The Biglaw Investor http://www.biglawinvestor.com Fri, 24 Mar 2017 11:44:21 +0000 en-US hourly 1 https://wordpress.org/?v=4.7.3 http://www.biglawinvestor.com/wp-content/uploads/2017/01/favicon.png The Biglaw Investor http://www.biglawinvestor.com 32 32 111859200 How to Prioritize Your Dollars http://www.biglawinvestor.com/guide-prioritizing-investments/ http://www.biglawinvestor.com/guide-prioritizing-investments/#comments Fri, 24 Mar 2017 10:00:00 +0000 http://www.biglawinvestor.com/?p=1128 Check out The Biglaw Investor or read How to Prioritize Your Dollars

Prioritizing investments is more art than science. The decisions are highly personal. Some people hate debt. Others have strong feelings about future tax rates. To serve as a talking point, I’ll lay out my view of the proper prioritization of investments. If you’re a high-income earner, prioritization is less of an issue. You should be maxing […]

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Check out The Biglaw Investor or read How to Prioritize Your Dollars

Prioritizing investments is more art than science. The decisions are highly personal. Some people hate debt. Others have strong feelings about future tax rates. To serve as a talking point, I’ll lay out my view of the proper prioritization of investments.

If you’re a high-income earner, prioritization is less of an issue. You should be maxing out all retirement accounts (as I’m doing). But I recognize that even new lawyers with high incomes need a starting point.

The following waterfall should work well for many lawyers:

1. Pay Off High Interest Debt. This is obvious and not worth much discussion. If you brought any credit card debt or other high-interest (above 10%) debt to your professional life, you need to eliminate it immediately.

2. Health Savings Account (HSA). If available to you (i.e. you are participating in a high deductible health insurance program), the HSA is a triple-tax-advantaged account with no income restrictions (sometimes referred to as the Stealth IRA).

3. Firm’s 401K Account. If you get a match, this should be your top priority, however most firms in my experience do not provide a match. Much has been written about whether to invest through a Traditional 401K or a Roth 401K. My opinion is to stick with the Traditional 401K and take advantage of the tax savings today.

4. Roth IRA. If your income is above $132,000 ($194,000 married filing jointly), you won’t be able to contribute directly to a Roth IRA. However, Congress has kept open the “backdoor” which allows you contribute to a non-deductible IRA and then roll it over to a Roth IRA. Roth IRAs act as great “emergency funds” because, if you absolutely had to, you can withdraw contributions at anytime without paying any taxes or fees. I wrote a Backdoor Roth IRA guide to show you how to do it step by step.

5. Emergency Fund. In the past, I’ve argued that you really don’t need an emergency fund in the traditional sense. However, it would be silly not to build up savings that can carry you if you need to leave your current job. If you have taxable investments, you can always sell some of those to cover living expenses in the event of a job loss, so you don’t have to keep this money in cash under the mattress. I have six months of expenses invested in a 60/40 mix of bonds and stocks which also fits into my overall asset allocation per my Investment Policy Statement. There’s a substantial peace of mind benefit to knowing that you could leave your current job and live for many months while you found a new gig.

6. Pay off Student Loan Debt. Student loan debt, even of the low interest kind, is not something wealthy people let linger. Better to knock out the debt and stop paying interest to your lender than to effectively invest on margin with the hope of arbitraging the rate of return between your student loans and returns in the market. I can see in some cases where lawyers managed to lock in interest rates below inflation (i.e. 1.5% or 2%) where it might not make sense to pay off the debt. Still, consider that by paying off the debt you will significantly improve your cash flow position which allows for more choices in life and your career.

7. Car Savings Fund. Living in NYC, I don’t own a car. That may change in the future and when I do, I’ll be paying for it in cash.

8. Down Payment Savings Fund. If you’re thinking about buying a condo or house in the near future, it’s helpful to earmark a specific account or line item in your net worth calculation to keep track of this money.

9. Taxable Investment Account. If you still have money left over, now is the time to start piling it into a normal taxable investment account (in low-fee index funds obviously). This should only be after taking full advantage of all retirement accounts.

Two accounts I didn’t mention are: (1) 529 accounts and (2) the Mega Backdoor Roth.

529 accounts are state-specific investment accounts for education savings. They are a good deal but only worth it if you have kids (which I don’t yet). The Mega Backdoor Roth IRA probably isn’t available to you, but worth looking into just in case.

Let’s talk about it. What’s your priority for your investment accounts? Let us know in the comments!

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Meet the Gotrocks Family! http://www.biglawinvestor.com/meet-the-gotrocks-family/ http://www.biglawinvestor.com/meet-the-gotrocks-family/#comments Wed, 22 Mar 2017 10:00:00 +0000 https://www.biglawinvestor.com/?p=2716 Check out The Biglaw Investor or read Meet the Gotrocks Family!

Imagine that all American corporations are owned by a single family: The Gotrocks Family. As you might expect, they are a very wealthy family. Even better, each year they grow richer and richer. After paying taxes on their dividends, the family continues to increase their net worth each year by the entire annual profit of the […]

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Check out The Biglaw Investor or read Meet the Gotrocks Family!

Imagine that all American corporations are owned by a single family: The Gotrocks Family.

As you might expect, they are a very wealthy family. Even better, each year they grow richer and richer. After paying taxes on their dividends, the family continues to increase their net worth each year by the entire annual profit of the US market.

Things are great inside the family too because everyone is getting richer at the same rate. Sure, they might spend a different amount of their money each year, but, as a whole, whatever is not being spent is being invested back into the companies they own for further compounding growth.

But then imagine that a few Helpers show up on the scene. The Helpers start speaking to different members of the family and convince some of them that they could outsmart their relatives by buying more of certain companies and selling some of the other companies.

Thus convinced, the Helpers – for a small fee – start a series of transactions where they help certain family members undertake this venture. Of course the Gotrocks family still owns the entirety of all US corporations, but now that ownership is being split up differently among the family members.

The Gotrocks family is less wealthy thanks to these transactions. Their annual profit is now the entire annual profit of the US market minus any fees they’ve paid to the Helpers.

The fees are not lost on the Helpers who realize that activity is their friend and therefore encourage it at every turn, thereby driving up their profit and, unfortunately for the Gotrocks, reducing their overall wealth.

Over time, the family members start to realize that they’re not really doing much better than their relatives. In fact, some are clearly doing a little worse.

A new player in the game shows up. They convince the family members that the Helpers are merely executing the transactions but not managing the portfolio holistically. The family needs a Manager to get the job done professionally.

The Managers continue to use the Helpers to execute the trades, but now the Managers spend much of their time looking at the performance of various slices of the market to determine which will provide the best growth.

