Your Rent Has a Big Impact on Building Wealth


Don't let your rent cost get the best of you. Keep your living expenses low and build a nest egg that will help you grow in the future. Here are some tips to cut down on one of your biggest expenses.

Don't live in mansion if you want to build wealth. Spend less on rent.

Everyone knows that it’s expensive to live in big cities and that the coasts are more expensive than the interior of the country. Consumer prices in Houston are 26.70% lower than New York City, but by far the greatest difference in cost of living is the amount you pay in rent.

If you’re a lawyer, chances are good that you live in one of the expensive urban environments (although my hats off to those that made their way to Houston – I’m now meeting a lot of lawyers who intentionally picked Biglaw markets based on the cost of living).

Yet, despite the fact that rent is likely your second greatest expense (the first being taxes), too often people gloss over how much they spend. A $2,500 a month apartment is a $30,000 purchase! There’s lots of room to make small changes that have a big impact, either positive or negative. Same is true for a mortgage, but by then you’ve committed to a fixed monthly payment for the foreseeable future.

As much as you might be ready for your own apartment after three years of law school, there are some compelling reasons why you should limit your housing out of the gate in Biglaw.

Benefits of Living With Roommates

Lifestyle Inflation. Making $160,000 $180,000 (congratulations!) straight out of school – or even making $60,000 working for the government – represents the opportunity for a huge jump in lifestyle. No matter where you start, it’s best to grow into this new salary slowly rather than inflate your lifestyle all at once.

Once you start working and life progresses, you will naturally want to inflate your lifestyle in other ways. If you start out with a $3,000 apartment, you’re not going to have a lot of room to grow. Additionally, the window where it’s fun to live with roommates is likely rapidly closing, so it makes sense to continue living with roommates while you’re used to it. o

One of the great things about living with roommates during the first couple of years of Biglaw is the built in social network roommates provides. It makes it that much easier to socialize after hours when you’re living with someone else and your roommates are always around even when your schedule is unpredictable.

Now is Not the Time to Buy. Occasionally new law graduates will think about buying a house or a condo straight out of law school. I think there are too many variables at play for anyone to know whether this is a good decision.

Will you like your job? Will you change firms from one side of town to the other? Will you decide to move to a different city in 5 years? In addition to the job instability of working in Biglaw, you may have the misfortune of purchasing a condo in 2005 before the housing crash.

That’s not say that you couldn’t get lucky and buy a house in 2010 before a soaring housing market. But, the gamble hardly seems worth it.

Either way, owning a home is a lot to add to your plate during the critical first two years in Biglaw. I would skip the headache.

Live Where You Want to Live. Some associates prefer to live close to work. Others want some physical space between job and home. Think about your preferences before you make a decision. Either way, a low cost rental provides you flexibility to figure out your preferences early in your career.

Living close to work can be extremely helpful during the slow times (and there will be lots of slow time). If you live nearby, it’s easy to go home and come back to the office if needed because you were “out running an errand.” Nobody will know the difference and nobody will care as long as you are available.

Some associates prefer a tangible difference between where they work and where they rest. Nothing wrong with that either, but you will have greater commute times and consequently less flexibility to leave the office early in your career. By the time you are a mid-level, you should have more control over the ability to work from home as needed.

Commuting Time Matters. There’s at least two reasons why your commute matters: (1) the time you spend commuting adds up, despite the several things you do to make your commute more productive and (2) there can be a financial cost to a long commute, particularly if you are driving. The federal mileage rate for 2016 is $0.54 cents per mile driven, which covers gas and the wear and tear on your car. So your 10 mile commute each way ends up costing you $10.80 each day.

Built in Social Network. Many junior associates feel isolated from the world around them. Quite often your friends will be your fellow junior associates and you’ll spend a lot of time socializing with them both inside and outside the firm. While fun, this has an unintended consequence of closing you off to the majority non-lawyer world.

Living with roommates (particularly non-lawyers, but even lawyers at different firms) can be exceptionally helpful in breaking the cycle as you’ll find that your roommate who works for a different has a similar and yet different lifestyle. If you live with non-lawyers, it’s even better because by osmosis alone you’ll absorb events occurring outside of the narrow universe of Biglaw.

How Long Should I Keep My Living Expenses Low?

Sold on maintaining a low cost of living at least straight out of law school? Here’s some numbers to give you perspective. Let’s assume a 1 bedroom apartment costs $3,000 but you can live with a roommate and spend $1,800. We already know that a $1,200 monthly expense is equal to a $182,400 over a decade, but let’s just assume that you save this money for two years ($1,200 X 24) and then never touch it again. $28,800 turns into $219,232 in 30 years. Wait another 10 years and it’s $431,264.

