It’s a new year, and if you’re like everyone else you’ve made a list of some things you’d like to do better, differently, more often or less often in 2019. These resolutions typically involve eating more kale, less sugar and working out more. All great intentions and hopefully you’re following through on those goals.
But what about your financial life? What goals have you set for 2019 to put yourself on more solid financial footing in the year ahead? Here are a few suggestions worth considering for lawyers, depending on where you are in the arc of your career.
Associates. Depending on whether you’re a first year or sixth year, your best next step could be very different. If you are very early in your legal career, you are likely mostly focused on paying down your law school debt. I would tend to agree with this approach, especially in light of rising interest rates which may make your law school loans more expensive. But do you have a strategy for how you are paying down your debt and how that cash outlay fits into your broader financial picture? As we start 2019, I would suggest you sit down and create a budget so you can be more strategic about what percentage of your income is going toward retiring your debt. This will also help you categorize your expenses into fixed and discretionary spending. As you get more organized perhaps you will find you are doing more discretionary spending than you thought and perhaps some of that spending could be redirected to either accelerate paying down your debt or starting to save a little bit for the future.
As you progress in your legal career your income is likely now trending in the traditional up-and-to-the-right pattern. So, as you start to get a little cash flow breathing room, what should you be thinking about next? Law firms are typically among the best at providing quality firm-sponsored retirement plans for their employees, usually 401(k) plans. You are still likely in your 20s, so it’s important to recognize that time is very much on your side and you need to take advantage of the miracle of compound interest by increasing your participation rate in your firm’s 401(k) plan. Take a look at what percentage of your income you are currently contributing to your 401(k). If you are at 5 percent, try to double it and get to 10 percent. Make it a goal to get to the point where you are maxing out your contributions by the time you make income partner.
Income partners. Income partners occupy a bit of a “land between”—you’ve graduated from the ranks of associate but not yet become a shareholder. Assuming that making equity partner is a major goal for you, I would suggest you use these in-between years to prepare yourself for a few important changes that will become your economic reality upon reaching equity partner status.
First, when you become an equity partner you will likely need to buy into the firm. Most firms utilize some type of credit facility either internally or through a bank to help partners make this equity buy-in payment. However, with interest rates going up, you would be wise to start saving now for that equity buy-in. If you are highly confident you are on the equity partner path, I would even consider asking your mentor if he or she could give you an idea of what it might cost for your initial equity buy-in. If you can put more cash toward the buy-in and borrow less you will save yourself some interest cost along the way. A few years ago this didn’t matter as much as interest rates were hovering around 0%. However, with rates having gone up quite a bit over the last couple of years and still rising, interest costs are starting to matter more.
Next, when you become an equity partner your tax situation will get more complicated. You will begin paying your taxes differently, moving from a simple April 15th deadline to likely making quarterly estimated tax payments on January 15th, April 15th, June 15th and September 15th. This is often a bit of a shock for newly minted equity partners because, depending on the timing of your partner distributions, you may face a cash flow crunch of needing to make a quarterly tax payment before you’ve received a partner distribution. Over time, this levels itself out, but in the early going it can be difficult from a cash flow standpoint. So, I would suggest starting to save up and build a cash cushion that can make those first couple of years a little less stressful when it comes time to make those quarterly tax payments.
Equity partners. You’ve made it to the promised land. You spent years and very long hours grinding away to make it to this point. Now that you’re here what should you be doing to capitalize on what are sure to be your peak earnings years?
My number one tip for equity partners for 2019 would be to figure out “your number.” Assuming you are already maxing out all of your various firm-sponsored retirement plans what else should you be doing to put yourself on the right path to retirement security? “Your number” is the amount of after-tax savings you need to be socking away each year between now and retirement in order to give yourself a greater than 90% probability that your retirement will be financially successful. You will likely need some help to figure this out, but a good financial planner should be able to help you with it. The beauty of knowing your number is that it taps into your competitive drive as a lawyer. It gives you that clear goal that you can fixate upon and make sure you hit that savings goal each year. To make this even more actionable, I suggest looking at your partner distribution cycle and earmarking a certain amount from each distribution that will go towards your annual after-tax savings hurdle. Having a crystal-clear plan like this will make it so much more likely that you will end up on solid footing when it’s time for life after the law.
A new year brings with it so much promise and the chance to make positive changes for the future. In addition to focusing on how you can be more physically healthy in 2019 utilize these few tips to get yourself more financially healthy as well.