Thursday, August 19, 2010

The 4 Ways That New Associates Can Free Up The Most Cash To Pay Down Loans

Around this time every year, a new crop of associates starts at law firms around the country.  This year's crop is much smaller in the past and has had to fight a lot harder to get in.  Also, the recent layoffs have forced associates to confront the possibility that their employment may be eliminated quickly at any time - and that a new job in another law firm may not be available.  This new reality has made the new associates a lot more conservative in their financial consumption choices on average - which is probably good for their long term futures.  However, here are the five areas where associates could still free up a bundle of cash that could go toward loan payments.  More after the break.

In January, we polled recent grads and got their suggestions about how they were saving money.  They are great suggestions and worth reviewing.  However, I am going to focus below on the 4 items that I typically see making the largest financial impact on the life of a young associate.

1) Take The Job In The Lower-Expense City
I know that job offers are hard to come by these days, but if you have the option, I highly recommend taking the job in the city with the lower cost of living - or making sure to include the lower expense city in your job search.  The cost of living factors into just about every financial aspect that you will engage in - rent, food, clothing, you name it.  It also impacts many things indirectly that would not be immediately apparent.  For example, if the cost of living is lower, then salaries for public officials will be lower, so your taxes will be lower.

Most people don't understand just how big of an impact this makes.  To put it in perspective, try out CNN's Cost of Living Calculator here.  When I plug in $160K in Chicago, I find that an equivalent salary in New York (Manhatten) is $294,843.  That Groceries will cost: 42% more, Housing will cost: 190% more, Utilities will cost: 35% more, and Healthcare will cost: 22% more.  Turning it around, I find that a salary of $160K in Manhatten is equivalent to $86,825 in Chicago.

The first thing that east coast people usually say when I point this out is to suggest that they could live someplace cheaper than Manhatten and commute - and that therefore the comparison is invalid.  They recognize that different areas in New York city have different associated costs.  However, they fail to realize that different areas in Chicago also have different associated costs.  For example, if you live in the Chicago suburb of Joliet and commute into the city, your $160 in Joliet is the equivalent of $339,961 in Manhatten.  I find that the "Chicago" numbers are pretty representative of the areas in the city where new associates want to live - downtown, Lincoln Park, Bucktown/Wicker Park, Wrigleyville, and the West Loop.

Comparing the $160K in Manhatten to the $86,825 in Chicago means that in Chicago you can live like you would on $160K in Manhatten and still have $73,175 left over to pay down your loans.  Now I note that the number really should be $73,175 after taxes - which is about $50K, but I also note that you get that savings each and every year.  That can really, really add up over time. 

I have spoken to many people over the years who wanted to live in a high-cost city like New York or San Francisco because it was "exciting" or "pretty".  However, time and again, when I talk to them 5 years later, they wish like hell that they had made the better financial choice.

2) Get A Roommate Or Live At Home
This was a big one that the associates mentioned in January, but it is worth mentioning again. It's not sexy and it can be completely awkward.  However, living with a rommate instead of on your own can easily free up $5K-10K per year that can go towards your loans.  Even better, live at home or with relatives for a few months (or years) until your financial feet are under you.  Living at home frees up a LOT of money that can go towards loans - maybe as much as $25K/year.

Personally, when I got out of law school I took the job offer in the city where I was born and my parents still lived.  At that time, I started working at the firm pretty much full time the Monday after law school graduation - that was the standard deal.  Studying for the bar was done on your own time, but the firm did give me a week off to take the bar exam - but I was back to work on the following Monday.  Also, there was an open question as to whether the job would still be available if I did not pass the bar exam.  

In light of all this uncertainty, I ended up living at home for several months.  I paid rent, but nowhere near what I would have been paying (including utilities) on my own, or even with a roommate.  This allowed me to put thousands of dollars toward my student loans instead of throwing it away on rent - probably about $10K-$15K total.

On the other hand, it was also pretty awkward and it really put a cramp in my ability to socialize and party.  Of course, that meant that I did less socalizing and partying, so I had more money to put toward the loans.

3) Slap a Budget On The Dating/Socializing/Partying
Most of the associates that are trying to be frugal are pretty good.  They can resist the big ticket items like buying a new car, for example.  However, associates (especially male, bachelor associates) often don't have a good feel for exactly how much they are spending on their dating and socializing - and they are often shocked to learn how much it really was.

