://www.blogger.com/profile/05130017520583425490noreply@blogger.comtag:blogger.com,1999:blog-3521318064826848712.post-44140313630593265822009-12-25T15:34:02.196-06:002009-12-25T15:34:02.196-06:00Is this a hypothetical person created for the purp...Is this a hypothetical person created for the purposes of instruction? This can't possibly be real.Anonymousnoreply@blogger.com