This article is by Ian Hu, claims prevention & practicePRO counsel at LAWPRO.
Young lawyers often talk about the stress and burden of debt. If there is one piece of advice worth giving, it is a simple one: spend less than you earn.
As a new lawyer, I was excited when I received my first paycheque. I forget what I spent it on, but I remember it disappeared as soon as I received it. Soon I was living paycheque to paycheque. How could it be possible to live hand to mouth on Bay Street?
Turns out, it was easy. Perry Mason, L.A. Law, Ally McBeal, Boston Legal, Suits, my peers: what did they have in common? Nice things and unlimited fun: sailboats and golf courses, Cayman Island and Paris, Coach and Louis Vuitton, Benz and BMW. I wanted the same. And it was easy to rationalize. After all, how our clients and peers perceive us can play a big role in our success as lawyers. I felt compelled to cover myself with the trappings of success, whatever the cost.
With marriage and the birth of my first son I experienced a slow change in priorities. Erasing the financial burden of law school and consumer debt became paramount. Two years ago I read a book that has reset my outlook on life: The Millionaire Next Door: The Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William D. Danko. For me, one of the key insights in the book is that lawyers (and doctors) accumulate very little wealth relative to their income. Who accumulates wealth the best? Those who save well, whatever their income. Even workers with modest incomes can and do manage to accumulate significant wealth. Outside of the extremes, there is no correlation between income and wealth. It’s all about how much you save.
In recent years I have made the move to a more frugal lifestyle. Other benefits have followed. As I now rarely think of what I should spend money on next, my thoughts can turn to more important issues, such as how I want to spend time with people and how to make it happen. It costs little to have a coffee with a friend, get together over a fire pit, or have a barbecue. Yet the dividends are far greater than any Zegna suit. And relationships – personally and in business – are built on shared experiences, not shared things.
Manage your money: Pay yourself first or budget
Whatever your income, young lawyers can consider the following two approaches to paying off debt and accumulating wealth. The first is known as the “pay yourself first” method. Whenever you get paid, take a little off the top, say, 10%, and deposit it into a savings or investing account. The idea behind this is to accumulate a pot of money. You never take money out of the pot unless you absolute need it – ideally, when you retire. After paying off your debts, go ahead and spend the rest of your funds however you like. Meanwhile, the pot of savings continues to grow year over year. The pay yourself first method allows you to forego strict budgeting, so long as you are not accumulating more debt and you do not dip your hand into the pot.
The second method is budgeting, typically on a monthly basis. This begins by taking stock of what you are already spending. Keep track of your current expenses and break them down into categories like food, shelter, entertainment, or even more specific, such as shoes, suits, and concerts. You will likely get a good picture of where your money is going. Then play with your budget, adjusting categories up or down until your expenses are below your income. So long as you stick to your budget, you can set aside money every month.
Free yourself to pursue meaningful stuff
Paying yourself first or following a budget (personal and firm) can alleviate stress over money. I have found that I am free to focus my priorities on the meaningful stuff in life. Family life has improved. My career marches forward. Meanwhile debt, and the burden of it, sail slowly out into the horizon. These are good things.
One revelation has been that nobody has ever said a word about my possessions or lack thereof. It’s been freeing to see that my social and work circles really don’t care about what I have and what I wear (so long as I meet professional norms). The Joneses have better things to do than to ponder how I am spending my money.
I am not saying we should forego our guilty pleasures. Everyone has their own balance to meet. Find that balance: at the end of the spend-less-than-you-earn rainbow is a life of meaning, a well-run practice, and a happy lawyer.
Review some steps you can take in our Managing the Finances of Your Practice booklet. The booklet includes a business plan, budget for your practice, associate agreement, and retainer agreements. Our website also includes articles about financial planning, avoiding financial difficulties, and common pitfalls associated with starting and leaving a practice. The Member Assistance Program (MAP) site has information on how to do deal with stress and other difficulties, and includes resources including online and telephone counselling.