A lot of people get confused about what it takes to build wealth as a lawyer. They assume that you need access to exclusive investments or to get into something like Bitcoin on the ground floor. Or maybe you need to leverage up through acquiring multiple real estate properties? It’s easy to spend a lot of time looking for the “magic solution.” Good luck finding it.
Unfortunately, getting rich as a lawyer is boring. It’s not sexy. That’s a bummer. We’d all like to get where we’re going quickly. It’s human nature and it’s your worst enemy.
Instead of getting caught up in the drama, I’ve been happy to get rich slowly following the path I’m about to describe below. It’s pretty simple. You can follow it whether you’re in Biglaw or a solo practitioner. You can walk it whether you’re making $200,000 or $50,000. The principles are the same. Will it take you longer to “get rich” if your starting salary is $65,000? Absolutely. There are real challenges along the way. Just because something is simple doesn’t mean that it’s easy. In fact, simple is hard.
But that’s the trick. If you can follow these simple steps, you’ll be well on your way too.
Make A Lot of Money
It’s obviously a lot easier to save money if you have money to save. How do you make sure you have ample money to save? Focus on increasing your income. Make it a priority. Increasing your income isn’t something you can do immediately. It’s not about walking into your boss’s office and asking for a 20% raise. It’s about making sure you’re making long term strategic plans to increase your income.
Let’s take an example of an assistant district attorney with a starting salary of $60,000. That’s not a lot of money for someone with a post-graduate degree but there are many reasons why people become prosecutors that have nothing to do with money. Perhaps that’s where you are today or maybe you’re at a small firm just beginning your career. Either way, $60,000 is your floor going forward for the rest of your life. It’s highly unlikely that you’ll ever work for less than $60,000 for the rest of your career.
If an opportunity comes along a few years into your career that bumps your salary by $10,000, most of would think of this as an “extra” $10,000 in our pockets. But the real benefit is that you’ve reset your floor. Now that you’re making $70,000 a year, you’ve effectively built in an extra $300,000 over a 30-year working career (30 years x $10,000). That’s why raises are so important early in your career. They set the floor going forward.
It’s also why you should pause to reflect on this. Did you recently get a modest raise by switching jobs? If so, take a second to congratulate yourself! That’s a huge deal. On the flip side, have you been working for a long time in a role where you feel underpaid compared to what you think the market should be paying you? Perhaps now is a time to switch and reset your floor.
The way to make sure you end up with a higher salary is to constantly keep learning and putting yourself in a position to get a raise. Often that means moving around in the job market. Those are the opportunities where you can reset your floor and everyone should take advantage of those opportunities.
Think this isn’t applicable to Biglaw where salaries are static? Every year that you stay in Biglaw, you’re effectively raising your floor. While a second year associate would happily leave a Biglaw job for an in house position paying $150,000, you’ll be much harder pressed to find a 7th year associate who is as comfortable with the change. In house salaries are often set based on whatever you negotiate when you join the company and don’t have the same automatic annual increases that you’d find in Biglaw. Therefore, Biglaw is a great place to continually reset your salary floor as you move up the ranks. It’s a built in advantage of being in Biglaw that most people completely miss.
Finally, try to find a way to be an owner rather than employee. You want to be a capitalist. By definition a business must make enough money to pay for the employee’s salary and have something left over for the business owner, otherwise there would be little point in the business owner running the business. Look for opportunities where you too can become an owner rather than an employee.
Don’t Spend A Lot of Money
Making a lot of money will do you no good if you’re spending it all. Many people write in describing a saving problem. They want to save more. “How do I save more money?” Well, good news. You don’t have a saving problem. You have a spending problem. If you stop spending so much money, you’ll have a lot of excess money sitting around. What do you do with that excess money? You’ll save it of course!
How do you focus on tackling your spending problem? The first thing you have to do is add it all up. I’m realistic. I know that many of you reading do not budget. You simply look at your checking account to see whether you have money, make a few mental calculations about upcoming expenses and then decide whether or not to spend the money. I’m not here to shame anyone into becoming a budgeting master. The truth is that if you don’t enjoy it, you’re not going to do it anyway, so it’s a colossal waste of your energy and effort to force yourself into doing something you don’t like.
But what you could do is take a Saturday morning and add up all your previous month’s expenses. How much did you spend on food? Restaurants? Bars? Subscriptions to Netflix, HBO, Amazon Prime, Birchbox, etc? It shouldn’t take you more than a couple of hours to go through your statements and come up with a list of expenses which you can bucket into categories. See anything that isn’t bringing you joy? All you have to do is make a couple of changes. Cancel a subscription, resolve to limiting yourself to a certain number of dinners a week, etc. Then you can do it all over again in a couple of months. That’s how you tackle a spending problem – one expense at a time.