From the family’s perspective, their wealth is now decreasing even faster as they pay fees to both the Mangers and the Helpers. As more and more family members employ additional professionals, the competition to earn a greater return than other family members intensifies.

The result? More help of course. More managers, institutional advisors and financial planners show up on the scene to sort out the mess created by the Managers and the Helpers.

By the now the family members are convinced that they know nothing when it comes to US corporations, so they gladly welcome the additional help.

The family’s overall fortunes continue to decline.

But just when you thought the family couldn’t do any worse, a fourth set of professional shows up on the scene.

They argue that the problem with the managers, helpers and financial planners has always been that they’re not properly incentivized. What you need is someone whose payment is based on some type of contingent payment. If these people earn a profit of 10%, they should get 2% for their service, thus incentivizing them to provide the family member with the greatest service.

Some of the family members recognize that this fourth class is really just more managers and helpers in disguise. But they are a convincing class, so the family decides to pay up for the services.

And that is basically where we are today. More than ever before, the portion of corporation’s profits that should go to the owners are instead diverted to the various helpers, managers and planners that profit from trying to find one way for a family member to beat another family member.

All of this money could have been retained by the Gotrocks family if they had simply done nothing and left everything alone.

Some of you will no doubt recognize this story from Warren Buffett’s 2006 letter to shareholders.

I still find the story of the Gotrocks the most powerful way to explain why paying the helpers and managers a fee for managing your portfolio isn’t necessary. Simply allow those profits to come to you by doing nothing!

If you’re interested in a readable compilation of Warren Buffett’s letters to shareholders, I highly recommend you check this out.

Let’s talk about it. Join us over at Lawyer Slack to talk about this article or let us know what you think of the Gotrocks family below in the comments!

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Predicting the Stock Market Future http://www.biglawinvestor.com/predicting-future-stock-market/ http://www.biglawinvestor.com/predicting-future-stock-market/#comments Mon, 20 Mar 2017 10:00:00 +0000 https://www.biglawinvestor.com/?p=2673 Check out The Biglaw Investor or read Predicting the Stock Market Future

Recently a reader sent in a comment: I really feel like you brush over the issue of whether the market will be the same in the future. I couldn’t help but completely agree. I do brush over whether performance of the stock market will be the same going forward as it has been historically. Why? […]

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Check out The Biglaw Investor or read Predicting the Stock Market Future

Recently a reader sent in a comment:

I really feel like you brush over the issue of whether the market will be the same in the future.

I couldn’t help but completely agree.

I do brush over whether performance of the stock market will be the same going forward as it has been historically.

Why?

Because my crystal ball is cloudy and so is everyone else’s.

The truth is that on the macroeconomic level, nobody has a clue how the market will perform in the future, whether that’s the next couple of months, years or decades.

Macroeconomics studies the performance, structure, behavior and decision-making of an economy as a whole. It includes national, regional and global economies. It includes technological innovations, inflation, unemployment, consumption, investment, international trade and international finance.

In short, the future performance of the stock market contains a bazillion different factors that are impossible to predict, so the ugly truth is that we have no idea how stock markets will perform in the future.

Worse, it’s next-to-impossible to predict the movement of even certain asset classes. Harvard has the brightest minds in the world and access to literally every investment opportunity, yet even the Harvard endowment can’t beat a bunch of passive index funds.

To a risk-averse lawyer (i.e. all of us), that might raise your legal spidey senses to the point of analysis paralysis.

If we have no idea what will happen in the future, then what do we do?

Well, it turns out that there aren’t a lot of options (and sitting on the sidelines isn’t an option).

Listen to the Talking Heads for Advice

There’s no shortage of people willing to try to predict the future. If thousands are doing it, some of them are bound to be right. That doesn’t mean they can do it consistently.

More often than not, the talking heads are simply selling entertainment. They have a vested interest in keeping you engaged which leads to recommending different strategies, following the daily movements of the stock market and headlines like “This Year’s Hottest Asset Class”.

You can safely ignore them.

If they could predict future economic performance, why would they have a day job on TV telling everyone else about it? It doesn’t make sense.

It reminds me of a passage from Warren Buffett where he points out the difference in being able to achieve an extra 10% return.

If you could consistently predict the future performance of the market, would you sign up for a six-figure TV contract or would you prove it to a few wealthy individuals and then start managing their money for a 1% annual fee?

If the talking heads can predict the future, they are woefully underpaid for their services.

Using Historical Data as Approximation

If everyone is unable to accurately peer into the future, what else can we do?

Well, thankfully we have access to historical market data that includes stock market performance during consequential events like the Great Depression, World War II, Vietnam, inflation in the 1970s, Black Monday and the Great Recession.

Does this mean the the average historical market return guarantees future performance? Heck no. But it’s a reasonable starting point for what we might be able to expect in the future.

The problem with historical returns is figuring out how to bridge the gap between what happened in the past and what will happen in the future.

Multiple Investing Futures

To bridge this gap, the easiest way to develop a hypothesis for how your investments will do in the future is to simply predict multiple investing futures.

If we take the after-inflation historical compound annual growth rate of the entire stock market and set it at 6.55%, then perhaps we’d want to run portfolio performance scenarios at everything from 4-8% to see multiple possible future outcomes.

Which future will materialize? We don’t know.

But, for now, we can simply examine a reasonable bunch of possible futures to see how they could turn out.

You can use the Compound Interest Calculator to do some rough approximation for how your portfolio will perform in the future. Simply adjust the interest rate to imagine different scenarios.

Compound Interest

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Compound Interest
time(s) annually

Results

Back to Basics (Index Funds)

Index funds will never be winners, but they will always be runner-ups.

At the end of the day, we can’t predict the future and therefore can’t know how the market will perform.

But we do know that low-cost index funds that capture the entire market (such as the Total Stock Market Index Fund) will give us the market return, whatever that may be.

And at the end of the day, what more can we expect? As a whole, we all own the entire market anyway. That means that if you add up every investor and then average their returns, you’ll arrive back at the same place: the total stock market return.

More to the point, this is why saving money is more important than your investment return anyway. You can’t take advantage of any future market performance unless you have a portfolio working for you in the market to begin with.

And then once you have that portfolio, accepting the market returns (i.e. finishing as a runner-up each and every race) will compound into a small fortune guaranteed.

Let’s talk about it. Do you spend time worrying about the future stock market performance? Why or why not? Let us know in the comments!

