(Biglaw Investor: Sorry for the lack of updates around here lately. A lot has been happening, all of which will make for good posts for the site. The temporary hiatus will end soon. Meanwhile, my next post will be my 2018 Tax Report detailing how much I paid this year – coming very soon! (See the 2017 Tax Report here))
Know someone graduating law school soon? Send them this article so they can check in and see if they’re on the right financial path.
You’re finally at the end of a long pipeline of academic performance. Well done. The next step of your legal career involves building upon what you’ve learned so far and translating those skills into real-world application.
But I suspect many of you are also concerned about your financial outlook. With student loan debt, retirement, investments and likely the largest salary you’ve ever had, what should you do with your money? Does it make sense to pay off debt or invest? How much should you save for retirement?
The good news is that you can get started figuring all of this stuff out now. There’s a lot of ground that can be covered before your first day at the office. For those looking to get a jump, here’s an 8 step financial checklist for a 3L or a recent grad.
1. Write It All Down. Add It All Up.
If you’ve been afraid to tally up the numbers during law school, now is the time to figure out how much you owe and who you owe it to. The National Student Loan Database is a good place to start to make sure you’re on top of every student loan you’ve borrowed over the years. Write down every loan balance, the interest rate and the monthly payment, along with other helpful information like account numbers and contact details. For most people, a simple Word doc or Google Sheet will do the trick for recording this information.
You’ll also need to make sure you have records for any private loans you’ve taken out during law school (or in connection with studying for the bar exam).
One suggestion is to add some dates to your calendar when the first payments are likely due. I nearly missed the first payment on one of my loans because it slipped through my fingers and didn’t make it onto my calendar. It’s your responsibility to make the payments on time, so make sure you know the date the first payment is due for each of your loans.
I know a lot of law students are reluctant to face the student loan debt monster, but, believe me, it’s a lot less scary once you face up to it. You may owe a lot of money but there are multiple options to figure out a repayment plan. The first step is making sure you’ve got all the information in one place.
2. Tally Up Net Worth
When you’re done adding up the student loans, it’s a good idea to take a step back and look at your net worth holistically. This means making a simple chart that shows your assets and liabilities. The end result is likely to be negative but that’s okay. All you’re trying to do is establish a baseline so you can measure your progress.
For lots of law grads, this will mean including credit card balances (I’ve seen the numbers and I know many of you are carrying credit card balances!). It’ll also mean including any assets you have as well. People have different ways of preparing net worth charts. Some want to include assets like personal property and cars. Others insist on including up-to-date credit card balances, even if they will be paid off in full next month. I try to keep it simple. Assets only include permanent assets (i.e. I don’t include my current checking account balance because those are transient funds, nor do I include cars or personal property). Liabilities only include permanent liabilities like student loans, mortgages and long-term credit card debt. It doesn’t need to be fancy.
3. Develop a Student Loan Plan
Congratulations! You’ve got everything written down. Now is the time to figure out how you’re going to repay everything. Are you pursuing PSLF? If so, you’ll want to file a PSLF certification form a couple of months after you start working to make sure that your employment and payments qualify.
Do you plan to pay off the loans? If so, you should consider whether the benefits of refinancing are right for you. Nowadays there are many lenders like SoFi, Earnest and CommonBond that are eager to lend to young professionals. By refinancing your loans, you can save thousands of dollars a year in interest which will save you money and allow you to pay off your loans faster.
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If you intend to pursue some type of forgiveness, you should make sure that you qualify for PSLF and that your payments count as “qualifying payments” because you’ll need to make 120 of them to receive forgiveness. Currently, PSLF forgiveness is not considered taxable income.
Unfortunately, forgiveness under an Income Contingent Repayment plans (like IBR or REPAYE) is considered taxable income, which could lead to a hefty future tax bill. You’ll need to become a student loan ninja to make sure you understand the rules for the various plans but have no fear as there are great resources on the internet to help you. You’re truly lucky to be part of a class that has lawyers ahead of you with nearly a decade of experience in these programs. If you had graduated in 2008, you’d be one of the first classes that could possibly qualify for PSLF!