If you want to take a giant leap, the truth is that you’re likely to see the greatest gain if you tackle the two biggest expenses (other than taxes) of any household: housing and automobiles. While it’s great to cancel a $10/mo subscription you’re not using, think of how much more you’d save if you were in a different apartment or if you weren’t leasing a car that you didn’t really need? These changes can’t be made instantly unless you’re super motivated but you can start to put them on your mental radar screen. When the lease is up on the apartment or car, how would you do it next time? Would you buy your own $10,000 car outright? Would you move to a different apartment in a different neighborhood where you could save $500 a month? If that’s what you’d do, now is the time to start saving for the transition costs. Put away $10,000 for that used car. When the lease is up, re-evaluate whether you want to spend that $10,000 to buy a car or whether you think it makes sense to go back to leasing a car. Start saving for the moving expenses, so when the apartment renewal letter comes you can realistically consider whether it makes sense to move.
Don’t Lose A Lot of Money
In addition to spending your money, it’s possible to lose your money by making dumb decisions. Losing money hurts a lot more than spending it because you don’t end up owning anything as a result. To avoid losing money. stick to passive index funds and avoid speculative investments or taking on unnecessary risk. It means taking the time to actually learn a little about the tax code so that you’re not needlessly paying extra in taxes. It also means avoiding investment management fees when you’re not actually receiving any good advice for your hard-earned money.
I think a lot of lawyers are leaking money without fully comprehending its impact. I know this is true for me. I wrote about how I lost $10,000 investing on a speculative company earlier in my career. At the time it seemed like a great move. In hindsight, I understand it was risk I didn’t need to take on a bet I didn’t need to make. That $10,000 would have been worth hundreds of thousands of dollars if I had kept it in a simple index fund. Lesson learned: stop trying to double your money and just focus on keeping everything that you make.
The other major type of loss likely to hit a lawyer involves the possible catastrophes of life (death, disability, divorce). Luckily you can insure for the first two and take the risk off the table. If someone depends on your salary, it’s very cheap and easy to buy term life insurance. If you need an agent, you can find a list of ones I’ve vetted under the Resources tab above. The same is true for disability, although many lawyers seem to think that disability won’t happen to them (“How does a lawyer get disabled at a desk job? I’m not going to throw out my back …”). It might surprise you to learn that the most likely disability you’ll face is survivable cancer. While health insurance will cover the medical treatment, what happens to your income while you’re unable to work? If you rely on that income, you’ll need a good disability insurance policy to cover you while you’re sick.
Put Your Money to Work
The final piece of the puzzle is to make sure your money is working hard. Assets tucked away in savings account do you no good in the long run as its buying power is eaten away by inflation. Your money should be out there working like an army of a million dollar bills making a nickel or dime for you each year.
Making sure your money is working hard is as easy as making a plan for it. Write a simple two page investment policy statement that outlines your investment plan. After that, you should automate your financial life so the money is moving where it needs to go. From there, you can focus on making sure your money isn’t being lazy by minimizing taxes and keeping investment expenses low (imagine if you hired an employee that routinely gave out free drinks to his friends – would you want to keep that employee around? Why should it be any different with your investment dollars?)
It also means making sure your financial house is in order. You may remember the second law of thermodynamics which states that every system left to its own devices tends to move from order to disorder. Just like a house or apartment on Friday shows the remains of a busy week, our financial systems get more complicated over time. You’ll open new accounts, end up with unused spreadsheets and generally a lot of unnecessary “clutter” over time. By pruning these systems, closing unused accounts and generally simplifying your life, you’ll guarantee that more of your money is working hard for you and not accidentally sitting in idle. My rule is pretty simple: if it’s not serving you, get rid of it!
It also helps to keep yourself educated about what people are doing in the personal finance space. Would you like a tip that could net you $100,000? I’ve got one right here. Open a Backdoor Roth IRA and make contributions through your investing career. $5,500 invested annually over 30 years could get you about $856,481. If you stuck that in a taxable account, you’d have to pay capital gains on $691,481 (the value of the account ($856,481) minus the amount invested ($165,000 (which is $5,500 x 30 years)). What’s 15% of $691,481? It’s $103,722 that you’ll pay in federal taxes. So while $5,500 might not seem like a lot of money, if you start making those contributions today I just saved you $100K in taxes. That’s information worth knowing!
Let’s talk about it. Are you following these four basic principles to get rich?