This guest post was written by Rob Berger, Founder of Dough Roller. Read Rob’s bio at the end of the post.
My law school graduation is a distant memory. George H.W. Bush was president and the Dow closed out the year at 3301.11. Paying off my law school loans, however, is a memory still fresh in my mind. I accomplished that feat just a few years ago.
Graduating from law school is an exciting time. You’ve accomplished an incredible goal and are ready to make your next big jump into your legal career. You may even have your first “real job” lined up, and can’t wait for the paychecks to start rolling in.
Unfortunately, lawyers don’t have the best reputation when it comes to money management. We tend to live beyond our means. The result may be a rich, country club lifestyle, but it leaves little by way of true wealth.
There are two reasons for this. First, lawyers tend to make good money. Second, they’ve denied themselves the things money can buy just to get through law school. The combination often results in a spending spree that can last decades. It’s even worse for doctors.
I should say here that I wasn’t great with money in 1992. Like many young lawyers, I spent as much as I made. Eventually, however, I came to my senses. Managing my money better allowed me to retire from Big Law at the age of 49. And no, I never made the big salaries equity partners pull in today.
I did it one dollar at a time, spending less than I made and investing the rest. What follows is a simple plan to help you accomplish the same goal.
Spend Less Than You Make
All of personal finance and wealth building comes down to one thing–spend less than you make. It’s a simple concept. It’s also devilishly hard to do, particularly for lawyers.
As a former Big Law associate and partner, I saw colleagues with six-figure cars and country club memberships. I even started down that path at one point. What you don’t see is the financial pain lurking behind these big purchases.
Some day you may have the money to splurge. Until then, commit to spending no more than 80% of your income. If you’re fresh out of college, this may be a hard lesson. You’re still at the age where you want the fancy car and the big house and the newest gadgets. But I assure you, you will look back on many of these in the future and feel that it was money wasted.
Spend some time now deciding what is really important to you. Sit back and think whether your purchases are actually “needs” or if they are simply “wants.” Then, adjust your spending habits accordingly.
Form a budget, and stick with it. This might mean using an envelope system, starting out with a 50-20-30 budget, or creating something unique that works for you.
Once you are spending less than you make, you can direct the difference to paying down debt and investing. Let’s start with debt.
Debt is a significant part of life for the majority of college graduates. Whether it’s credit card debt, a car note, or the average $37,172 in student loans, you’re likely starting off your exciting new career in the hole. In my case, I had a negative net worth of $55,000.
Don’t despair. With the right plan and some dedication, you can start tackling that debt now. Not only will it save you a ton in interest payments over the years, but you’ll meet the goal of living debt-free as soon as possible.
Student loans, and particularly law school loans, present several challenges. First, the sheer size of the monthly payments can crush the most well-intended budget.
Second, there are a number of important decisions you have to make. For example, you have to consider whether you may be eligible for a loan forgiveness program. Then there is choosing one of several repayment programs on federal loans. And of course, refinancing to a lower rate is an important consideration.
As to these first two considerations, you can learn more about your options for dealing with law school loans in our guide here. I wrote it based on my own experience paying of law school loans.
Finally, you have to work paying off student loans into your other financial goals. Here we should make an important observation. It took me about 20 years to pay off my school loans. While that sounds like two long decades of pain, there was a method to my madness.
I had several other financial goals that were more important than my school loans:
- Maxing out my retirement accounts (particularly with an employer match)
- Buying a home for my family
- Investing in real estate
The fact that my school loans were at very low interest rates made setting my financial priorities even easier. The point is that while getting out of debt is an important financial goal, it’s not the only important financial goal.
Credit Card Debt
Between tuition, room and board, and painfully expensive textbooks, it’s easy to see why the average college grad walks away with thousands of dollars in credit card debt.
Clear off those credit cards as soon as possible. This may mean transferring the balance to a 0% APR card in order to avoid wasting money on interest. It may also mean putting every extra penny you have into paying down high-interest debt. It may mean a combination of the two.
