In my recent post Why $145K Is Often Not Enough To Max Your 401k, I tried to outline the typical expenses (based on cost of living information from Bankrate and my experiences and interviews with associates) of an associate living an average professional lifestyle while making top dollar - and to show some general parameters of how quickly the associate's compensation was eaten up by taxes, living expenses, and loan payments. My goal was not to suggest that it was impossible for the associate to pay off their loans and max their 401k, but to give potential associates some hard numbers that might temper their expectations about how far their salaries will actually go. In other words, even associates making top dollar are going to have to live reasonably frugally if they want to pay off their loans and max their 401k - they are not going to be able to afford $145K of toys.
Fortunately, a few associates that are more frugal than most stepped up and gave some great suggestions about how new attorneys can economize and plan their financial reality in order to make paying off their loans a reality. I like the idea that someone might read their suggestions and use them to their own advantage. Below I will summarize their suggestions, as well as some of my own. Also, if you have any great suggestions, please share them in the comments or e-mail me.
One overall thought might be the hardest for new associates to accept - that is, swallow your pride. Pride doesn't pay the loan payment. "Looking wealthy" doesn't pay the rent. Yes, you have accomplished a lot, but it's not over yet. There is a long road ahead of you and you are going to have to work your way back to zero net worth from your current position that might be a couple of hundred thousand negative. Make your financial future a focus and a planned event. If you just "let it happen" then you are not likely to be happy with the end result. You can do it - you got through law school, right? Just remember to keep the finances in focus. To give you a real world example, a firm can have the greatest lawyers in the world, but if they don't watch their numbers, then the firm is going to go bankrupt. In that fashion, you can be the greatest lawyer in the world, but if you don't pay attention to your finances, then you are going the same way.
OK, I'll climb down from my soap box and present the suggestions broken down by area:
Commute - by commuting, the associates were able to drastically reduce the amount of rent that they paid. This could be a savings as great as $1000/month in some cities. Of course, any expense related to commuting may offset the reduction in rent somewhat, but you are still likely to come out ahead. As far as specifics, in the New York area, living in Brooklyn was recommended over living in Manhattan.
Get a roommate - Having your own place is a luxury. You can get your rent significantly by sharing a 2-bedroom or a 3-bedroom.
Stay at home - If you are lucky enough to practice in an area where your parents or some relatives live, staying with them for free or reduced rent can really help you get on track financially. It's not sexy, but it could mean an extra $25K/year in your pocket in some cities.
Arrange your housing so you don't need a car - This might require a little financial balancing. For example, housing that allows you to dump the car may cost more in rent. However, you can so some math to find out which is most advantageous. For example, if your car costs $200/month (and it probably does after insurance, parking, gas, and wear-and-tear) then an apartment that lets you dump your car but costs $100 more per month still ends up putting an extra $100 in your pocket.
Use carsharing - Zipcar is the big player here in Chicago. There cars are located all over and are easy to rent. I know multiple associates that have given up their cars and rely on Zipcar. They typically use public transportation to work, so the car often did not get much use anyway. One associate claims to be saving over $400/month by getting rid of his car, even after factoring in the cost of occasionally renting from Zipcar.
Consider carefully if a slightly lower-ranked school is willing to offer you a large financial package - You don't want to trade Harvard for a TTT, but if you were targeting a school ranked #20 and a school ranked #40 will give you a much better financial package, then take a careful look. If your employment prosepects are not radically diminished, then you may be better off graduating with less loan debt.
Try out for scholarships and writing competitions - I was was interviewing someone a few years back that had literally about 15 scholarships and writing competition wins on their resume. Their grades were good, but not that good. When I asked them about it, they reminded me about all the notices that I used to see around the law school about obscure writing competitions. I never bothered to enter them - I was so busy with law school. Apparently this guy was one of the few that actually entered them and he managed to get several thousand dollars out of it. He also managed to re-use his essay for several entries - sometimes with minor touchups. He didn't win them all, but he won some while at the same time getting practice writing and having something to add to his resume.
Have a plan - Know what your expenses are monthly. Have a plan to pay off your debt and set aside money for investing. Set it up so that your money gets out of your hands and to the loans or investments as quickly as possible so that you are not tempted to regard the money as free to be spent.
Learn the tax code and what "goodies" you may qualify for - I often tell new associates that by learning the tax planning opportunities that are available to them and taking advantage of them, will probably provide them with about as much financial value as their first year's bonus. I am amazed at how many opportunities people pass by. Do a tax projection. See if you qualify for any programs. You can also change your witholding to manage your cashflow and conform to your tax projection.
That's it for now - please add your own ideas in the Comments or e-mail me!
This is a very simple scheme that I would recommend to every fellow associate with fiscal discipline that has student loans at varying interest rates and has already taken care of his or her consumer debt. It depends on two facts: There are lots of different student loan repayment options, and student loans have no prepayment penalty.ReplyDelete
-- Determine your blended interest rate, and use this tool to estimate what kind of timeframe you’re looking at for repayment: http://www.moneychimp.com/features/debt_payment_calculator.htm
-- Once you determine how much you want to pay-- let’s call it X-- a month, consider paying that much each month mandatory.
-- Extend all your student loans out in whatever form gives you the lowest required monthly payment; this is most likely extended repayment or graduated repayment, depending on your situation.
-- Pay the minimums on every loan, except your highest interest loan. Your minimums plus the ‘extra’ you pay on your highest interest loan should equal or exceed X from above.
-- As soon as the highest interest loan is paid off, repeat with the next highest interest loan. Repeat until done.
-- The only reason you should ever pay less than X is in truly dire emergency, or to finance something that will allow you to save money in short order; for instance, paying for a move to a place with lower rent that will allow you to recoup your costs in a few months.
-- This will likely save thousands. If you’re curious about how much money this will save you, use this spreadsheet and enter your information: http://www.vertex42.com/Calculators/debt-reduction-calculator.html
8:42 - Great suggestion. Of course, paying off your loans based on highest interest rate works if you have consumer loans, too. Also by paying off your loans this way, you typically pay the least interest over time.ReplyDelete
Alternatively, some financial commentators advocate paying off the *smallest* loan first. They acknowledge that this will cost you more money in the long run, but the psychological success of actually paying off the loan may motivate you more to pay off the remaining loans (instead of seeking a psychological reward spending the money buying toys).
Of course, you could always start out on the "highest interest rate plan" and then periodically pay off a small loan if you need a psychological lift. Whatever gets the job done.
I'm a second year associate, and I'm so glad that I found this post. I make a great salary but often find myself stressing about money. I know everyone is in a different financial situation, but I committed to (1) max out my 401k; (ii) max out my IRA each year; (iii) put away $1000/month in a money market until I have an emergency fund that covers 6 months of my expesnses, and (iv) pay off my loans as aggressively as possible. All this means that I'm living pretty frugally otherwise. I spent a good chunk of time reducing my expenses (eating out rarely, calling to negotiate a better cable/internet rate, shopping for the best value car/home insurance, only buying clothes rarely and on sale, etc. I also chose to buy a car that I could pay cash for, although it isn't as nice and fancy as many of my co-workers' cars. If you make sacrifices in your everday life, which surely won't be as hard as the sacrifices you make when you are actually a student, the large salary goes a long way. However, if you don't pay attention to where your money is going each month, it is easy to let even the best associate-level salary slip away, imo.ReplyDelete