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The Mega Backdoor Roth IRA http://www.biglawinvestor.com/mega-backdoor-roth-ira/ http://www.biglawinvestor.com/mega-backdoor-roth-ira/#comments Fri, 17 Mar 2017 10:00:00 +0000 https://www.biglawinvestor.com/?p=2646 Check out The Biglaw Investor or read The Mega Backdoor Roth IRA

There’s a little known (and rarely used) provision in some 401(k) plans that catches the attention of lawyers from time to time. If available, it could allow you to make an additional $36,000 in Roth IRA contributions each year (aka the Mega Backdoor Roth IRA coined by Jim Dahle). Unfortunately, for most of you, this […]

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Check out The Biglaw Investor or read The Mega Backdoor Roth IRA

There’s a little known (and rarely used) provision in some 401(k) plans that catches the attention of lawyers from time to time.

If available, it could allow you to make an additional $36,000 in Roth IRA contributions each year (aka the Mega Backdoor Roth IRA coined by Jim Dahle).

Unfortunately, for most of you, this won’t be an option. But, I think you should explore and report back to me if your firm plan will let you do it.

Before we dive into figuring out whether your plan allows Mega Backdoor Roth IRA contributions, let’s make sure everyone has the background facts.

When contributing to a 401(k), there are three different types of contributions you can make: (1) pre-tax; (2) Roth; or (3) after-tax.

Pre-tax contributions are usually the best bet for a high earner, since they reduce your taxable income and save you money on your taxes today.

Roth contributions are made with post-tax money which means you pay taxes today but will skip paying taxes on withdrawal.

Today we’re most interested in exploring the after-tax contributions.

After-tax contributions are contributions to a 401(k) plan made with post-tax money (like Roth contributions). After-tax contributions will grow in your 401(k) plan tax-free but all of the earnings will be taxed upon withdrawal (of course, your contributions won’t be taxed again as that would be double-taxation).

You can think of these three types of contributions as different sub-accounts inside a bigger account that is your 401(k). Each sub-account is tracked by your plan administrator separately.

Typically, contributing with after-tax money to your 401(k) isn’t a great deal because you won’t get a tax benefit when you contribute or when you withdraw. The only benefit is that the money isn’t taxed while it’s growing, but in exchange for that benefit you give up all the benefits of having a taxable account (i.e. no restrictions on using your money and the ability to tax-loss harvest).

Plus, the worst part of making after-tax contributions to your 401(k) is that you’re converting what would have been capital gains taxes (i.e. the tax on growth in a taxable account) for ordinary income taxes (i.e. the tax you have to pay on growth of after-tax contributions to a 401(k) upon withdrawal). Once you understand the last point, you understand why you’ve probably never heard of after-tax contributions before.

But IRS Notice 2014-54 made everything much more interesting by giving clear guidance that when transferring money from your 401(k) into an IRA, you can divert the after-tax portion to your Roth IRA without having to pay any taxes.

This is important for those that can make in-service distributions (i.e. you can transfer from your 401(k) to IRA while still employed).

Assuming your 401(k) plan allows for both (a) after-tax contributions above the $18,000 annual contribution limit and (b) in-service distributions, you can contribute after-tax money to your 401(k) and then roll it over to your Roth IRA. Viola, the Mega Backdoor Roth IRA.

Example. Larry contributes $18,000 of pre-tax money to his 401(k) plan each year. His plan allows for after-tax contributions up to the maximum $54,000 limit and for in-service distributions. He contributes $36,000 of after-tax money to his 401(k) and then rolls all of his after-tax dollars into his Roth IRA account at Vanguard. Larry has effectively made a mega $36,000 contribution to his Roth IRA.

Eligibility

Now that you understand how the Mega Backdoor Roth IRA works, are you eligible?

The answer is probably not, but it’s worth checking.

Step 1) The first thing to do is to reach out to your benefits coordinator or get a copy of your 401(k) plan and see if you can make after-tax (non-Roth) contributions above the $18,000 annual employee contribution maximum.

Here’s a look at the language in my plan that makes it clear that the Mega Backdoor Roth IRA is not an option for me:

I suspect you’ll find similar language or a similar answer from your benefits department when you ask. If you are eligible for a Mega Backdoor Roth IRA, please send me an email as I’d love to hear from you. So far I haven’t found a firm that offers this option but I’m hoping there is 1 or 2 out there.

Step 2) If you are able to make after-tax (non-Roth) contributions to your 401(k) plan, the next step is to see whether your plan allows you to perform in-service withdrawals.

If it does, then you’re all set since you can make the after-tax contributions and then immediately roll them to a Roth IRA.

If you can’t, then you have another dilemma to consider. So long as you’re employed, you won’t be able to move the money to a Roth IRA. But, when you leave the job, you will have the option of rolling your 401(k) to an IRA. During that rollover, you can allocate the pre-tax money to a Traditional IRA and the Roth/after-tax money to your Roth IRA. So, if you’re planning on leaving in the near future, you might find it more palatable to make those after-tax contributions knowing that soon you’ll be able to move it to a Roth IRA.

Here’s a few other things to consider:

(1) You can still make your $5,500 Backdoor Roth IRA contributions. These are made via making a non-deductible contribution to your Traditional IRA and then rolling the money to a Roth IRA, so the Mega Backdoor Roth IRA has no impact (despite having a similar name).

(2) If you are married and both of you have cooperative 401(k) plans, you can put up to $72,000 a year into two Roth IRAs!

Summary Points

Feeling lucky today? Reach out to your benefits coordinator and ask:

  1. Does my plan allow non-Roth after-tax contributions and, if so, how much can I contribute; and
  2. If it does, can such contributions be distributed while I’m employed (i.e. “in-service distribution”)?

Let’s talk about it. Is the Mega Backdoor Roth IRA an option at your firm? Have you used this strategy. Let us know in the comments or in Lawyer Slack!

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Defeating the Imposter Syndrome http://www.biglawinvestor.com/imposter-syndrome/ http://www.biglawinvestor.com/imposter-syndrome/#comments Wed, 15 Mar 2017 10:00:00 +0000 https://www.biglawinvestor.com/?p=2634 Check out The Biglaw Investor or read Defeating the Imposter Syndrome

If you’re like a lot of lawyers, you graduate law school, pass the bar and instantly realize you have no clue how to practice law. If you’re not a lawyer that sentence might be a little alarming, but it’s pretty much true. Law school gives you the building blocks to figure out how to practice […]

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Check out The Biglaw Investor or read Defeating the Imposter Syndrome

If you’re like a lot of lawyers, you graduate law school, pass the bar and instantly realize you have no clue how to practice law.

If you’re not a lawyer that sentence might be a little alarming, but it’s pretty much true.

Law school gives you the building blocks to figure out how to practice law but you’ve got to go out and do the work.

The good thing about this is the lawyers are comfortable telling clients that they don’t know the answer to a particular question. In fact, it’s kind of expected that you won’t know the answer at first but that you’ll be able to find the answer and get back to them.

The problem with this is that it pours gasoline on the fire known as the imposter syndrome, which can be hard to shake off.