Only you can make the decision of when it’s right to move out on your own, but I hope the above calculations shed some light on just how a couple of years can make a big difference in your long term bottom line.

One final example: Save that money for four years and you’ll end up with $57,600. Never touch it again for 40 years and you’ll have $862,528. That’s not an unlikely scenario for a junior associate that starts in Biglaw at 26, moves out to a 1 bedroom at 30 and doesn’t start withdrawing from the account until he’s 70.

Let’s talk about it. What kind of decisions did you make about housing early in your career? How have you approached housing expenses later in your career? Let us know in the comments.

Thirteen thoughts on Your Rent Has a Big Impact on Building Wealth


  1. I live in NYC because I grew up here, but now with a growing family I often day dream about living in a lower cost area. No plans to leave since our family and friends are here. I don’t have the big law paycheck…work in government but the hours are better =) If I did work in big law, I would imagine having a short commute would be important since you’re probably working long hours. And agreed about the benefits of having a roommate. At that phase in my life, I’d probably be at work or out with friends…having my own place wouldn’t be a priority.

    1. The hours are way better in government, you’re right. The short commute is a double-edged sword. It’s better for obvious reasons (it’s short!) but given the location of many law firms, it means you’re probably not living in a great neighborhood. A lot of peers live and work in midtown. That sounds like a horrible existence to me, but if they’re doing it with a roommate then I say more power to them!

  2. These are very relevant points for us, we also live in an expensive coastal city in Australia. Rent is a high % of our income, but we try to reduce our spending in all other aspects to make up for that. There aren’t really any interior cities in Australia, most of the population lives by the sea. We plan to avoid lifestyle inflation though, so all future income rises will go straight to our bottom line.

    Tristan

    1. Lifestyle inflation is really tough. It’s particularly tough for young lawyers to go from making $0 to $100,000. From what I’ve read on your blog, seems like you’re going a great job keeping expenses low. Have you written a post about what strategies you use to make sure all future income increases go straight to your bottom line?

      1. Thanks for the praise – I’d like to think we do a good job. At the moment we don’t have specific strategies, we just buy what works best for us (value wise) and that’s usually in quite a low price range bracket. So even if we earned tripled what we do, I don’t think we’d spend much more – we’d just invest a lot. Until our investment income is more than what we’d like our retirement income to be (frugal in most areas except travel and building our dream house), we’ll probably remain as frugal as we are.

        Tristan

  3. Great post! You state that it’s not the right time to buy out of college, not that I am going to buy, but one thing that I am wondering, however, is the classic adage “rent provides no returns,” What if someone just entering their first job waits till they are sure they like their job and decides to buy a house?

    To hear your perspective, as real estate has always fascinated me!

    1. In some ways it’s a simple answer, right? If you’re going to make more money owning a home (through building equity and home value appreciation), then it makes sense to buy a home. Of course, I’m ignoring the other intangibles that come with home ownership. The problem is calculating the costs associated with home ownership (property taxes, property maintenance, interest on a loan, inability to move, seller’s closing cost, possibility of home price depreciation, additional furnishings, additional utilities, etc.)

      You should build a spreadsheet to make that calculation. The NY Times Rent vs Buy is helpful too. No need to be in NYC for the calculations to work: http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

  4. I think each point is correct, especially not to rush to buy a property.
    I don’t own a property because I could certainly move at anytime and that is why I can be in Taiwan for the summer. You are right about rent, a $200 difference may not seem like much when the rent is over $2000, but that is a significant amount.
    I prefer living close to work so I can eliminate the need for a car. I got married young, so it is like I have a permanent roommate, works well.

    1. The permanent roommate is a handy tool indeed, particularly since you get by with less space. It’s good point that people don’t talk as much about “location freedom” either when it comes to buying a house. Much more difficult to take a work assignment in Taiwan if you own a home (unless of course your Company is willing to pay the mortgage while you’re abroad).

  5. For years I worked for a client that required me to drive 45 minutes in the morning and close to 1.5 hrs in the afternoon thanks to the terrible traffic in D.C. Then I changed clients (my choice) to in aprt reduce my commute time. I can’t even begin to describe what a positive change that was in my life. If I had to put a dollar figure on the value of it – it would easily be in the tens of thousands of dollars.

  6. I bought a condo on installment two years out of law school. It does anchor you and limit your options for employment as to location but fortunately I married and now settled where condo is located. The perks of buying early though is it forces you to SAVE – a lot. Leaves little room for frivolous expenses.

  7. Great advice. I think buying can be a poor decision for new grads, especially when moving to a new area. And rent is an easy place to save money for the first few years of practice. An home can be livable without being extravagant!

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