For example, I was recently talking with a 3rd or 4th year associate who realized at the end of the year that he had spent more than $24K on dating/socializing/partying.  That's an astronomical, mind-boggling sum.  How could it have been so much?  Well, he and his girlfriend had a standing date on Friday where they would try out a new nice restaurant every week - not the absolute most expensive, but nice.  Also, on Saturday they would usually eat at one of a small number of restaurants that they liked - sometimes with other couples - and then go see a movie or a play.  On Sunday, they would usually have people over to watch a game, have dinner, or hang out - and they ususally ended up footing the bill for the food and drinks for that as well.

Seems pretty innocuous, right?  Well, in dollar terms he figured that his average Friday night dinner with drinks and tip usually ended up being about $200 - and 52*$200 is $10,400 for the year.  Saturday was a less expensive restaurant, but movie tickets and food were expensive - and the periodic theater tickets were significantly more expensive.  He figured that his average cost per night was around $150 - and 52 times $150 is $7,800.  The Sunday events were less frequent and the cost structure was better because they were at their home, but they still spent about $5,000 over the year.  Add these together and it is a total of about $24,000 - which is far too much.

The tricky thing about it is that the money went out in fairly low increments - and that the activities in by themselves were not viewed by the associate as "expensive".  Thus, his "frugality sensor" was not activated.  However, taken in the aggregate, they were spending far too much.  (You can also see the complacency trap that many young lawyers fall into after a few years.  It's kind of like "I'm a laywer, I make a lot of money, I should be able to afford this.")

The fix here does not need to be painful- you don't have to stop all dating.  However, the amount that you spend per month should be determined in line with your long-term goals and not just unconsciously spent.  For example, the associate and his girlfriend resolved to cut their socializing expense by trying a new restaurant every other week (instead of weekly), making Saturday a take-out night, keeping the movies, but dropping the theater, and cutting the frequency of gatherings at their place in half.  That still means that they are spending $1000/month, which is still a little on the high side, but certainly more in the realm of reality.

4) Find Your Weakness And Manage It
Everyone has a financial weakness - something that they spend money on that they really don't have to.  People also often develop elaborate justification/defense mechanisms as to why they need to continue spending that money.  This one is kind of a toss-up and varies a lot from person to person.  However, my advice in this category is not just "stop spending money" - lots of financial authors do that and it's good advice by the way - but to write down and actually track your monthly expenditures.  That's really the only way that you are going to be able to find your weakness.  I have seen people's minds often fail to register certain expenditures and costs - unless they are looking them square in the face on a writtem espense tracker.

Once you have found your weakness, you can try to address it by stopping that expenditure.  However, that often creates a lot of internal stress in people and may not be the best and most creative solution.  Try to think outside the box and find a creative solution.

For example, a lawyer in a local firm really loved Starbucks coffee and would have it every day - sometimes multiple times a day.  Their firm provided coffee, but it was pretty nasty.  When confronted with how much their coffee expenditure was costing them a year (over $2000), they intially vowed to swear off Starbucks.  However, a couple weeks later they found their thoughts preoccupied by Starbucks and began to fear that it was distracting them from their billing.  Consequently, they ended up going back to Starbucks, but feeling bad about themselves.

The good part to this story is that the associate eventually recruited other more senior associates who were also big Starbucks fans and they convinced their firm to switch to Starbucks coffee.  Now, from an associate view point it might be a strange luxury to have Starbucks as the firm's coffee, but the price differential was really not that much and the associates mentioned that it would eliminate the time that they spent going to and from Starbucks - it was also potentially a nice thing for clients.  This associate also liked whipped cream in their coffee, so they just got a cannister of whipped cream and stuck it in the fridge.  They estimated that they cut their coffee budget from $40/week to $2 (whipped cream) - and more importantly, they found a solution that worked for them.

Obviously, this is a very personalized solution.  Some people will not be satisfied with it - and that's OK.  You just have to try to find a solution that works for you.  Identify the need and try to think of a creative way to get it met inside your budget.  You might even have fun and new experiences in attempting to meet that need.  You might also get a sense of accomplishment.

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