For those of you that aren’t familiar, the imposter syndrome is a well-documented condition describing high-achieving individuals that aren’t able to internalize their own accomplishments (i.e. good grades, great test scores, getting a professional degree and landing a good job) and a persistent fear of being exposed as a “fraud”.

Does that sound like it could be you?

Here’s another quick test:

What percentage of Americans end up with a professional degree?

If you said anything higher than 3.27%, you might be suffering from a little bit of bias based on your surroundings.

Feeling like an imposter can have a direct impact on your finances.

Therefore, it’s probably a good idea to take a step back and make sure this isn’t you.

I’m Not Going to Be Here Much Longer

Many law students start their first job thinking that they might not be cut out for the position. The truth is, it’ll take some time to figure that out.

But that doesn’t stop you from thinking that you won’t be there for much longer.

When you think you’re not going to stick around (or that someone might ask you to leave), you’re not likely to take steps that impact your long term financial health, like putting money in a 401(k) account.

Why should you? You’ll be gone in a few months.

Unfortunately, this behavior can last for years.

Objectively, if you looked at a lawyer who didn’t manage to save very much over three years you might feel a twinge of judgment. But for that lawyer, it might have been a series of 36 individual months, with each month feeling like it might be the last. They never saw it as that “three year stint”.

The solution is take a step out of your personal situation and look at your life and the current year holistically.

So what if you might be gone in a couple of months? Well, it’d be great to get a couple of months of savings. That’s what!

Plus, even if you leave you’ll eventually find a job somewhere else and that job will probably have retirement accounts too.

There’s no shame in transferring a 401(k) account with $1,000 in it to a new job. That’s $1,000 more than you would have if you never got around to opening it in the first place.

Don’t let the imposter syndrome set you back a couple of years. Getting started saving your first $100,000 is the hardest part.

Welcome to the Genuine Fake Factory

Investing, building wealth, etc. is pretty much similar to the fake it until you make it concept.

Pretend like you’re paying off your student loans and building a great war chest of dollar bills working for you.

Pretty soon after you decide to fake it, you won’t have any student loans and the dollar bills will each bring in nickel or two a year (which adds up!).

That means that everyone has to start with a 401(k) balance that shows a pretty small sum. On the flip side, everyone has to go from $200,000 in debt to $196,000 in debt to $192,000 in debt, etc.

But a lot of your peers will skip these steps, thinking that they’ll go from a negative net worth to wealth in one giant leap.

In my experience, they’ll be waiting a long time for that leap and it may never come.

I’ve corresponded with partners that have told me stories of their fellow partners betting everything looking for the “quick buck” because they assume they have better investment insight that the professionals and have a lot of ground to make up due to not starting sooner.

I’m sure this behavior is common among doctors as well. When you start your career late in life, you’re way more likely to think that you need to catch up by doing something dramatic.

Nobody sees the day in and day out work of building wealth as dramatic. It seems almost too ordinary to get the job done.

But, welcome to the genuine fake factory! If you start off “faking it” by putting in $1,000s of dollars, it really doesn’t take much time before you’ll build genuine wealth, especially if you’re banking your raises.

If you’ve felt imposter syndrome feelings (who hasn’t, right?), take a moment to think about how it might be impacting your personal finance goals.

Let’s talk about it. Does the imposter syndrome affect you? Have you thought about how it might impact your financial decisions and have you taken steps to get to the 50,000 foot view so you’re not trying to chase yield?

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Do You Need Disability Insurance? http://www.biglawinvestor.com/do-you-need-disability-insurance/ http://www.biglawinvestor.com/do-you-need-disability-insurance/#comments Mon, 13 Mar 2017 10:00:00 +0000 https://www.biglawinvestor.com/?p=2600 Check out The Biglaw Investor or read Do You Need Disability Insurance?

Over the last few months, I’ve gone down the rabbithole looking into disability insurance. I have adequate coverage with a pretty decent group policy but disability insurance is sufficiently important that I wanted to make sure I wasn’t making any mistakes. Additionally, I’ve already had multiple readers contact me about disability insurance. That’s not surprising. […]

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Check out The Biglaw Investor or read Do You Need Disability Insurance?

Over the last few months, I’ve gone down the rabbithole looking into disability insurance. I have adequate coverage with a pretty decent group policy but disability insurance is sufficiently important that I wanted to make sure I wasn’t making any mistakes.

Additionally, I’ve already had multiple readers contact me about disability insurance. That’s not surprising. Disability insurance is much more complicated than any other type of insurance policy you’ll purchase. There’s a lot we’re going to need to sort through.

Since I’m not a disability insurance agent, I reached out to several professionals in the business to speak to them about the intricacies of disability insurance. You’ll see their names and links to their sites throughout this series. We have no financial relationship.

So, let’s get started with the basics of disability insurance.

Do You Need Disability Insurance?

A majority of Americans do not have a private, long-term disability insurance policy that would replace a portion of their income should they become sick or injured. For that reason, disability insurance isn’t something that gets a lot of press.

The reason that people don’t have private insurance is because many people have disability insurance through their employer. I assume most people have given their employer’s disability insurance very little thought (I know I hadn’t up until a couple of years ago). Or, if you have looked at private disability insurance, you’ve realized that it’s incredibly expensive and decided to reconsider it later or put those dollars to work elsewhere.

Sensing concern that people were underinsured (and perhaps that they weren’t selling enough policies), the insurance industry has put together various studies to get your attention. Most show the likelihood of an American becoming disabled during his or her lifetime.

How likely are you get to become disabled?

Well, it turns out the numbers aren’t so clear. Ron Lieber has an amusing piece in the New York Times were he complains that the chance of becoming disabled range from 80% to 30%.

Those numbers sound scary and I’m sure are in part an attempt to drive you to purchase insurance. But at their core they are misleading because they don’t take into consideration your profession. Obviously, the chances of a lawyer becoming disabled due to a back disorder (the second most common disability) are much lower than someone who works for a moving company. However, cancer doesn’t care what you do for a living.

According to Unum, the top reasons for long term disability leave are:

  • 16% Cancer
  • 14% Back disorders
  • 11% Injury
  • 9% Cardiovascular
  • 9% Joint disorders

But the key takeaway from these studies are that you are far more likely to become disabled during your life than to die prematurely.Yet, if you’re like most people, you’ve probably given way more thought to what would happen if you were to die unexpectedly than to what would happen if you become disabled.

For me, that was in part because I didn’t really connect the dots between something like getting cancer and “being disabled”.

Isn’t cancer why you have health insurance?

But health insurance only covers the medical costs associated with treating your illness.

Health insurance has nothing to do with replacing your income while you obviously won’t be working. That’s where disability insurance comes in.

