(Biglaw Investor: Today’s post is about bonuses. Of course not everyone has the luxury of getting a huge Biglaw bonus but many lawyers get some form of annual bonus. I wanted to see what a financial advisor would say, so I asked Mark Mohtashemi, CFP®, a financial planner that works with many lawyers at Morgan Stanley what advice he’d give to lawyers trying to decide how to handle bonus money. He said yes to writing the article but one of the downsides is that I have to turn off comments in order to comply with Morgan Stanley’s compliance department. Feel free to send me a message on Twitter with your thoughts on this article. Mark and I have no financial relationship.)
Annual bonus season is upon us and websites such as Above the Law are attracting the eyes of every BigLaw associate looking to see announcements from various firms.
Initial reports are that this year’s bonus payouts will be as generous (or not, depending on your opinion) as those of recent years.
Now that you are eagerly expecting a fat deposit into your bank account, what are you planning to do with that cash?
You could invest it in the latest tech stock or Bitcoin – but the stock market is near all-time highs and Bitcoin is for another article.
You could put a down payment on a condo/co-op/house – but the median sales price of Manhattan real estate is up 9.3% year over year.1
You could treat yourself to a nice vacation or other unique experience. This may actually be worth the “investment.” Studies have shown that people get more happiness when they spend on experiences, rather than material possessions. Reasons for this finding include that experiences are more open to increasing favorable interpretations over time, experiences are more central to one’s identity, and experiences make people happier than possessions because they are more pleasurable to talk about and foster successful social relationships, which are closely associated with happiness.2
So, buy yourself a fantastic experience and, hopefully, you will still have some of that bonus left over after the trip.
When it comes to financial priorities, your personal situation is unique and there are very few, if any, money maxims that apply broadly to all attorneys.
However, if this applies to you, I would recommend using this year’s bonus to reduce your debt – starting with the highest interest rate debt such as credit cards and/or car loans. Although credit card debt is unsecured (no collateral can be confiscated if you default3), paying it off should be a top priority in order to prevent interest from accruing and to maintain a good credit score.
Additionally, many lawyers have student loan debt. There are sharp differences of opinion on how to handle repayment. Some say that if your interest rate is low and tax-deductible, it might be beneficial to pay it off slowly while investing to earn more than the interest rate on the debt (or, at least, attempting to do so). This may be preferable from a purely rational, economic standpoint but my experiences with attorneys have led to a different recommendation. I have witnessed powerful emotional and physical transformations resulting from becoming debt-free. Depending on one’s personality, this peace of mind could be worth so much more than trying to arbitrage interest rates and returns on investments.
If you are like most attorneys, your primary assets are your retirement plan at work and, if you own real estate, the equity in that property. Once you have contributed the maximum amount to your 401(k), you think you have done enough to feel good about managing your money – but this is typically not the entire story.
You may find this unbelievable but many of my attorney clients do not want to practice law for the rest of their lives. Yes, read sarcasm into that statement. They have dreams of being creative, starting a business, attempting a different career path or just enjoying a life of leisure.
All of these dreams require financial resources.
If you are fantasizing about what you will do after BigLaw, I recommend that you start a “financial freedom bucket.” The contents of this bucket will offer you the key to your destiny. Initially, it will serve as an emergency fund and when it contains enough to cover several months of living expenses you should consider investing to seek growth.
If you love your job, you will no longer worry when work gets slow and layoffs occur. If you hate your job, you will be confident in the fact that you can walk out at any time and securely begin the next phase of life.
If you really want to feel good about yourself and do something positive for the world, give a portion of that bonus to your favorite charity. You can give directly or, if you are not yet certain about which cause to support, consider contributing to a donor advised fund that can make distributions in the future.
Any and all of these decisions should be considered in context with your overall financial and life goals. It may sound trite coming from a financial planner but this may be the time to think deeply about what you want in life. We can work together to craft a plan intended to help you achieve your goals. This roadmap for today and for the future may change with time and circumstances but we will make the necessary revisions so you can know you are on track to accomplish what is most important to you.
Invest this bonus wisely – in experiences, reducing debt and planning for your future.
1 The Elliman Report, Quarterly Survey of Co-op and Condo Sales, 3Q 2017.
2 Gilovich, T. & Van Boven, L. (2003) Journal of Personality and Social Psychology Vol. 85, No. 6, 1193–1202
Mark Mohtashemi is a Financial Advisor with Morgan Stanley Global Wealth Management in Jericho. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.
Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money and is always negotiating better student loan refinancing bonuses for readers of the site.