One of my goals for the blog in the new year is to figure out a way to highlight a few actual lawyers as case studies for others. I think it’s always helpful to see what your peers are up to and we can all learn from different ways of approaching the same problems.
I have quite a few lawyers lined up that want to share their financial progress, but what I haven’t yet figured out is the best way to showcase what they’re doing. I’m thinking a written interview is probably the most interesting, but here’s where I could use your help and feedback. Leave a comment to this post or send me an email if you have particular questions you’d like to ask your fellow lawyers about how they’re handling their personal finances. I’d like to come up with a format and repeat it as I find more lawyers willing to be interviewed.
Meanwhile, to kick things off, I’ve put together an example budget for a fictional 1st year Biglaw associate. These won’t be your specific numbers, but should be helpful in generating some thinking on your part.
In this hypothetical, I’ve calculated the first year associate could save $68,785 a year. That’s a pretty solid savings rate of 35.3%.
Hardcore savers could do even better, but I wanted to start with something that’s middle of the road because I’m much more afraid of the other end of the spectrum – lawyers making a $180K starting salary and yet only saving $20-$30K a year while thinking that they’re making good progress toward their financial goals. Thanks to your late start, a savings rate of 10-15% just isn’t going to cut it.
We’re assuming our first-year associate lands a job at one of the prestigious firms in New York, San Francisco, Boston or even places like Dallas and Houston and is getting paid the market rate. For purposes of this example, let’s assume she lives in New York as it’s one of the most expensive places to live in the country.
The First Year Associate Biglaw Sample Budget
As you can see, on the income side we’re assuming a starting salary of $180K plus a first year bonus of $15K. Those numbers match up with the current market salaries.
After that, we’ve taken out taxes and retirement savings to arrive at a disposable income of over $100K. The key here is how big the tax bite will be on your salary – and that’s even after taking advantage of the traditional 401(k), Health Savings Account (i.e. Stealth IRA) and using pre-tax dollars to pay for health insurance premiums and a monthly subway card. Anything else you can do to minimize taxes is going to be an effective use of your time and worth planning.
After that, the discretionary part of the income assumes a generous $2,500 spent on a 1 bedroom apartment. If you can live on less (i.e. with roommates, as you should be doing), that’s even better as you could trim $1,000 from your rent by continuing to live like a law student. For anyone serious about building real wealth, I highly recommend you continue to live like a law student for the first 3-5 years after law school.
You’ll also notice in this category I’m assuming you have a house cleaner (a luxury I think is well worth it) and that you’re only spending $50/month on Internet and $40/month on your phone. There’s really no need to be paying more than that, nor do you need cable TV. Cut out the unnecessary expenses and move on.
For food and bars, I’m assuming you can get by on $1,200 a month. Many spend much less, but hey NYC is expensive and you’ll probably be going out with friends to relieve some of the stress, so go ahead and have a little fun. For the most part, you should be trying to capture all of your reimbursable expenses anyway, which will often include late night meals.
On the shopping side, I’ve assumed a generous clothing allowance as this hypothetical lawyer will likely need work appropriate outfits and this will be a new expense. For men it’s a lot easier to wear the same clothes over and over again, so women may need to spend more than this amount. The budget is just a target, so feel free to adjust as needed.
For entertainment, we’ve kept things pretty minimal. You’ll mostly be working, so I doubt you’ll be able to spend much on entertainment even if you wanted to. The key here is keep from paying for expensive monthly subscriptions for services you don’t use.
At the end of the day, this hypothetical lawyer is saving a total of $68,785 a year. That’s a great base, particularly since you’ll be saving your raises as you go along. Even if you only spend 3-5 years in Biglaw, you’ll be able to rack up over $300K in savings in a pretty short timeframe.
Many of you will notice that this doesn’t include any student loan payments. Since you’re making $26,850 in retirement account contributions, that leaves $41,935 that you can either contribute to a taxable savings account or apply toward your loans. If you have $200,000 in student loans, you should be able to pay them off in 5 years, assuming you use future raises and bonuses toward the loans. If you follow the Student Loan Refinancing Guide, not only will you get a great rate but I’ve also negotiated cashback bonuses from each company.
If you find yourself 5 years out with no student loan debt (i.e. you’ve paid off $200,000) and over $150,000 in retirement accounts (remember, you’re still making those contributions in the above example), I’d say you’re doing pretty good.
I know many readers will want to do even better and of course you can do more to push the needle by increasing your savings rate.
Unfortunately, many lawyers won’t be able to save this much. They’ll leave Biglaw in 3-5 years with a large student loan balance and a negative net worth. It’s pretty easy to spend the salary when you’re living in a high cost of living city like NYC and you’ll be watching your peers do the same.
It’s up to you to decide where you want to be in 5 years.
Let’s talk about it. Did I get some numbers wrong? Do you think you could live within this budget? Was I too generous? How would you change this to increase your savings to over $80K a year? Comment below!