So being “disabled” is a wide range of circumstances, which includes getting sick and being unable to work. Having reframed it that way, it seems a little more important to understand what would happen should you ever find yourself in that situation..

If you don’t have any disability insurance, you either should consider whether it makes sense to purchase it or figure out a plan should you become disabled. The average Social Security disability benefit in 2016 is only $1,166 per month, which hardly seems enough to replace a lawyer’s lost income.

Three Pillars of Insurance (Health, Life and Disability)

So, how does disability insurance fit into the three pillars of life, disability and health insurance?

Life insurance provides provides a meaningful amount of money to your heirs to replace your income should you die.

Health insurance provides protection from catastrophic health costs that you could incur should health problems arise.

Disability insurance provides protection to cover your income should you become disabled, whether due to sickness or injury.

In this way, I see life insurance as an all-in-one policy. If you die, you won’t have any health expenses, nor will you have ongoing life expenses. Your only concern is making sure everyone else is taken care of.

But if you get sick or injured, you have two problems to deal with: (1) covering the cost of healthcare and (2) replacing your income during the period of your disability. Without protection for both, a disability or illness could be a big problem.

The Basic Terms of Disability Insurance

There’s a few things that make disability insurance unique in the world of insurance. You should understanding these basic parameters:

  1. Disability Insurance is Proportional to Your Income. Unlike life insurance, the benefit provided by a disability insurance will be proportional to your income. You might have a policy that pays 66% of your monthly income should you become disabled. It may have a cap on the total monthly benefit. You’ll need to dig into your policy to make sure you have enough income from disability insurance to replace your current income should you have a period of disability.
  2. Tax Treatment of Disability Insurance Benefits. There’s an inverse relationship between the type of dollars you use to pay for disability insurance premiums and the benefit you receive. If you use pre-tax dollars to pay for disability insurance, your benefits will be subject to income tax. Conversely, if you use post-tax dollars to pay for disability insurance, your benefits will be tax-free. If you get disability insurance through a group plan at work, it’s likely being funded with pre-tax dollars (so your benefits will be taxed).
  3. Disability Insurance is Expensive. Disability insurance costs more because it has a higher likelihood of being used. If you’re purchasing your own private policy, you might spend 1-3% of your current income in annual premiums. If you’re making $200,000 each year, a policy that pays $10,000 each month (60% of your salary) might cost $2,000 – $6,000 a year. Understandably, this makes it a big ticket item that needs some thought.
  4. You Need Disability Insurance When You’re Young. The worst time for a lawyer to become disabled would be three months after graduating law school. Our hypothetical young lawyer just took on $200,000 in student loan debt and hasn’t worked a day in his life, so probably has a negative net worth. Ironically, a young lawyer is one that is least likely to be able to afford disability insurance and has the most use for those dollars elsewhere. But as you get older and build assets, disability insurance (like life insurance) becomes one of those insurance policies that you can eventually let lapse. Once you’re financially independent, most people drop disability insurance coverage because your assets are producing enough income for you to live on.
  5. Disability is Subjective. Without getting metaphysical, you’re either dead or alive. That’s not the case with disability. There are 50 shades of gray between healthy and disabled. The definition of disability in your policy is important. Unfortunately, the industry doesn’t use a standard definition of disability so no two policies will look the same. You can’t treat disability insurance as a commodity where you pick and choose the best price. You’ll need to understand most of the policy and the definition of “disability” is probably the most important part.

The series will be spread out over a few months (nobody wants to read about disability all at once). When I’m done, I’ll put together a mini guide that includes all the information and link to it here.

Let’s talk about it. Join us over at Lawyer Slack to discuss disability insurance. We conducted a recent poll and about 55% had disability insurance while another 45% did not. Do you have adequate disability insurance? Let us know in the comments.

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Old 401(k): What Should You Do? http://www.biglawinvestor.com/old-401k-what-should-you-do/ http://www.biglawinvestor.com/old-401k-what-should-you-do/#comments Fri, 10 Mar 2017 11:00:00 +0000 https://www.biglawinvestor.com/?p=2514 Check out The Biglaw Investor or read Old 401(k): What Should You Do?

The other day I was chatting with a friend discussing the Backdoor Roth IRA. As anyone who has made a backdoor Roth IRA contribution knows (or, at least, I hope they know), you can’t have any existing IRAs holding pre-tax money on December 31st of the year you make the backdoor Roth IRA contribution without […]

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The other day I was chatting with a friend discussing the Backdoor Roth IRA. As anyone who has made a backdoor Roth IRA contribution knows (or, at least, I hope they know), you can’t have any existing IRAs holding pre-tax money on December 31st of the year you make the backdoor Roth IRA contribution without being subject to the pro-rata rule.

If you do, when you convert your non-deductible Traditional IRA contribution to a Roth IRA, you’ll be forced to convert both the non-deductible portion and the pre-tax portion from your other IRAs on a pro-rata basis, therefore paying tax as you convert pre-tax money into post-tax money (something that you don’t want to do and is easy to avoid).

This friend had an old 401(k) from a previous job that he had moved into a Rollover IRA, so we got into a discussion of what you can do with your old 401(k) upon leaving a job. In particular, what could he do to keep his backdoor Roth IRA options open.

There’s really only a few options when you leave your job:

Roll Old 401(k) into Traditional IRA

This is probably the most common thing to do, but probably not the best option for a high earner given how it complicates the Backdoor Roth IRA.

The benefits of rolling your old 401(k) over to a Traditional IRA is that you can roll it into a company of your choosing, allowing you to invest in index funds that either weren’t accessible in your company’s 401(k) plan or allowing you to invest in funds with lower expenses.

Keep in mind that if you’re rolling a 401(k) that has pre-tax and Roth money, the pre-tax money will go to your Traditional IRA and the Roth money will go to your Roth IRA. My understanding is that if your Roth 401(k) is qualified (holding period of 5 years and your age is at least 59.5) then all of your Roth 401(k) gets added to your Roth IRA basis. On the other hand, if your Roth 401(k) is not qualified, your contributions are allocated to your Roth IRA contributions and any earnings in your Roth 401(k) are allocated as Roth IRA earnings.

This isn’t likely to be a major point for many people since all qualified Roth IRA withdrawals will be tax-free. It seems like it would only come into play if you tried to withdraw Roth contributions before you turned 59.5. Essentially, there’s no magic trick that lets you roll an entire Roth 401(k) to a Roth IRA and then access the entire Roth balance in 5 years (you’ll have access to the contributions in 5 years, but not the earnings until you’re 59.5). I didn’t find a direct IRS source for this, but Alan S. is usually just as good.

However, since most lawyers are or should be interested in doing a backdoor Roth IRA, rolling your 401(k) balance to a Traditional IRA is probably not a good option.