4. Refinance Student Loans
If you know that you’re going to pay off your loans, it’s a pretty smart decision to refinance them and save thousands of dollars of interest. You will give up your federal protections but many of the private lenders offer similar protections. Keep in mind that you won’t qualify for PSLF or one of the much longer forgiveness plans if you refinance your loans (the decision to switch to private lenders is permanent). My path took me to Biglaw, so I never had any doubt that I’d repay my loans. I had to wait a few years for the refinancing companies to show up on the scene but when I did, I refinanced my law school loans as quickly as I could to escape the unbearably high-interest rates.
Many of the student loan refinancing companies will let you refinance based on an offer letter alone, so consider whether it’s right for you to refinance as soon as you graduate. Doing so could save you 3-6 months of high interest. They’ll even let you delay your first payment until you start employment, so you won’t have to worry about beginning repayment immediately.
5. Figure out the two big expenses related to your job: Housing and Cars
After you take the bar exam, the first year of practice will have a big impact on your net worth going forward. It’s not because the first year of lawyering is critical to your future career growth (nearly all new lawyers need time to grow into their practice). It’s because you’re about to make lifestyle choices that will forever set your lifestyle floor going forward. For most of us, the first job after law school is the first “real” job we’ve ever had in life. There’s a lot of pent-up demand to consume things (like a nice apartment, cars, etc.). Resist the temptation.
In particular, focus on the two biggest expenses: housing and cars. You’ve been living like a law student for the past three years. Can you continue living like a law student for a few more? If so, you’ll keep your expenses low and have ample income to devote to the things that build wealth, like paying off debt and building up investment accounts.
Now is a great time to continue living with roommates and to continue using a reliable car. There will be time for the nicer things but you don’t need everything all at once. Since you likely aren’t making any money right now, there’s a lot of room for lifestyle expansion going forward. Grow into your new income slowly.
6. Develop an Investment Policy Statement
During your first few years of practice, you’re going to be laser focused on your legal career and learning how to practice law in your particular field. The way to make sure you don’t drop the ball with your financial life is to develop a simple investment policy statement. It sounds complicated but yours will probably only be a couple of pages.
Your investment policy statement is a cheat sheet with all the info you need, along with your plan for how you want to invest your money going forward. Once you write it down, try not to make any changes. Here’s my Investment Policy Statement.
The key parts are setting objectives and then following the plan. When you get “extra” money and are wondering what to do with it, consult the investment policy statement. Keep following this written plan until you’ve made meaningful progress and then re-evaluate. Use the plan to avoid temptations and to keep yourself on track during the inevitable busy months ahead when 100% of your energy and time is concentrated on being a good lawyer.
7. Learn About Taxes and Retirement Accounts
Taxes are probably the last thing on your mind but they’re about to become your biggest expense (likely bigger than housing and cars). That’s okay. It’s the price we pay for civilization. But the government wants to incentivize you to make certain decisions. Wealthy lawyers understand how the tax code works and they use it to their advantage.
You don’t have to learn everything about the tax code immediately but you do need to become familiar with the basics, including the types of tax-protected accounts. Generally, this means understanding the difference between traditional retirement accounts (where you do not pay taxes on contributions or growth but pay taxes upon distribution) and Roth accounts (where you do not pay taxes on distribution or growth but pay when you contribute). It’s also a good idea to get familiar with 401(k)s, Backdoor Roth IRAs and Health Savings Accounts, as these will likely be the solution you’re looking for when you’re trying to reduce your tax burden.
8. Take Your Personal Finances Seriously
Now that you’ve done all the work to get through high school, college, the LSAT, law school and soon the bar exam, you owe it to yourself to take your personal finances seriously. If you want the financial security that can come with a law degree, it won’t happen automatically. In fact, you’ll likely be a target for unscrupulous “advisers” (who are actually salespeople with no fiduciary duty towards you).
Luckily this doesn’t require that you devote every waking moment to personal finance. Instead, the path to financial security requires you to treat your student loan debt and personal finances with the appropriate care. It means reading a book or two each year to learn the lingo. You might find it boring but you made it through Con Law, so I know you can learn the basics of personal finance! The great thing about this is that you don’t need to know everything. You only need to know the parts that are relevant to you. And what’s relevant when you first start? Only the simple things like student loan management and retirement accounts. You don’t have to understand the complicated stuff. In fact, if it’s complicated, it’s probably best avoided anyway.
Good luck with your journey!