If you have multiple cards and other debts, look into either the debt snowball or debt avalanche methods, in order to repay your debt in the fastest (and smartest) way possible. You can use this free debt snowball calculator to see which option is best.
Finally, avoid any new credit card debt at all cost.
Avoid Expensive Cars
I wanted an expensive car as soon as BU handed me my diploma. And eventually I got one, only later to regret the decision and sell it at a loss. The point–avoid car loans. Pay cash.
This simple step helps you avoid debt. It also helps you save 20% of your income or more.
There’s a heated debate in the world of personal finance. Should you pay off all your non-mortgage debt before you invest? Some, like Dave Ramsey, answer with an emphatic yes. I couldn’t disagree more.
It’s certainly true that high interest rate debt should be a top priority. If you have credit card debt at 24% interest, focus on paying it off first.
But with debts at more reasonable rates, like school loans, the story is different. Should you pass up an employer-match on a 401k to pay off a school loan at five or six percent? Absolutely not.
With that in mind, let’s look at both short-term savings and long-term investing.
Your short-term savings goals could vary widely, so decide what’s most important to you in the next couple of years.
First things first, though–you need to establish some rainy day savings. Ideally, you’ll want to tuck away an initial $1,000 in an emergency fund. This will be your fallback if something unexpected pops up, like a sudden car repair bill. You shouldn’t use this money for bills – even those of the one-off variety, like that annual insurance premium that you forgot to save for – or a vacation. This money is for emergencies.
Then, once you’ve done that, start saving an even larger cushion. This fallback fund should, ideally, include 3-6 months of expenses. If you were to unexpectedly get laid off (think 2008), these savings would cover your living expenses (and those student loan payments!) while you found a new job.
When you’re fresh out of law school, retirement can seem like a lifetime away. It’s hard to plan (or save) for a goal that far in the future.
The truth is, though, that the decisions you make today can completely alter your retirement success. Thanks to the power of compound interest, every dollar that you don’t save today could be hundreds of dollars that you cannot enjoy in retirement. Now is the time to set some general long-term goals and starting thinking about how your habits today will help you reach them.
The best way to start working toward them is to establish and begin contributing to a retirement account. Depending on where you work, your company may offer a 401(k).
If your employer offers a match on your 401(k) contributions, you’d be wise to take full advantage. At the very least, you should be contributing enough to your 401(k) each year to receive every penny that the company offers to match. If you don’t, you’re essentially leaving free money on the table.
Once you’ve contributed enough to get your employer’s match, begin funding an IRA. If you max out both a 401k and an IRA, start investing in a taxable account.
How to Invest
One final thought. Investing intimidates many college and law school graduates I talk to. You may have booked first year contracts, but have no idea when it comes to stocks, bonds and mutual funds.
It’s simple. Start with a target date retirement mutual fund. These funds allocate your investments across a wide range of U.S. and international stocks and bonds. It’s likely that your 401k at work offers them. And you can open an IRA or taxable account at Vanguard or Fidelity and have access to these low cost, diversified investments.
Financial freedom is not the result of hitting the lottery, receiving an inheritance, or making a huge salary. It’s about the daily habits and spending decisions we often make with little thought. Put the right plan in place today, and your finances can enable you to pursue your life’s purpose.
Rob Berger is the Founder of Dough Roller, a website to help people make sense out of the ever-more complicated world of personal finance, investing, and money management. What started out as a simple blog about money has turned into a website enjoyed by nearly 2 million visitors a year. Rob’s articles on personal finance have been syndicated to Forbes, MSN Money, U.S. News & World Report, and Yahoo! Finance. Rob holds a law degree from Boston University and an undergraduate degree in English from Evangel University. He lives in Virginia with his wife of more than 20 years, their two teenaged children, and their Shih Tzu, Sophie.
All opinions, advice, and experiences of guest bloggers/columnists are those of the author and do not necessarily reflect the opinions, practices or experiences of Solo Practice University®.