Roll Old 401(k) to New Work 401(k) (Reverse Rollover)

To preserve the Backdoor Roth IRA option, you can do a reverse rollover if you’ve already put the money in a Traditional IRA (i.e. a reverse rollover moves money from the Traditional IRA to a new 401(k)). This presumes that your new 401(k) will accept incoming rollovers.

The other option is just roll your old 401(k) directly to the new 401(k). This could be an existing 401(k) that you have or could be a 401(k) plan at your new place of employment. Again, the only thing that matters here is making sure the receiving 401(k) plan allows incoming transfers.

Set Up a Solo 401(k)

If you have any self-employment income at all (I’m told as little as $100 should do it), you can open a Solo 401(k). If that Solo 401(k) accepts incoming transfers, you can then transfer the old 401(k) to the new Solo 401(k). This could be a good option if you don’t like the fees or investment choices at your new job’s 401(k) or if there’s no “new job” and you still want to preserve the option for the Backdoor Roth IRA.

Do Nothing With Your Old 401(k)

If your old 401(k) plan worked fine, had low fees and good fund options, then you could always keep your old 401(k) plan intact. As long as there’s a reasonable balance in the account, my understanding is most 401(k) plans allow you to keep the money. Just check with the 401(k) plan agreement to make sure. I could also see using this if your 401(k) has access to some type of unique fund.

Convert Old 401(k) to Roth

It’s also possible to convert your old 401(k) into a Roth IRA. Obviously, you’ll be paying huge taxes on the conversion, but it’s possible that this is the best decision for you. Perhaps you’re leaving Biglaw and taking a 1 year sabbatical traveling the world where you’ll be earning no money? In a low income year, doing a conversion could make sense since the income you’ve generated by doing the conversion would first fill up the lower tax brackets and therefore be taxed at a lower effective rate.

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Notice that I didn’t include the option to “cash out” the 401(k) on the list. That’s never an option or at least shouldn’t be an option. You want to keep that money sheltered, so leave it in a 401(k) or put it in an IRA.

Let’s talk about it. Let me know if you have another ideas for handling an old 401(k) in the comments section below!

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Sneaking Around FICA Taxes http://www.biglawinvestor.com/sneaking-around-medicare-and-social-security-tax/ http://www.biglawinvestor.com/sneaking-around-medicare-and-social-security-tax/#comments Wed, 08 Mar 2017 11:00:00 +0000 https://www.biglawinvestor.com/?p=2470 Check out The Biglaw Investor or read Sneaking Around FICA Taxes

Today’s article comes from the mailbag. Recently someone wrote in with the following question: Q: Are 401(k) contributions subject to FICA taxes? Are there any benefits or savings accounts which aren’t subject to FICA taxes? It’s a perceptive question and illustrates that not all “pre-tax” contributions are created equal. Some are worth more than others. […]

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Today’s article comes from the mailbag. Recently someone wrote in with the following question:

Q: Are 401(k) contributions subject to FICA taxes? Are there any benefits or savings accounts which aren’t subject to FICA taxes?

It’s a perceptive question and illustrates that not all “pre-tax” contributions are created equal. Some are worth more than others.

FICA is the Federal Insurance Contributions Act but is better known as the Social Security and Medicare tax imposed on both employees and employers.

As an employee, you are responsible for paying a 6.2% Social Security tax on the first $127,200 of income up to a maximum tax payment of $7,886.40. With Medicare, the tax is 1.45% on the first $200,000 of income and then 2.35% on amounts above $200,000. The 2.35% is based on the 1.45% rate plus an Additional Medicare Tax of 0.9% imposed by the Affordable Care Act.

Employers pay the other half of the FICA taxes on your behalf, meaning they contribute 6.2% of your salary to Social Security and 1.45% to Medicare. If you’re self-employed (i.e. earning any kind of 1099 income) you have the obligation of paying the self-employment tax which is both the employee and employer portion of FICA taxes.

Now, some people would argue that Social Security isn’t a tax but is instead a forced savings mechanism since you pay into the program today and receive benefits at some date in the future (an article for a different post). But since benefits are based on contributions, it’s important to understand how your Social Security benefits are calculated.

Those future benefits are based on your highest earning 35 working years. If, during any of those years, you have income which is not subject to Social Security tax, that income won’t be counted in your Social Security income for that year. For example, if you look at Box 3 of your W-2 you will see your reported Social Security wages for the year. Box 3 is your Social Security income for the year and will never be higher than the maximum amount of Social Security that is taxable for that year.

Treatment of Pre-Tax 401(k) Contributions

Since everyone refers to contributions to a traditional 401(k) as pre-tax, you’d be forgiven for thinking that you’re not paying any taxes on those amounts. However, that’s the case.

401(k) contributions are subject to FICA taxes.

This means you’ll see your 401(k) contributions reported in Box 3 (Social Security Wages) and Box 5 (Medicare Wages) of your W-2.

Of course, if you’re making more than $127,200 in 2017, the Social Security component isn’t relevant because you’re already paying the maximum amount of Social Security tax.

You will, however, be paying the Medicare portion of the FICA tax on those 401(k) contributions.

Because 401(k) contributions are subject to FICA taxes, you won’t be paying these taxes when you withdraw your 401(k) contributions in the future (however, you will of course pay income tax). And, the earnings from the 401(k) contributions are not earned income and so will also not be subject to future FICA taxes.

What’s Not Subject to FICA Taxes?

There are a few benefits that aren’t subject to FICA taxes, meaning these pre-tax dollars are sheltered even further thank 401(k) contributions. The IRS counts these types of benefits as a reduction to your income (exempt wages) and therefore they never show up in Box 1, Box 3 or Box 5 of your W-2.

Perhaps the most familiar of these types of benefits are what’s known as 125 cafeteria plans, named after (you guessed it) Section 125 of the U.S. Code.

The cafeteria description comes from employees being able to pick and choose which benefits they want, such as health insurance, supplemental insurance (vision, dental, etc.), flexible spending accounts and qualified transportation benefits.

Again, your W-2 should be instrumental in helping you understand which benefits fall under Section 125. In 2016 I was able to include a little more than $5,000 of income in Section 125, which meant I didn’t have to pay Medicare tax on that amount which saved me about $120 bucks. Not exactly a lot of money, but we never say no to free money around here.

Mostly, this covered things like my health insurance premiums and transportation benefits (including paying for Uber rides pre-tax). If I had children and paid for child care, I could have excluded an additional $5,000 through a Dependent Care FSA (Editor Note: Following publication, I looked into this further and it appears as a Highly Compensated Employee I’m in fact not eligible for the Dependent Care FSA at my employer. Bummer.).

The other big component of my Section 125 cafeteria plan came from my contributions to a Heath Savings Account (also know as the Stealth IRA).

The rules around contributions to your Health Savings Account being exempt from Medicare and Social Security taxes are a little tricky, but employer contributions made to your Health Savings Account are exempt (See Question 19).

So what about employee contributions to a Health Savings Account? See this portion of IRS Publication 15:

Health savings accounts and medical savings accounts. Your contributions to an employee’s health savings account (HSA) or Archer medical savings account (MSA) aren’t subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they’ll be excludable from the income of the employee. To the extent it isn’t reasonable to believe they’ll be excludable, your contributions are subject to these taxes. Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan aren’t wages and aren’t subject to employment taxes or withholding. For more information, see the Instructions for Form 8889.

As long as your Health Savings Account contributions are made as a salary reduction arrangement, they’re considered employer contributions and therefore exempt from Social Security and Medicare tax.

This means that if you make HSA contributions directly through payroll, you likely won’t be paying FICA taxes on those contributions.

These contributions should show up as Code W in Box 12 of your W-2.

However, if you choose not to use your employer’s Health Savings Account provider and make contributions outside of payroll, those contributions would be deemed employee contributions and therefore subject to FICA.

This seems like a quirk in the law. Why wouldn’t all Health Savings contributions be free from FICA taxes, including those made by the self-employed (which count as “employee” contributions and are therefore subject to FICA taxes)? But I didn’t write the rules!

Let’s talk about it. Join us over at Lawyer Slack where $120 tax savings is considered worth the work or let us know in the comments below if I left out any savings mechanisms that are also exempt from FICA taxes.

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How to Retire in 5 Years http://www.biglawinvestor.com/how-to-retire-in-5-years/ http://www.biglawinvestor.com/how-to-retire-in-5-years/#comments Mon, 06 Mar 2017 11:00:00 +0000 https://www.biglawinvestor.com/?p=2444 Check out The Biglaw Investor or read How to Retire in 5 Years

The other day it occurred to me that I could retire in 5 years. It’s not that I’m going to retire in 5 years (at least I don’t think I will) but it’s kind of exciting to be so close to a goal. Calculating whether you can retire in 5 years is surprisingly straightforward. In […]

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The other day it occurred to me that I could retire in 5 years. It’s not that I’m going to retire in 5 years (at least I don’t think I will) but it’s kind of exciting to be so close to a goal.

Calculating whether you can retire in 5 years is surprisingly straightforward. In fact, there aren’t many variables involved.

If you’re curious if you could retire in 5 years, I put together this little calculator so you can run the numbers yourself. The calculator defaults to retiring in five years, but you can adjust the number of years if you want to see whether you could retire 7, 10 or 15 years (or 2 years?).

Can You Retire in 5 Years?

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Ready to Be Financially Independent?

If you’re not on track to retire in five years, you should isolate each of the variables in the equation to understand what needs to change so that one day you’ll be 5 years away from retirement.

1) Current Retirement Savings Too Low. Your current retirement savings may be too low if you’re just getting started saving for retirement. Many lawyers are behind their undergraduate peers in terms of retirement savings thanks to the three years of professional school. You might have even taken a couple of years before law school to gain experience. This means that many lawyers don’t start in a legal career until their late 20s. While there isn’t much you can do about your current retirement savings, you’ll need to focus on boosting your nest egg if you want to take advantage of compound interest.

2) Interest Rate Too Low. If you’re not invested in risky assets like stocks, your rate of return will be too low to generate the wealth you need to retire. If your retirement savings are in cash or bonds, you’re relying entirely on your own savings rate to build up your retirement account. Regular readers will know that the best way to get the market returns are low fee index funds. Don’t rely on brute force savings for retirement when you can let the US and international economies work for you.

3) Safe Withdrawal Rate Too Low. The Safe Withdrawal Rate is the percentage you can withdraw from your nest egg each year without worrying about touching the principal. If all goes well, you can withdraw funds at the safe withdrawal rate for 30 years or longer. I’ve written before about using4% as a benchmark safe withdrawal rate. Depending on market performance in retirement (i.e. if you retire during a bull or bear market), you might even be able to withdraw 5% or 6% each year from your portfolio. Still, others are pessimistic that 4% is too aggressive. If that’s you, know that you’re going to have to work extra years to account for a more conservative withdrawal strategy. There’s no other way around it.

4) Expenses Too High. The Desired Annual Income in Retirement is the amount of money you need each year before taxes. Rather than guessing your desired income, the easiest number to plug in is your current expenses adjusted for the reality of not working. If you’re like most, this means your expenses in retirement will probably be lower once you subtract commuting expenses, job-related expenses and convenience expenses. There’s less pressure to order take out when you have all day to cook your meals. If you’re planning an extravagant retirement with lots of annual spending, you’ll need to work longer.

Calculating a Realistic Retirement Goal

If retiring in 5 years is out of the question, you’re probably wondering how many years until you can retire.

To answer this question, I repurposed the calculator and probably made it more user-friendly. You can type in your specific numbers here and then calculate how many more years you’ll need to work in order to retire.

It’s fun to make slight adjustments in variables like your annual savings amount or income in retirement to see how it impacts the calculation.

How Many Years Until You Can Retire?

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Will I Actually Retire in 5 Years?

Probably not. I’m enjoying my career and while I could retire in 5 years, it wouldn’t be a luxurious retirement by any stretch. Plus, I’m getting married this year and could be starting a family soon which will likely increase my expenses (or so I hear).

There’s also some other risks to retiring that could derail a portfolio, including sequence of return risks. That’s when you retire into a bear market. Anyone who retired in 2007 is familiar with sequence of return risk. The problem is that you start off retirement receiving lower or negative returns early in the period when withdrawals are made from your underlying investments. Ideally you’ll retire into a bull market and have the bear years come 10-15 years after you retire.

Another problem could be longevity risk. As humans are living longer and longer lifespans, it would be risky to rely on a nest egg in your mid-30s to last through a retirement that could take you to your mid-90s. Of course, the reality is that if I retired in 5 years I would still engage in income-producing activities. In fact I think it would be hard to sit around and not make any money.

It’s not all bad news though.

The good news about getting close to your retirement number is that you’re achieving financial independence, where you’re no longer required to exchange your time for money. Whether that’s 5, 10 or 25 years away, we all know that if you’re reading a blog like this you hope to achieve that financial independence at some point. Now you have a simple calculator to plug in your numbers to see how long it’s going to take!

Let's talk about it. How many years until you can retire?

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5 Step Checklist to Be a DIY Investor http://www.biglawinvestor.com/5-step-checklist-become-diy-investor/ http://www.biglawinvestor.com/5-step-checklist-become-diy-investor/#comments Fri, 03 Mar 2017 11:00:00 +0000 https://www.biglawinvestor.com/?p=2347 Check out The Biglaw Investor or read 5 Step Checklist to Be a DIY Investor

You’ve got a great job. You’re making more money than you’re spending. Your loan balances are moving in the right direction for once and you’re starting to explore concepts like financial independence. You’re ready to start investing. But you’re not sure where to start. You don’t want to fork over hefty fees to a financial […]

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Check out The Biglaw Investor or read 5 Step Checklist to Be a DIY Investor

You’ve got a great job. You’re making more money than you’re spending. Your loan balances are moving in the right direction for once and you’re starting to explore concepts like financial independence. You’re ready to start investing.

But you’re not sure where to start.

You don’t want to fork over hefty fees to a financial advisor that might be a commissioned salesperson. But you know that sticking that extra monthly money into a cash savings account is probably not the best move.

So you decide to become a do it yourself investor. After all, you made it through law school, so how hard can it be?

1) Start Slow

When you get started you might have a four figure or low five figure portfolio. This is a great time to learn the ropes. Your financial life is pretty simple. Taxes are pretty simple. If you make a mistake, it’s not likely to hurt you that much because you don’t have that much money in the account anyway. If you’re not sure how you want to invest $10,000, it’s not going to get any easier when it becomes $50,000 and eventually $100,000. So you might as well dive in with what you have and see if you like managing your accounts. If you’re like most, you’ll find that it’s relatively easy and it’ll soon become part of your routine like everything else.

2) Learn As You Go

Know that different people learn in different ways. Do you like reading books that you can pick up and put down over a month? If so, find some investment books written for a general audience and order the physical books. Sure, you have a Kindle and prefer it for reading on the beach, but these are books that you are going to want to pick up and read a chapter on some idle Saturday, so it’ll be nice to have a physical object around when you have some down time.

Here are a few that I can recommend:

  • The Simple Path to Wealth by JL Collins. Jim Collins has written a fun-to-read guide in simple and clear language with respect to building wealth. Great read for any investor.
  • The White Coat Investor: A Doctor’s Guide to Personal Finance by James Dahle. Written by a practicing emergency room physician. While the book is geared toward medical students and physicians, many of the concepts are applicable to law students and lawyers.
  • The Bogleheads’ Guide to Investing by Taylor Larimoe, Mel Lindauer and Michel LeBoeuf. Written by the Bogleheads themselves, with a forward from Jack Bogle, this guide to investing is a DIY handbook. Another solid option written for the general public.

Others might prefer reading blogs and Internet forums.

Here’s a few that are really good:

  • The Whitecoat Investor. With over 5 years of articles, there’s a ton of wealth and information here. Written by an emergency physician doctor in Utah but still applicable to many lawyers.
  • The Finance Buff. The archive stretches back over 10 years, so you know there’s a high likelihood that Harry has written about a topic you’re interested in.
  • The Oblivious Investor. Mike is another writer with years of experience. He has a particular knack for explaining complicated concepts in only a few short and clear sentences.
  • The Bogleheads Forum. Sometimes called the friendliest place on the Internet, the pros show up at the Boglehead forums to talk about investing and personal finance. Searching through the forum you’ll find answers to commonly asked questions. If you have a particularly sticky tax situation, sometimes it feels like it’s the actual IRS that will respond with helpful guidance to your questions.

3) Invest in the Market

Sometimes new investors can go one of two ways when getting started: swing for the fences or park it all in cash.

Don’t swing for the fences. When you’re first getting started it’s about hitting singles and getting players on the bases. You absolutely don’t need a home run during your first at bat.

Since many lawyers start investing in their 30s and with a small amount of money, there’s a combination of feelings that will lead to trying to get a 5x return. First, you think that it’s a small amount of money and so why not try to turn it into something “big”. And second, you recognize that you’re “behind” thanks to three years of law school and $200K in student loans, so you feel like you need to do particularly well today to “catch up”.

Resist both impulses and focus on a slow but steady progress.

Don’t park it in cash. The there side of the coin is a conservative investor that wants to put the money in 100% bonds, TIPS or some sort of stable value fund because they don’t want to “lose” money. After all, it’s been three years of law school, $200K of student loan debt, so the last thing you want to do is throw away this $10K that you managed to save up.

But keeping it in cash is a sucker’s bet because you can’t see inflation slowly eating away your purchasing power. Like compound interest in reverse, by the time you realize your mistake you’ll have missed out on some prime years of time in the market. You’ve got to deploy the cash according to your investing plan and make the money work for you.

4) Track Your Net Worth

You won’t see progress unless you track what you’re doing. That means you need to start making an assessment of where you stand each month. It doesn’t have to be fancy (in fact, the less complicated the more likely that you’ll stick with it). A simple excel spreadsheet with your assets and liabilities should do the trick.

The importance of tracking your net worth and investments is that human beings are awful at predicting the future. We just weren’t built with the ability to project a vision of ourselves decades into the future. Survival of there here and now nature ranked much higher.

This is why the power of compound interest escapes our understanding and why it doesn’t feel that great to be saving X dollars a month. I don’t even have to put in a number for “X” because I promise you that no matter what “X” is it will feel insignificant compared to the hundreds of thousands and even millions of dollars you will have saved up if you continue on a slow but steady course of saving. “X” just feels small today because it represents only a fraction of the eventual goal.

However, that fraction does add up over time. And time is going to happen anyway, whether you like it or not, so you might as well get started investing and you definitely should keep track so you can recognize the progress that you’re making. Don’t leave it up to your brain to remember how you you’re doing each year. Create a spreadsheet, track it and when you update your net worth each month, take a few minutes to look over your history and see were 3 months or 1 year ago. If you get into the practice of doing this regularly, you’ll remember what you were thinking and how you felt when you created those former entries. I can think of no more powerful way to remind yourself that each month of effort counts other than tracking your net worth.

5) Write an Investment Policy Statement

You might read this and think, “Yeah, sure” and then go back to whatever else you were working on. Writing an Investment Policy Statement sounds hard. It shouldn’t scare you off. I’ve written about my IPS before and provide you with Investment Policy Statement templates that you can use to draft your own.

They don’t have to be complicated.

University of Chicago Professor Harold Pollack managed to fit his IPS on an index card and it went viral. The point is that it doesn’t need to be complicated, but you absolutely need something to refer to as you go through the years.

The point of reading this site isn’t to obsess about money and spreadsheets. I like this stuff and write about it, but you don’t have to be in the weeds. You can keep it simple and get on with the rest of your life. An IPS is a perfect document that keeps track of what you hope to accomplish and how you will do it so that you can get back to living life and all the other non-money aspects of being a lawyer.

Let’s talk about it. Join us over at Lawyer Slack to talk about the article or leave your comment below. Are you a DIY investor?

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